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97 Cards in this Set
- Front
- Back
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Ownership in Place
Corporeal (right to own land) |
1. Owner of O&G rights owns right to search, developand produce plus a possessory right to the O&G in place beneath the owner’stract. 2. Followed by TX,CO, NM, MI, and ND. 3. TX- since minerals are real property, must file a deedof record. 4. Creates a mineral estate in land. (Maj.) |
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Non-Ownership Theory
Incorporeal (right to use land) |
1. Owner of O&G rights owns rights to search, developand produce (but no possessory right to O&G in place)
2. Followed by OK,CA, and LA. 3. Creates a profita prendre. (Minority) a) “exclusiveright to take” |
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Ownership and Non-ownership causes of action
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Ownership: Corporeal, rights cannot be abandoned at CL
COA: Trespass, ejectment, compulsory partition. Non-ownership: Incorporeal, rights may be abandoned at common law. COA: Quiet Title (remedy title disputes), Non-posessory actions |
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Real Property v. Personal Property
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OG in the the ground or Mineral rights are treated as Real Property.
In most states Royalty Interest is also treated as Real Property. Personal Property. |
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Rule of Capture |
1. Landowner owns mineral below the surface of tract. a.Protects correlative rights by encouraging self-help.
2. No liability for draining O&G from adjoining adjacent tracts of lands.
3. Mineral rights include right to drain other lands—such drainage is not considered a trespass. a. Does not authorize direct entry or trespass.
4. Explosion of development lends to other problems.
5. Exceptions to the Rule of Capture: a. Cant trespass b. Cant break the plane c. Cant act negligently, results in draining of land.
Gas: if in ground real, if extracted personal. If escapes then it does not return to land. |
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Correlative Rights |
Refers to the rights and duties of all landowners in the common source of supply
1. Each landowner must be given the opportunity to recover without waste their fair share of O&G in a common reservoir. 2. Each landowner has a duty to produce from a common reservoir without wasting O&G and without negligently damaging reservoir. |
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Ad Coleum
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Ownership under CL ROC extends landowners rights to all the below and above their land, as high and low as "heaven and hell".
-Surface rights are mineral rights |
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Texas Mineral Interest Pooling Act |
Applies only to field discovered after Atlantic Refining co... March 8, 1961.
-Applies when applicant has exhausted efforts to pool voluntarily and when applicant’s offer to pool voluntarily was “fair and reasonable” in theeyes of RRC.
-Eliminates forced pooling in many established fields as of that day.
-Court will look for "fair and reasonable" metrics to determine the split. Will look to price of OG at time offer was made.
-If you own a small tract TMIPA may allow you to "muscle in" to a larger neighboring tract if they have a pooling clause. |
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3 step test for minerals analysis
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Texas 3-Step Test for “Minerals”Analysis
1.Is intent clear from the “four corners”of the instrument? If so, the instrument controls. a) i.e.,is the mineral listed in the lease 2. If not, any substance previously held asa matter of law to be “surface” belongs to the surface owner. a)“TheNine” - Building stone; limestone; caliche; surface shale; sand; gravel; water;near surface lignite; and iron ore. -TheTexas Supreme court has held that these substances are part of the surface estateas a matter of lawiii. If not, then: 3. Applythe surface destruction rule to any severances pre-June 8, 1983severance, [not conveyances]
-Remember,with conveyances, you cannot give away what you do not have 3.Applythe ordinary and natural meaning rule to June 8, 1983 and afterseverances. |
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Texas Relinquishment Act
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Start: 9/1/1895
1. Land was classified asmineral land. Private owner did not own the minerals. a. Landowners had the rightto lease mineral lands and share in the lease benefits equally with the State ofTexas. 2. Came with a fiduciaryduty to the State. c. State retained a 1/16royalty interest in relinquished lands.ii. Finish: 8/21/1931 |
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Fair share living allowable |
Traditional living allowable (small tract owners received an allowable that covered operational costs and gave a reasonable profit) was abandoned in 1961 by Atlantic Refining Co.
a.Court struck down the opportunity for a small tract owner to receive $2.5M over the life of the well when the oil under his acreage was only worth $7K. b.“50-50 Formula” is themost widely used.
