Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
169 Cards in this Set
- Front
- Back
|
Delay Rentals - "Unless Lease"
In General |
Does not bind the lessee to do anything, but are considered conditions precedent so if the does not lessee do anything and fails to pay delay rentals, then estate and the lease automatically revert back to the lessor.
|
|
|
Delay Rentals - "Unless Lease"
How They Work |
The terms set in the habendum clause will terminate unless the lessee does one of two things:
(1)commences drilling operations within the time stated; OR (2)pays delay rentals |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems (1 of 3) |
(1) the lessee attempts to make payment but makes a mistake in good faith
Phillips Petroleum v. Curtis- Phillips' employees made inadvertent error which caused delay rental to be late CRT would not grant equitable relief from termination even if good faith mistake Young v. Jones - improper amount tendered (73.29 vs. 76.25) caused the lease to terminate EXCEPTION - Kincaid v. Gulf Oil Corp - where language in the lease indicates that the parties intend to soften the rule of automatic forfeiture, an interpretation of the language that prevents forfeiture is preferred to one which would result in forfeiture |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems (2 of 3) |
(2) The lessee attempts to make payment but is late b/c of the actions of a 3rd party
(a) when you have multi-lessors who appoint a bank as agent for the term and the bank receives payment and IMPROPERLY allocates delay rentals among the lessors, the bank's actions WILL NOT terminate lease (b) where the lease provides for tender of delay rental by mail and the payment is properly mailed, the lease does not terminate if the letter gets lost or arrives late bc the lessor has appointed the mail service as an agent |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems (3 of 3) |
(3) The lessee attempts to make payment but it is improperly made because of some action or ambiguity of the lessor
Humble Oil & Refinancing v. Harrison - The lease will terminate where: (1) the mineral interest owner furnished the lessee with an ambiguous instrument; (2) the lessor knew the lessee had misconstrued the document; and (3) if there is notice by the lessor THE holder is ESTOPPED from terminating the lease - he has the duty to notify and rectify the situation. |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems - EXCEPTION |
Even if the lessee improperly tenders delay rentals or pays them in an untimely manner, if the lessor accepts payment, the lessor is estopped from later claiming an improper tender or late payment
|
|
|
Payment Clause or Assignment Clause
In General |
This clause protects the lessee if lessor transfers her interest during the course of the lease and does notify the lessee. Thus, the lease is not terminated if teh lessee sends delay rentals to the wrong party.
Gulf Refining Co. v. Shatford - a lessee under and O & G lease may send his delay rental payments out a reasonable time in adv of the payment date, and one who acquires part of the lessor's interest and fails to provide the required proof before such payments are sent cannot sue to cancel the lease b/c payments were not made to him |
|
|
Delay Rentals - "Unless Lease"
In General |
Does not bind the lessee to do anything, but are considered conditions precedent so if the does not lessee do anything and fails to pay delay rentals, then estate and the lease automatically revert back to the lessor.
|
|
|
Delay Rentals - "Unless Lease"
How They Work |
The terms set in the habendum clause will terminate unless the lessee does one of two things:
(1)commences drilling operations within the time stated; OR (2)pays delay rentals |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems (1 of 3) |
(1) the lessee attempts to make payment but makes a mistake in good faith
Phillips Petroleum v. Curtis- Phillips' employees made inadvertent error which caused delay rental to be late CRT would not grant equitable relief from termination even if good faith mistake Young v. Jones - improper amount tendered (73.29 vs. 76.25) caused the lease to terminate EXCEPTION - Kincaid v. Gulf Oil Corp - where language in the lease indicates that the parties intend to soften the rule of automatic forfeiture, an interpretation of the language that prevents forfeiture is preferred to one which would result in forfeiture |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems (2 of 3) |
(2) The lessee attempts to make payment but is late b/c of the actions of a 3rd party
(a) when you have multi-lessors who appoint a bank as agent for the term and the bank receives payment and IMPROPERLY allocates delay rentals among the lessors, the bank's actions WILL NOT terminate lease (b) where the lease provides for tender of delay rental by mail and the payment is properly mailed, the lease does not terminate if the letter gets lost or arrives late bc the lessor has appointed the mail service as an agent |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems (3 of 3) |
(3) The lessee attempts to make payment but it is improperly made because of some action or ambiguity of the lessor
Humble Oil & Refinancing v. Harrison - The lease will terminate where: (1) the mineral interest owner furnished the lessee with an ambiguous instrument; (2) the lessor knew the lessee had misconstrued the document; and (3) if there is notice by the lessor THE holder is ESTOPPED from terminating the lease - he has the duty to notify and rectify the situation. |
|
|
Delay Rentals - "Unless Lease"
Improperly tendered or untimely problems - EXCEPTION |
Even if the lessee improperly tenders delay rentals or pays them in an untimely manner, if the lessor accepts payment, the lessor is estopped from later claiming an improper tender or late payment
|
|
|
Payment Clause or Assignment Clause
In General |
This clause protects the lessee if lessor transfers her interest during the course of the lease and does notify the lessee. Thus, the lease is not terminated if teh lessee sends delay rentals to the wrong party.
