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Can a Lease Survive Foreclosure? Two Foreclosure Cases and a New Statute By: Martin Gibson
Two recent federal foreclosure cases applied Texas law and one highlighted a fact situation that may involve a new (2015) statute. In Arbuckle v. Chesapeake, Case No. 3:14-CV-04584-M (N.D. Texas, Dallas Division September 18, 2017). Chesapeake (CHK) took oil and gas leases on properties on which there were existing mortgages. Arbuckle, one of several plaintiffs in a putative class action suit, bought the properties out of foreclosure and claimed that the oil and gas leases granted on those properties were junior to the mortgages and were, therefore, terminated by the foreclosure sale. Because this case was decided on a pre-certification motion for partial summary judgment, many facts are not yet clear. Four properties were proffered by the Arbuckle group and all appear to have these facts in common: CHK acquired leases on various commercial and residential properties in the Barnett Shale, which were covered by prior mortgages, the mortgagors defaulted, and were foreclosed. Arbuckle argued that the leases were terminated when the properties were sold at foreclosure because CHK had not obtained agreements subordinating the mortgages to the leases. CHK argued limitations, estoppel, laches, adverse possession, demanded strict proof of the terms of the mortgages and compliance with the Property Code; CHK also argued that the mortgagee’s failure to give notice of foreclosure to CHK was a violation of CHK’s due process right under the U.S. and Texas Constitutions.
then terminated by valid non-judicial foreclosure. In rejecting Arbuckle’s motion, the court examined the title documents related to each of the four properties and, in each case, found the Plaintiff ’s title to be deficient (failed to show the minerals were part of the property when it was mortgaged, the foreclosure deed went to an entity other than the Plaintiff, there was no assignment from the mortgagee to the foreclosing bank, and the foreclosure sale was conducted under a mortgage dated in 2004 instead of 2003 and was not in the record provided to the court). So the court’s decision was based on a failure of Arbuckle to prove its title and not whether a senior mortgage can extinguish an intervening lease. At first blush, the proposition that a senior mortgage, when foreclosed, extinguishes the oil and gas lease seems unassailable. The comment to Texas Title Standard 15.90 Lien Priority and Subordination says “After a senior lien is validly foreclosed, junior liens and junior interests in the same property are extinguished.” Enter the Texas Legislature. In 2015, Section 66.001(b) was added to the Texas Property Code: “Notwithstanding any other law, an oil or gas lease covering real property subject to a security instrument that has been foreclosed remains in effect after the foreclosure sale if the oil or gas lease has not terminated or expired on its own terms and was executed and recorded in the real property records of the county before the foreclosure sale.” The new law goes on to (i) extinguish the surface rights of any such junior oil and gas lease upon foreclosure, (ii) allow a subordination agreement to control, (iii) prohibit any agreement between mortgagor and mortgagee to
Arbuckle sought a partial summary judgment that four CHK leases were subject to senior mortgages, which were
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