2. Correlative Rights
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Oil and Gas Lease Parts
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The oil and gas lease is a document governing the relationship between the parties to a lease of the exploration and production of oil and gas.
It is both a conveyance (as it transfers title in real estate to someone. Mineral rights are transferred.) A a contract for the right to explore, produce, or pay a royalty to the lessor. |
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Overriding Royalty
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Overriding royalty interest is an interest that is payable out of the working interest, instead of out of the lessor’s. So it is paid out of the lessee’s interest. This override will terminate when the K bw assignee and the lessee is terminated.
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3 Kinds of Royalty Interest
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Lessor, Overriding Royalty, and Non Participating Royalty
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Lessors royalty
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Royalty retained by a lessor in a lease and expires with the lease.
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Non-paricipating royalty
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Royalty carved out of mineral interest, entitling its holder to a stated share of its production without regard to any of the terms, of any lease. Lasts forever.
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Adverse Possession/Before Severance
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Before Severance:Minerals follow the surface when one successfully possesses before severance.
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Adverse Possession/After Severance
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After Severance:Minerals do not follow surface when one possesses surface after severance ofthe minerals. There would be no notice given to the mineral owner.
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Adverse Possession/During Severance |
AP is not restarted, suspended, or interrupted if owner sells minerals after adverse possession. The title relates back to the beginning of the possession. Minerals would follow. |
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Adverse Possession |
Open and Notorious
Ouster of former owner/exclusive use.
SOL |
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Geophysical Surveys
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CAN: there is an implied right to reasonable surface use. Mineral owner contracts for surveying. Vibrations alone DO NOT constitute a trespass.
CAN'T: Cannot cause excessive damage to the surface. COA if excessive include: Assumpsit, Trespass, Conversion, Loss of speculative value, Surface damage acts. |
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Unauthorized Entry
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Good Faith Trespass: Didn't know you were a trespasser. Can recoup production costs.
Bad Faith Trespass: Knew you were a trespasser, cannot recoup production costs. Truth is a defense in some jurisdictions. |
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Reigned in the ROC
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Correlative Rights: each landowner has the right to their fair share of the oil and gas in a common reservoir.
Conservation Practices: States limit on production to prevent waste and protect correlative rights. |
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State efforts to protect Correlative rights
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Police powers to prevent waste through conservation agencies. These agencies were given wide deference by the TX courts.
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Allowables / Acre-foot
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Acre-Foot (volume): how manycubic square feet of reservoir exists under a tract. Owners in the middle ofthe reservoir prefer this calculation.
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Allowables/ Surface Acreage |
Surface Acreage (surface): amount of surface acres one holds over a reservoir. Owners on the edge of a reservoir prefer this calculation. |
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Allowables
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This basically gives a well an allowance – determines the MER (maximum efficient rate) at which the well can produce without damages the reservoir.
-Formula for determining allowables (50/50 rule) Take the field allowable and divide it by 2, -50% based on surface acres & -50% based on volume (thickness) Surface acres – advantage to those who have more land Volume – advantage to those who have more oil (acre-foot) Courts can allocate 50% per acreage and 50% per well (helps small landowners) A proration order fixing the rate at which various owners of oil field can produce is valid where it is reasonably supported by substantial evidence – violation is conversion (Pickens) - It is fair and appropriate to take field migration into account when giving allowables. |
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Rule 37 |
Rule 37 controls SPACING of wells Within property lines and between other wells
467 ft property/lease lines
1200 ft from other wells
Rule 37 Well Spacing Exception: Permitted to prevent waste or the correlative rights of the parties, and the presence of an existing well at the proposed location can be properly considered in making such a decision if it was:
- Drilled and completed legitimately in good faith AND -Not as a subterfuge to bolster a later exception request
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Rule 38
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How many wells you can have on land or density. 1 for every 40 acres.
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Living Allowables |
A small tract can drill a well and recover an allowable amount that accounts for costs of production and reasonable profit.
Not always economical |
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Fair Share |
A small tract owner can only attain his fair share of oil based on acre-foot or surface acreage. Normally is a 50-50 split. |
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MIPA in TX |
-Weak in Texas compared to other states around us that have compulsory pooling acts.
-Voluntary in Texas with a date associated with it (3/8/1961).