Gulf Refining Co. v. Shatford - a lessee under and O & G lease may send his delay rental payments out a reasonable time in adv of the payment date, and one who acquires part of the lessor's interest and fails to provide the required proof before such payments are sent cannot sue to cancel the lease b/c payments were not made to him |
|
|
Delay Rentals - The "or" Lease
"OR" lease vs. "UNLESS" lease |
"or" lease - a lessee agrees to commence a well on the premises within so many years or pay delay rentals
"unless" lease - if production is not commenced within a certain period of time, the lease will terminate unless delay rentals are paid |
|
|
Delay Rentals - The "or" lease
In General |
(1) The "or" lease is treated as a fee simple based on a condition subsequent and a right of reentry; it requires an affirmative action on part of the lessee to terminate.
(2) The payment of the delay rental is structured as a contractual obligation (a covenant). Thus, an "or" lease WILL NOT terminate automatically if the lessee fails to commence drilling operations or pay delay rentals. |
|
|
Delay Rentals - The "or" lease
Equitable Principles |
Equitable rules ARE applicable to an "or" elase but not to an "unless" lease because under an "unless" lease, there is automatic termination"
|
|
|
Delay Rentals - The "or" lease
Breach of Covenant |
If the lessee is in violation of an "or" elase, the lessor may sue for breach of covenant and obtain past due delay rentals, or if teh lease contains a forfeiture clause, the lessor may being forfeiture proceedings.
|
|
|
Delay Rentals - The "or" lease
Surrender Clause |
Warner v. Haught, Inc. - the lease in question did not constitute an "or" lease or an "unless" lease but it had a surrender clause. Lessee tendered delay rental payments late, and lessor, construing the lease as an "unless lease claimed that the lease had terminated. The lessee construed the lease as an "or" lease, arguing that there was no automatic termination.
Crt held the lease as an "or" lease. An oil and gas lease containing a surrender clause will NOT be construed to automatically terminate upon failure to pay delay rentals or drilling. |
|
|
Delay Rentals - The "or" lease
Revoke an "or" lease |
Alexander v. Oaks - lessor tried to revoke an "or" lease. The lessor under the lease was required to give 90 days notice even though the lessee never drilled during the primary term.
Crt held that the lessor WAS ALLOWED to revoke without an affirmative act bc the lease provided that if the lessee did not start drilling the lease would terminate. Thus, the lessor and the lessee can provide for an intention in the lease that it will terminate w/out the act of re-entry. |
|
|
Effect of Operations During the Primary Term
The Dry Hole Clause |
(a) The dry hole clause clarifies what the lessee must do to maintain the lease for the rest of the primary term after drilling a dry hole.
(b) Under a typical provision, if after drilling a dry hole, the lessee commences additional drilling or reworking operations within 60 days or begins to pay delay rentals, then the lease will not terminate. |
|
|
Effect of Operations During the Primary Term
The Dry Hole Clause - Timely Resumption of Delay Rentals |
Superior Oil Co. v. Stanolind Oil & Gas Co. - Stanolind claimed that the O & G lease Superiod had come to hold had terimanted when delay rentals were not timely paid after a dry hole was drilled.
Crt held that if an O & G lease is ambiguous, the crt will give it the construction placed upon it by the parties and evidenced by their course of conduct in performing thereunder. |
|
|
Effect of Operations During the Primary Term
Implying Special Limitations after Drilling Dry Hole |
Chandler v. Drummet - the lease had 10 yr primary term w/NO obligation to pay delay rentals, BUT there was a commencement obligation to drill w/in 120 days. The dry hole clause provided that the lease would not terminate if the lessee started drilling within 60 days after drilling a dry hole. The lessee argued that they did not have an obligation to drill another well once the dry hole was drilled.
Crt held that the dry hole provision was a SAVINGS PROVISION and it reflected an agreement as to what constituted a reasonable period of time to commence drilling - THUS - implying special limitation. SIMILAR TO CONDITION PRECEDENT - if you dig dry hole YOU MUST drill again w/in time or lease terminates. |
|
|
Extension of the Lease Beyond the Fixed Primary Term
Drilling Operations - General |
The secondary term is kept alive by production. If the lessee has discovered minerals but not yet produced them at the end of the primary term, the lease will usually be forfeited.
|
|
|
Extension of the Lease Beyond the Fixed Primary Term
Drilling Operations - Excuses for Nonperformance |
Baldwin v. Blue Stem - Blue Stem argued that it had not completed a well before the date set in its O & G lease DUE TO WEATHER AND GOVT'L actions (force majeur??) and that the lease should not be forfeited.
Crt held that in an action to cancel an O & G lease which has expired b/c of nonperformance, excuses for nonperformance CANNOT SERVE to extend the lease. NOTE - today this lease would probably not have expired b/c of the dry hole and cessation of production clause which would give the lessee to act after the expiration of the lease. |
|
|
Extension of the Lease Beyond the Fixed Primary Term
Discovery Rule |
Majority Rule - actual marketing (aka production) is required to extend into secondary term
Minority Rule - You dont have to market, but you have to at least discover and exercise reasonable and diligent efforts (and take into consideration whether such efforts have a reasonable probability of being successful.) McVicker v. Horn, Robinson & Nathan |
|
|
Extension of the Lease Beyond the Fixed Primary Term
Lessor Interference - Pending Litigation |
Where lessor or his assigned brings suit to avoid an O & G lease and the primary term ends during litigation, they are ESTOPPED to claim the lease has expired for lack of production. Court of Equity may give the lessee an additional period of time in which to commence drilling operations and extend the terms of the lease by continued production.
Greer v. Carter Oil Co. - Carter Oil stopped drilling b/c of pending litigation (Greer sued to clear title). Primary term ended during litigation and Greer claims that the lease had been forfeited b/c the primary term had expired w/out production. |
|
|
Extension of the Lease Beyond the Fixed Primary Term
Lessor Interference - Lessor Knowledge of Halted Production |
Watson v. Rochmill - Lessee's obtained production during the primary term. They stopped b/c well was stopped up & market was bad due to depression. While there was no production, lessee kept watchmen and maintained well. After primary term ended, lessee resumed production. Lessors sued saying the lease had terminated when production had ceased after the primary term.
Crt agreed that there was a cessation of production which terminated the lease as a matter of law. The crt rejected the lessee's claim of estoppel based on teh fact that teh lessors knew why production had been halted. The court reasoned that the conduct of the lessor had occurred AFTER the termination of the lease; conduct SUBSEQUENT to termination WILL NOT work as an estoppel. |
|
|
Extension of Lease Beyond the Fixed Primary Term
What Constitutes Production |
If the habendum clause requires production for extension into a secondary term - production means production in paying quantities.