-State will only step in once the applicant has exhausted all voluntary pooling options and the offer to do so was fair and reasonable.
-Favors small tract owners and will only give allowable based on surface acreage. |
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Lease Clauses (5)
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a. Granting
b. Habendum c. Drilling Delay Rental d. Royalty e. Savings Clauses |
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Granting Clause |
The lease grants to the lessee the right to make reasonable use of the surface area to explore, develop, and produce O&G from the lease premises without imposing any obligation. To do this, lessee must:
1.Identify the size of the interest granted
2.The substances covered by the lease, AND
3. The land covered by the lease
And will usually include: specific uses permitted |
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Reasonable Use |
Lessee (or mineral owner if they have not leased the minerals) MAY DO WHATEVER is reasonably necessary on the surface to explore for, develop, and transport oil UNLESS other rights are expressly granted or reserved
HOWEVER this right is SUBJECT to the Accommodation Doctrine |
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Accommodation Doctrine |
Accommodation Doctrine:
(1) There was a pre-existing use on the surface, this use could come from the surface estate owner OR the original mineral who is also the estate owner
(2) The mineral owner or lessee has a proposed interference with the surface owner’s use of the surface, AND
(3) the mineral owner or lessee has a reasonable alternative available on the lease.
-THEN the reasonable alternative must be followed |
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Liability standard for Surface Damage
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Negligence, Trespass, and Nuisance
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Habendum Clause
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The Habendum Clause creates the Primary Term; there are 2 types of Habendum clauses:
1. Production Habendum: "worded as this lease shall remain in force for a primary term of --- years in which to establish production, " and as long thereafter, as oil and gas are produced from said land. 2. Operations Habendum: wordage will be same as above with addition of " as oil and gas are produced from said land" |
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Delay Rental Clause
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Requires that during the primary term the Lessee has an obligation to drill for OG OR pay OR the lease is terminated.
Does NOT extend he primary term. If the PT comes to an end and you're not drilling the lease is expired. A notice clause may be included, lessee required to pay new or original owner depending on when notice was given. |
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Paying a DRC |
If a lessee is a day or a dollar short the lease will terminate.
Advanced payment allowed as long as ownership doesn't change.
Joint payments allowed as long as right amount on right time.
Mailed with correct date on postage is allowed.
Depository clause allows for deposits to be made into lessors bank and requires that you not teach down Lessor.
Estoppel: if accepted Lessor is estopped from termination the lease.
3P mistake : not held against lessee
Good Faith Attempt: 30 days to correct error.
Can stop paying when you have commencement ( requires substantial performance or prep). |
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Savings Clauses (4)
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Shut-In Royalty
Cesation or production clause Force Majeure Clause Pooling Clause |
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Shut-In Royalty
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When a well that is capable of producing gas is shut in due to a lack of market the lessee can maintain the lease by paying shut-in royalties.
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Mother Hubbard Clause |
The mother hubbard clause is a cover all clause to make inadvertent commissions of small strips of land due to improper descriptions, adverse possession, survey errors, easements, etc. Makes these land subject to the lease that are adjacent to land. |
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Operations clause:Cesation and Production |
If a well ceases production , the lease can nevertheless keep the lease alive provided the lessee commences repairs within a stated time period.
The lessee does not have to achieve production within the stated time period ( i.e 60/90 days); rather the lessee must merely start working on the problem in good faith within the time period and diligently pursue repairs until the well begins producing again. |
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Operations clause: Engaged in operations
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Covers the situation we where at the end of the PT, operations had commenced and were continuing over the expiration of the PT, but there was not yet actual production. The EIO clause provides that the lease will NOT expire while the lessee is engaged in drilling or reworking operations at the end of PT.
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Operations clause: dry hole
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covers the situation where, while the lease is in effect, the lessee drills a dry hole, but gets valuable information from the drill core (I.e move 500 ft for pay dirt) This clause provides that if a dry hole is drilled by the lessee , he can keep the lease alive by commencing operations for a subsequent well on the leased property within the stated time period.
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The Operations Clause: Savings Clause
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Covers three common contingencies that may occur while in the course of developing oil and gas.