TWO PRONG TEST: 1) If a well pays a profit, EVEN A SMALL ONE, it produces in paying quantities, though it may never repay its costs and the enterprise as a whole prove unprofitable (Garcia v. King) -- if the first prong of the test is not met and operating expenses exceed the revenue, you look to the second prong of the test: 2. the standard by which paying quantities is determined is whether or not under all of the relevant circumstances, a reasonable and prudent operator would, for the purposes of making a profit and not merely speculation, continue to operate a well in the manner in which the well in question is being operated. (Clifton v. Koontz) |
|
|
Extension of Lease Beyond the Fixed Primary Term - Production in Paying Terms
What is Revenue |
(1) revenue exceeds all operating and marketing expenses
(2) revenue includes all revenues attributable to the overriding royalty and the working interest. It excludes revenues which are paid to the land owner, as royalty interests. |
|
|
Extension of Lease Beyond the Fixed Primary Term - Production in Paying Terms
What are Operating Expenses and Marketing Expenses |
Expenses Include:
1. Lifting costs - lifting the oil from a producing formation to the surface 2. Treating and Transporting costs 3. Labor and repair costs 4. If the gas is being moved, the cost of delivering the gas to the buyers 5. Administrative and overhead charges if actually traceable to operating and marketing THEY DO NOT INCLUDE: 1. original investment expended; 2. drilling and equipping the well |
|
|
Extension of Lease Beyond the Fixed Primary Term - Production in Paying Terms
What kind of factors would influence a RP Operator to continue to produce for profit and not for speculation? |
1. how much of the reservoir is depleted?
2. price the lessee can sell for 3. what is the relative profitability of the wells in the area? 4. what are the operating and marketing costs of the lessee? 5. relative lease provisions 6. reasonable time limit in the lease 7. profits |
|
|
Extension of Lease Beyond the Fixed Primary Term - Production in Paying Terms
Burden of Proof |
Lessor has BOP to prove that the lessee is not making a profit.
|
|
|
Savings Clauses
Continuous Operations Clause - In General |
The clause permits the lease to continue so long as production continues. Operations at the end of the primary term will be considered constructive production for the purposes of the habendum clause. If operations CEASE, the clause extends the lease as long as the lessee uses DUE DILIGENCE in resuming production efforts. FACT QUESTION FOR THE JURY.
Sword v. Rains - jury found that ceased production for 8 mos was reasonable b/c Rains used due diligence. |
|
|
Savings Clauses
Dry Hole Clause - In General |
Dry hole clause - it permits the lessee to maintain the lease in the event he drills a dry hole. It keeps the lease alive during the primary term if lessee starts another well or assumes payment of delay rentals.
|
|
|
Savings Clauses
Cessation of Production Clause - In General |
Cessation of Production clause - If production ceases during the secondary term and the lessee acts within reasonable time and uses due diligence to start work over or drill a new well or continue payment of delay rentals the lease is kept alive.
|
|
|
Savings Clauses
Inapplicability of Dry Hole Clause & Cessation of Production Clause |
Sunac Petroleum Corp v. Parkes - O (O & G lease) -> Parkes (w/primary term of ten years).
Parkes sold to 3rd party (reserving an overriding royalty interest of the production from the lease OR ANY RENEWAL or EXTENSION). 3rd party -> (mult. assign) Sunac After primary term expired, O approached Sunac to set up new lease which DID NOT GRANT royalty payments to Parkes. B/C oil was found (gas required) Parkes could not show that the lease had been extended by the dry hole or the cessation of production clauses. THUS, there was no continuation or territorial enlargement of the old lease, Sunac (assignee) did not breach a confidential relationship or act in bad faith, and no material misrep by the assigned prejudiced the holder of the overriding interest. |
|
|
Savings Clauses
Effect of Express Savings Provision on Temporary Cessation of Production |
If there is are express savings provisions, the TCOP doctrine WILL NOT apply.
Samano v. Sun Oil Co. - The lessor argued that lease had expired;b/c, during the secondary term, there was neither production nor any drilling or reworking operations for a continuous period of 73 days. The lessee argued that the 60-day limitation only applied to operations in progress at the end of the primary term (and therefore TCOP doctrine, with its more vague standard of “reasonable time” should apply). Crt held that clause did not refer to extension of primary term but to both of prior statements about duration of the lease. Hence when production stopped, during the secondary period, the lessee had an express 60 days. When it failed to do so, the lease by its express terms automatically terminated. |
|
|
Extension of Lease Beyond the Fixed Primary Term - Production in Paying Terms
Temporary Cessation of Production Doctrine |
TX - upon permanent cessation of production after the primary term, a mineral lease automatically terminates, however - if there is a temporary cessation of production triggered by sudden stoppage of the well or some mechanical breakdown . . . or the like, the lease is not automatically terminated if the lessee remedies the problem within a "reasonable time”.
Cobb v. Natural Gas Pipeline of America - In TCOP cases, once the lessor shows a period of non-production, the lessee has the BOP proving the cessation was only temporary. The lessee presented expert testimony that sought to explain the lack of production in the three periods as being caused by a lack of sufficient pressure in the pipeline from the well to the main pipeline system. Since the lessor offered no evidence in rebuttal, the court found that it satisfied the lessee's burden of producing evidence. |
|
|
Shut In Royalty Clause
In General |
1. typically only applicable to gas production
2. provides substitute for habendum clause 3. clause allows the lessee to hold production on a lease through the payment of royalty payments until he finds a market for the product or gets a needed pipeline -- considered constructive production |
|
|
Shut In Royalty Clause
Oklahoma Rules (Discovery) |
Failure to pay shut in royalties will not even give rise to claim for breach of contract unless the lease contains promissory language as in an "or" lease (either do this or do this...)
Gard v. Kaiser - the lease was in its secondary term and for a 2 yr period no gas was sold and no shut-in royalty payments were made. Lessor argued that the lease had terminated. Lessee argued that the lease remained in effect b/c he diligently sought a market for the gas. In OK production does not include marketing, so as long as lessee is diligently pursuing a market the lease continues. Failure to pay a shut-in royalty will only terminate the lease if the lease clearly indicates that was the parties intention ("or" lease). Thus, the shut-in royalty provision did not operate as a limitation on the estate. A shut-in royalty clause is virtually meaningless in a discovery jurisdiction. |
|
|
Shut In Royalty Clause
Texas Rules |
Works like a delay rental clause, a delay in several months in tendering the shut-in royalty automatically terminates the lease.
** REMEMBER, the O & G lease had to producing in paying quantities. If not, clause cannot be invoked. |
|
|
Shut In Royalty Clause
Texas Rules (majority view) |
Unless specified otherwise in the habendum clause, there must be an actual contract or agreement to sell the oil and gas for there to be production, not merely a diligent effort to sell it. (Stanolind Oil & Gas v. Barnhill)
|
|
|
Production of Oil & Gas
OK & WV (minority view) |
Discovery Rule - an O & G lease will not terminate if O & G is discovered prior to the end of the primary term, actual production is not necessary. Requires due diligence in seeking marketing and production WITHIN reasonable time. (Flag Oil Corp. v. King Resources Co.)
|
|
|
Shut In Royalty Clause
Purpose |
Major purpose is to substitute payment of the shut-in royalty for actual production when there is no market.
That means that there must exist the capability of production in paying quantities. Thus, if a well is incapable of producing (b/c of high maintenance costs, etc.) paying shut-in royalty costs WILL NOT act as constructive production and the lease WILL automatically terminate. (Tucker v. Hugoton Energy Corp.) |
|
|
Savings Clauses
Force Majuere Clause |
Clause protect the lessee from acts of God and other listed events outside the lessee's control.
Historically such clauses only covered acts of God but now the clause is utterly dependent upon the terms of the contract in which it appears Typical Clause: "Should the lessee be prevented from complying with any express or implied covenant, or from conducting drilling or reworking operations bc of scarcity of or inability to use equipment or material or b/c of a federal or state rule of regulation, then the lessee's obligation to comply with the lease is suspended and the lessee is not liable for not being able to comply; the lease is extended and the time is not counted against the lessee." |
|
|
Savings Clauses
Pooling Clause |
Permits the lessee to combine separate tracts into one single unit. Production anywhere on the pooled unit is considered production on any lease in the pooled unit.
|
|
|
Terms
Leasehold royalty |
The share of production, excluding the costs of production, that the LESSOR is entitled to if and when production is obtained.
|
|
|
Terms
Royalty Interest |
1. It is the property interest created in O & G AFTER severance by a royalty deed. Its duration is like that of a common law estate (fee simple).