-Cessation of production -enageged in operations -dry hole |
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Force Majuere Clause |
-The force major cause extends performance ( or extends the time for performance) because of unforeseeable factors beyond the lessee's control.
-typically includes acts of god, weather, labor shortages, government interference, etc.
- act of force majuere must be identified in the contract (not CL implied) and there must be a nexus between the event and the non performance. |
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Pooling Clause as Savings Clause
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If a OG lease contains a pooling clause (most do). The Pooling clause may act as a savings clause because operations or production from anywhere on the pooled unit will be treated as if operations or production was obtained from every tract within the pooled unit.
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Surface Use BOTTOM LINE |
a. Mineral owner has implied right to reasonable use of the surface. Kerbaugh. i. Lessee has dominantinterest ii. Lessor has servientinterest
b. Mineral owner may notuse surface to benefit any other land.
c. Limitations on SurfaceUse i. Accommodation Doctrine: Mineral owner cannotsubstantially interfere with an existing use by surface owner if there is areasonable alternative. ii. Lessee cannot benegligent or reckless. iii. For an alternative to bereasonable, it must be located on the land.
d. Obstruction Doctrine:Lessor cannot obstruct the lessee’s access to the property.
e. Surface Damage Act (notin Texas): provides payment for damage caused to the surface by production andoperations. |
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Primary Term |
On or before each anniversary date of the lease lessee must either: Pay delay rentals or commence operations for drilling, if the lease has a delay rental provision, or, commence for drilling by the end of the PT if the lease is paid up.
At the end of PT lease must have commenced operations for drilling.
Commencing operations does not require spudding, but does require activity on the land related to or preparatory to drilling conducted in good faith and diligently pursued to completion. |
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Secondary Term
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Either under production or by satisfying a savings clause.
In TX production means to produce and market in paying quantities. Paying quantities requires lessor win both prongs of 2 part test a litmus test (Rev. exceeds costs) and reasonable prudent operator test (reasonable person motivated by profit not speculation operate lease in its current fashion). |
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Pooling (Generally) 2 types of pooling |
Pooling allows an operator an efficient means to prevent physical and economical waste by limiting the number of wells necessary to drain the productive reservoir.
If two landowners have adjacent tracts and both drill wells both are usually paid based on the production attributable to the well that has been drilled on their tract.
Pooling allows for the lessee and operator to combine tracts and drill one well and royalty owners would be paid based on a proportional basis to the acreage they own. |
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Compulsory Pooling (Forced Pooling)
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A govt. regulation, as with conservation laws the purpose of compulsory pooling is to prevent waste and protect correlative rights.
If parties in a situation where pooling would be desirable cannot work out a deal for themselves, the state will work out a deal for them, by imposing compulsory pooling. -Favored in OK (maj.), NOT TX (min.) |
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Compulsory Pooling OK |
If Compulsory Pooling order granted the the majority interest owner gives forced interest owners 3 options:
1. Participate: pay share of drilling costs up front, in return receive proportionate share of rev., less his proportion of expenses. Becomes working interest owner.
2. Be carried: other WI owners advance costs of drilling and the carried party will not participate in rev from production until the WI owners recoup costs they have advanced on behalf of the carried party. After costs recovered carried party receives proportionate share. - often includes risk penalty
3. Lease: the default if interest owner doesn't select to be carried or participate, they are deemed by statute to have leased interest at a bonus and royalty, based off market value rates in the area as est. by evidence at forced pooling hearing. |
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Voluntary Pooling
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A consensual transaction, absent lessor's consent the lessee cannot pool the lessor's interest.
The 3 overriding considerations in voluntary pooling include (1) Why (2) How (3) What effect? |
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Voluntary Pooling/ Why
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Why:
-Lesse may want to to comply with spacing regs./to small to to drill an economic horizontal well. -to locate well over more productive part of reservoir. -business flexibility in creating a larger unit to obtain greater allowables, hold multiple leases by drilling 1 well, eliminate lease lines within the pooled unit to drill more wells at legal locations. |
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Voluntary Pooling/ How
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Must obtain consent of royalty or mineral owners.
Then 3 potential ways: (1)Community lease (2) separating pooling agreement (3) lease pooling clause |
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Community Lease
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A community lease is a single lease document that covers 2 or more separately owned tracts of land executed by the mineral owners of such tracts.
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Separate Pooling Agreement
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All parties who own interests in the minerals underlying the tracts to be pooled enter into a specific agreement authorizing the pooling of their tracts, such as executing a Designation of Pooled Unit or Consent to Pool Agreement.
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Lease Pooling Clause
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Lease pooling clause gives the lessee power to pool the Lessor's interest; it essentially gives the Lessee a power of attorney to act on behalf of the lessor.
Lessee's will generally be the ones to require the a pooling clause and they are given the power to authorize or not authorize the clause. |
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Pugh Clause |
Provides that that operations or production from the pooled unit will only preserve the acreage that is within the boundaries of the pooled unit.
Effectively severs the unopposed acreage from the pooled acreage.
The more acreage the Lessor has to lease, the more important it is for the Lessor to a have a Pugh Clause in his lease.
ONLY applies to pooled units.
2 Requirements: 1. Did lessee strictly comply with the lease terms 2. Did Lessee pool in good faith |
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Mineral v. Royalty Interest
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p. 68 in Primer
Bottom Line: Likely a MI if... -"in and under" language" -labeled MI -interest is cost bearing -interest has right to lease and to share in the economic benefits under the lease, bonus, royalty and delay rentals/ Like RI if... -"produced and saved" language -labeled RI -interest non-costbearing, but calls for % of gross production -no right lo lease or to share in any economic benefits under the lease, other than royalty. |
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Mineral Interest |
A mineral fee can be carved from the fee interest and it endures forever. Includes a number of Rights:
a. Right to Use the Surface i. The owner has the right to use the surface or subsurface as reasonably necessary to explore for, develop, and produce the minerals. ii. The right to the mineral interest is a bundle of rights; can sell some of the rights as real property interest. iii. The mineral estate is the dominant estate; have implied easement to explore, develop, etc.
b. Right to Lease?
c. Right to Develop- incur costs and take profits. i. Working interest (WI): Owner has rights to use the surface, incur costs, and retain profits. ii. Carried Interest (NPI): Owner has only a right to share in any profits.
d. Right to Alienate i. The owner has the right to transfer all or portion of the mineral interest to others.
e. Right to Retain Lease Benefits
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Bonus |
i. Consideration from lessee to lessor for execution and conveyance of the lease.
a)Up-front cashpayment |
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Royalty |
Kicks in immediately after production starts, the lessor is entitled to a share of production or percentage of proceeds of production, free of production costs. |
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Implied Covenants
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implied covenants are unwritten promises that impose duties on the lessee and protect the lessor. They arrive from the relationship the parties and the objectives of the oil and gas lease.
Important one: lessee will act as a reasonable and prudent operator. |
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Surface Destruction Rule
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The SDT does not focus on presumed intent, or on the scientific definition of minerals, rather the point of focus is on damage to the surface the property which the "other minerals" were extracted.
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Linear Classification implied covenants
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1.to test
2.to protect 3.to reasonably develop 4. to further explore 5. to market 6. to operate properly Common points of litigation are: drainage, reasonable development and further exploration, marketing, and proper operation. |
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Reasonable Prudent Operator
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Can do what is in his own self interest, but must act in 1. good faith 2.competently 3. with due regard for the interests of the lessor.
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Vela Rule (Majority TX) |
1.“Market Value” is a plain term that must be given its usual meaning—the price a willing buyer would pay a willing seller at the time of production. (Tx)
a. Implied covenant to market is not needed to give meaning to “market value/price”
b. Implied covenant to market applied where terms of royalty clause require performance by lessee but fail to spell out a standard. i. Market within a reasonable time for “proceeds/amount realized.”
c. “Market value” does not equal “contract price”(proceeds), but “proceeds/amount realized” equals best contract price. |
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Tara Rule (Minority NOT TX) |
1. “Market Value” is an ambiguous term or a term of artin the gas industry. Courts must look beyond the four corners of lease to the parties’ intent, to implied covenants, or to fundamental fairness. “MarketValue” is contract price if contract was entered into in good faith for best available arm’s-length-equivalent prices and terms. (Okla.)
i. Okla.: Best contract price equals market value. |
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Implied Covenant to market
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Imposes upon the the lessee a duty to market oil and gas produced (1) within a reasonable time (2) and at a reasonable price
Reasonable time: Reasonable prudent operator would sell at time. Question of fact. 8yrs in Bristol |
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Reasonable Deduction Costs |
i. Logically, lessees will hold actual costs down to increase profits ii. But, may not do so for royalty accounting purposes iii. Underlying “accounting” issue: Is Lessee’s calculation reasonable?