2. Distinguished from mineral interest by the absence of operating rights. 3. The owner of a royalty interest is entitled to a share of production, free of the costs of production. |
|
|
Terms
Working Interest |
The lessee owns the working interest in a lease. Working interest owners are the ones who have the exclusive right to enter the property for exploration and production purposes. Also known as an operating interest.
|
|
|
Terms
Overriding Royalty Interest |
1) An interest produced at the surface free of the expenses of production, marketing or exploration. It is in addition to the lessor's royalty that is reserved in the lease.
2) Once the lease dies, so does the overriding royalty interest. |
|
|
The Royalty Clause
In General |
It is a right to a fractional share of production free of cost or expenses that are incident to exploration, development and production. After the lessor has leased the premises, it is a return to the lessor as compensation for the lease.
Lessor may have a right to take production in kind (lessor get physical control of his share and lessee has duty to deliver – oil) or a right to a share of the price for which the production is sold (gas). Main provision for lessor compensation. |
|
|
The Royalty Clause
Nature of Royalty Prior to the Execution of a Lease |
Royalty is one of the sticks in a bundle of rights. It can be conveyed separately and apart from the rest of the rights; it is a real property interest.
|
|
|
The Royalty Clause
Nature of Royalty After the Execution of a Lease - What does the royalty interest GRANTEE receive? |
1. if a grant ONLY GRANTS a royalty interest, the grantee receives the right to receive some share of the production if and when there is production
2. the grantee MAY NOT receive bonus, delay rentals, and he MAY NOT lease the property or explore it. The grantee has a nonparticipating royalty interest. |
|
|
The Royalty Clause
Nature of Royalty After the Execution of a Lease - What does the GRANTOR of a royalty interest retain? |
The grantor may receive bonus, delay rentals, explore and lease the property.
|
|
|
The Royalty Clause
Nature of Royalty After the Execution of a Lease - Severed v. Unsevered Royalty |
unsevered royalty = real property interest
severed royalty = personal property |
|
|
The Royalty Clause
Nature of Royalty After the Execution of a Lease - Payment in money or kind |
royalty is normally in money but may be paid in kind
|
|
|
The Royalty Clause
Nature of Royalty After the Execution of a Lease - Gas Royalty Clause vs. Oil Royalty Clause |
A lessor's royalty in oil is usually paid in kind whereas gas is usually paid in the amount realized. This is important in terms whether you can sue for conversion (aka - only oil b/c you have title, w/gas you wouldn't so you would have to sue breach of contract)
|
|
|
"The Royalty Clause
Problems of Allocation of Expenses and Calculation of Amount Due - Allocation of Expenses" |
Whether the lessee is entitled to market value at the well or the net realized.
|
|
|
"The Royalty Clause
Problems of Allocation of Expenses and Calculation of Amount Due - Allocation of Expenses" |
"Royalty Interest Owner - does not bear costs of production, but must share proportionate burden of subsequent production costs
Operator (lessee) must pay - the costs of geological surveys; drilling costs and the cost of bringing the hydrocarbons to the surface; tangible and intangible costs incurred in testing; completing and reworking a well; secondary recovery costs. Operator and Royalty Interest Owner must PROPORTIONALLY bear the cost - gross production and severance taxes; transportation charges or other expenses incurred in conveying the minerals produced from the well head to the place where the buyer of the minerals takes possession; expenses in treatment required to make the mineral product saleable; expenses of compressing gas to make it deliverable into a purchasers pipeline; manufacturing costs incurred in extracting liquids from the gas" |
|
|
"The Royalty Clause
Problems of Allocation of Expenses and Calculation of Amount Due - Vela Rule" |
Market price is determined at the time of the sale, not the time of the contract b/c gas is not sold when the contract is made; it is sold when you deliver the gas to the purchaser (Texas Oil & Gas v. Vela - lease provided lessor would receive 1/8th of the market price of gas sold or used off premises (which was 2.3 cents at k). when it was actually sold the market price was 13 cents. The lessor wanted (and got) the market price when sold)
|
|
|
"The Royalty Clause
Problems of Allocation of Expenses and Calculation of Amount Due - Gas Sold Off the Premises" |
"Gas sold in its natural state, describes not only location but quality as well.