Must Include: Overhead, depreciation, interest in calculation. |
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Market Value at the well |
Production for purpose of royalty calculation is complete when the oil and gas is captured and brought to the surface. Basically lessee pays costs to get oil to well head. TX Rule |
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Marketable Product
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CO, KS, OK: production is not complete until the lessee has both captured the oil and gas and made it into a marketable product.
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Division Orders
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A division order is a statement executed by all the owners of production, all persons who own working interests and royalty interests --stipulating how the proceeds of production are to be distributed.
-Protects the lessee from mistakes as to production payments. -Can revoke to correct allocation error in future. -Can recover from party unjustly enriched by error. Mistakes in lease order must be honest and reasonable and there must not be any unjust enrichment. |
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Retained Acreage Clause |
i. Divides a lease as pooling or proration units are formed, with the result that production from one unit propels the lease into the secondary term only as to the land within the productive unit. ii.Operates independently of pooling. a) Severs the pooled acreage from the remaining acreage under the lease, thereby creating two separate leases b) This protects the Lessor because, by creating two leases, the Lessee will need to drill additional wells in order to retain the acreage that doesn’t have the well on it.
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Concurrent Ownership
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Most frequent is A tenancy in common TIC. Each Co tenant owns an undivided interest interest in the whole tract and any underlying minerals. Any co tenant of OG in TX can explore, drill, and produce the minerals or lease his share of the minerals, without obtaining the consent of his other covenants.
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Developing v. Non participating Co tenants
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Developing Co-tenant absorbs all risk and must account to non participating co-tenant for share of profits from production.
Done on pro rata basis and developing Co tenant can recover the non participating cotenants share of the costs from the profit. |
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Other options to covenant besides carrying NPCT to payout.
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Ratifying the lease: if ratifies the lease a non consenting co tenant can begin receiving share of the royalty immediately as opposed to to waiting until payout and no longer responsible for share of costs.
Forced Pooling: Developing co tenant can apply with TRC for a forced pooling order under the "muscle in" provision of the TMIPA. Joint Operating under Joint Operation Agreement: JOA is a contract between co-tenants, separate owners of oil and gas properties, or their Lesses that are being jointly operated. Pick an operator, and identifies non operators, and creates an agreement for sharing costs and expenses of parties to JOA. Partition: in TX cotenants have an absolute right to partition property, regardless of any inequities cause by the partition to other co-tenants. Partition is a judicial proceeding and can be done unkind (divide property) or forced sale (order sale and divide proceeds). |
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Successive ownership: LE and Remainderman |
These property concepts bring about special questions and applications in OG. This being a...
Leasing Issue: Neither a LE or a remaindeman can grant a valid OG agreement, without joinder of the other. LE cannot commit waste and remainderman has no present right to possession.
Accounting Issue:Principle or Corpus is paid to the remainderman upon LE termination and interest generated from the principal and current income is paid to the life tenant during the term of the life estate.
-Delay rentals are considered current income and paid to life tenant.
- Royalty and bonus are considered corpus. Proceeds invested in a special account for benefit of LE. LE receives interest and principle. Goes to remainderman at LE death.
Can change division of benefits through Agreement.
Open Mine doctrine: If a lease is executed PRIOR and ONLY PRIOR to the creation of the life estate, the Life Tenant can receive all proceeds of the lease and not just the interest |
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The Executive Right
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The executive right is essentially the power to lease. Only mineral owners hold the right to lease
The executive right is a stick in the bundle and is alienable from the other mineral interests. |
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The Executive's duty to non executive interest holders (3) |
1.Good faith: Act without malice or fraud.
2.Utmost good faith and fair dealing:have due regard for the non executive and be able to execute a lease on terms that a reasonable prudent landowner would do, absent executive right.