Lessor receives market value at the well (means before processing and transportation), and gas is sold at the well if the price paid is consideration for the gas as produced but not for processing and transportation. (Includes when gas is piped to a different piece of property)" |
|
|
"The Royalty Clause
Problems of Allocation of Expenses and Calculation of Amount Due - " |
Lessor receives amount realized
|
|
|
"The Royalty Clause
Ways to Calculate Royalty - Amount Realized" |
royalty is based on actual sale price (costs incurred after production are deducted)
|
|
|
"The Royalty Clause
Ways to Calculate Royalty - Market Value" |
royalty is based on market value – what a willing buyer pays a willing seller
|
|
|
The Royalty Clause
Calculating Royalties - Application of "at the well" and "off the premises" doctrine |
Exxon v. Middleton -
If gas is sold at a point on the leased premises, royalties are to be based on the "amount realized" from the sale. If gas is sold at a point off the leased premises, royalties are to be based on the "market value at the well" |
|
|
The Royalty Clause
Calculating Royalties - altering physical quality of the gas |
Piney Woods Country Life School v. Shell Oil Co - Shell obtained gas, but it was sour so it had to be taken to Shell's plant for processing. Shell claimed that the royalties should be based on amt realized, while Piney Woods claimed royalties should be on market value.
Crt held that to qualify for "at the well" the physical quality of the gas could not be altered. If value is added to the gas after it is taken from the ground and before it is transferred to the buyer, it is NOT sold "at the well". B/c it was processed, it should be based on market value. |
|
|
The Royalty Clause
Calculating Royalties @ Market Value: Comparable Sales |
sales comparable in time, quality, quantity, and availability of marketing outlets (requires an expert to determine)
preferred method by the courts |
|
|
The Royalty Clause
Calculating Royalties @ Market Value: Net-Back |
This method involves subtracting reasonable post-production marketing costs from the market value at the point of sale.
In other words, to arrive at the "market value of the gas at the well," subtract from the price received the reasonable costs of transporting the gas to the point of sale and other "post-production" costs. Approved by Piney Woods Country Life School v. Shell Oil Co. |
|
|
The Royalty Clause
Calculation of Royalties - Take or Pay Provisions |
Killam Oil v. Bruni -
O leased to A in exchange for right to receive royalties. A enters into K w/3rd party w/ take or pay provision (3rd party will pay lessee a certain amt of money every month, whether or not the lessee produces gas). 3rd party refused to pay and 'A' received judgment of 6.8 million for the unpaid installments. O wanted the royalties from the 6.8 mill. Crt held that O could not collect. A is not obligated to pay a royalty for gas that was not produced or sold. The bottom line is that the lessee is not obligated to pay royalty interest on money as a result of a take or pay provision. |
|
|
The Royalty Clause
Remedies for Nonpayment - In General |
If the lessee fails to pay royalties, the lease is not canceled, but instead the lessor has a damage action at law for breach of the express covenant to pay royalty on production. If the royalty is payable in kind, a royalty owner also has a tort action for conversion.
Cannon v. Cassidy - lessor sought to cancel O & G lease b/c lessee failed to pay royalties for 11 mos. Crt held that nonpayment of royalties is NOT sufficient basis for the lessor to seek forfeiture or cancellation of the lease if the lease does not expressly provide for such remedy for nonpayment of royalties. The lessor must sue for money damages at law. |
|
|
The Royalty Clause
Free Gas Clause and Related Provisions - In General |
This clause gives the lessor the right to use the gas produced for domestic purposes; the royalty is deducted after the use. Non-domestic purposes are not allowed.