3. Fiduciary Duty: must subordinate his interest to the interest of the non executive land owner and act only for the benefit of the non-executive landowner. |
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Minerals
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Texas courts look to intent first; if the intent is clear after looking within the 4 corners of the document separating the minerals and the surface the courts give effect to that intent. if not:
Surface Destruction Test if before 6/8/1983 Ordinary and Natural Meaning if after that date. |
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Surface Destruction Test |
In TX before 6/8/1983, unless specifically expressed, the term "minerals" does not include any substances that would cause substantial damage o the surface estate by extracting such minerals. Focuses solely on potential damage to surface. |
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Ordinary and Natural Meaning Test
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substance will be regarded as a mineral if it is generally regarded as a mineral in the community at the time and in the place where the instrument was created.
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Term Interest |
Mineral interests and royalty interests can be severed or conveyed for any duration.
Term Interest Issues: -Requires actual production, not just a capability - Shut in royalty does not maintain term interest, it is not actual production. -Often lesses hold term interests for mere speculation.
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Voluntary Subdivision Rule |
A necessary part of the rule that enables a small tract owner to drill a well on her tract as a matter of right is that the tract had to be in existence before the spacing rules became applicable to the tract. Otherwise, it would be easy to evade the spacing rules by subdividing larger tracts into smaller ones to get more well permits. |
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Distinguishing Grants "of and "out of" a Fractional Interest |
If a grantor retains a fraction of his interest the size of the fraction retained is found by multiplying the first fraction by the second fraction. For example', if a grantor, who has a 1/4 RI under an oil and gas lease, later conveys to a grantee "1/2 of my 1/4 RI," he retains a 1/8 RI. In other words "of in these circumstances has the same meaning as times in a multiplication formula.
On the other hand, if a grantor who owns an undivided 1/2 of the mineral estate executed a deed conveying a 1/4 MI "out of" his 1/2 MI, the grantor has conveyed a 1/4 interest and has retained a 1/4 interest. The words "out of merely designate the source of the interest but do not affect the size of the interest. |
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"Subject To" Clause |
States that the interest conveyed in a mineral deed is subject to an existing oil and gas lease. This clause
(1) protects the grantor from liability for breach of warranty, (2) it avoids the "Duhig" problem (3) it makes clear that the grantee will receive an interest in future royalties and rents under the existing lease. |
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Two Grant Ambiguity |
QUESTION: Was the grantee, Hoffman, entitled to lA the royalties and rents attributableto the entire 320 acres covered by the lease or only to 'A the royalties and rents attributableto the 90 acres conveyed to him under the granting clause of the deed?
HELD: The Hoffman Court held that the grantee, Mr. Hoffman, was entitled to 54 theroyalties and rents attributable to the entire 320 acre tract. RATIONALE: The court's rationale for its holding has come to be known as the "twogrant doctrine," because the court construed the deed as containing two grants: Grant #1—the granting clause—which granted the grantee a reversionary interestin the minerals in and under the 90 acres. Grant #2—the "subject to" clause—which granted the grantee the right to 54 thelease benefits (i.e., rents and royalties) under the entire 320 acre tract. |
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Overconveyance |
problem that arises when the sum total of the fractional interests reserved in a chain of conveyances is greater than 100% |
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Duhig Rule |
Where full effect cannot be given both to an interest granted and to a reserved interest, the courts will give priority to the granted interest (rather than the reserved interest) until the granted interest has been fully satisfied |
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Proportions Reduction Clause |
Solves over conveyance for lease:
A clause commonly included in contemporary leases providing for the reduction of the payments to a lessor if his interest is less than that which he purported to lease.
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Top Lease |
Lease taken when premises are already subject to existing (bottom) lease.
1. Top lessee avoids slander-of-title claim by bottom lease by spelling it out. 2. Common counter-claim in top leasing—top lessees pay for lessor to sue base lessee. a. Base lessee counter-claims slander of title.b. Note 2: Top leases don’t cloud title. |
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Withholding or Putting in Suspense Remedy |
i. Dispute exists concerning title. ii. Lessee has doubt that lessor (payee) has allowed the sale or owns the interest. iii. A title opinion requirement has not been met. 1. Evidence of ownership 2. Title opinions are essentially “the gospel” |