Thomas v. Thomas - H & W execute on O & G lease which allowed the lessor to use the gas for lighting in principal dwelling. W conveys 1 acre tract to A who plugs into the gas well. H & W die and their house is no longer in use. Does the free gas clause extend to the second dwelling? - No. |
|
|
The Royalty Clause
Division Order - In General |
provide a procedure for distributing the proceeds -- a statement executed by all parties who claim an interest stipulating how proceeds of production are to be distributed (purpose is protect the distributor of such funds against liability for improper payment)
Exxon v. Middleton - The lessors executed division orders, which calculated payments of royalties on the amount realized. The court holds that the division order modified the gas royalty clause until revoked, Here, they were not revoked until commencement of the suit, so prior to commencement lessor are entitled to amount realized (versus lease provision requiring market value), after commencement they are entitled to market value (correct calculation based on Piney Woods. |
|
|
The Royalty Clause
Transfer Order - In General |
a direction and authorization to change the distribution provided for in a division order
Gavenda v. Strata Energy - lessee (Strata) erroneously underpaid royalties on an oil and gas lease to the Gavendas, who sought the difference. Strata executed division order under the belief that Gavendas had died. Crt held that transfer and division orders are not binding when an operator prepares erroneous orders and retains part of the proceeds for itself. |
|
|
Miscellaneous Clauses
Covenants of Title and Subrogation |
The lessor warrants and agrees to defend title to said land and agrees that the lessee, at its option may discharge tax, mortgage or any other lien upon said land. If the lessee does discharge these obligations, the lessee shall be subrogated to such lien with the right to enforce it and apply rentals and royalties accruing towards the same.
|
|
|
Miscellaneous Clauses
Drilling and Operating Restrictions |
For example, the lessee is bound to bury all pipelines and drill outside 1200 ft. of a dwelling.
|
|
|
Miscellaneous Clauses
Release of Record |
This clause facilitates the quieting of the lessor's title. For example, the lessees will provide the lessors with a release when the lease expires.
|
|
|
Miscellaneous Clauses
Removal of Fixtures |
The lessee has the right to remove property or fixtures. If you are the lessor, you should put in a time for removal; if the lessee has not removed the items within that time, the lessor then owns them.
|
|
|
Miscellaneous Clauses
Liquidated Damages Clause |
Traflager House OIl& Gas v. Hinojosa - In the lease between these two parties, there was a clause requiring that the lessee pay the lessor liquidated damages if the lessee assigned the property to another w/out giving the lessor notice.
Crt held that such clauses were ENFORCEABLE. The clause was a REASONABLE estimate of damages and not a penalty, which would be unenforceable (more than 10%(?) would be a penalty). |
|
|
Covenants Implied in Oil & Gas Lease
Why the need for implied covenants? (definition of relational ks) |
A lease is a relation contract which involves a situation in which an asset (or something of value) is managed by the performing party (lessee), with the income (or return on capital) of the passive party (lessor) solely dependent on the performing party’s action.
Relational promisees (lessors) are often victimized by opportunistic behavior: when lessee acts to manipulate the contract so as to maximize its wealth at the expense of the lessor. The judicial implication of covenants into oil and gas lease is a response to the problem of lessees acting opportunistically. The implied covenant and the prudent operator standard seek to eliminate lessee opportunism by requiring the lessee to act for the common advantage of both lessor and lessee (implied covenant doctrine of fair and reasonable dealings). |
|
|
Covenants Implied in Oil & Gas Lease
Main Issue |
Whether the lessee should be required to perform outside the terms of the lease.
Crts have consistently held that there are implied covenants to: (1) to protect from drainage (2) reasonable development and further exploration (3) market |
|
|
Covenants Implied in Oil & Gas Lease
Intention of Parties |
In addition to those typically implied, implied covenants stem from the intention of the parties as gathered by the express terms of the lease that were clearly within contemplation of the parties, but which were unnecessary to express.
Danciger Oil v. Powell - An implied covenant is valid when: 1. it appears that it was contemplated by the parties, but unnecessary to express; 2. it effectuates the purpose of the contract as a whole; 3. it is used as a means of describing what is fair and customary. |
|
|
Covenants Implied in Oil & Gas Lease
Implied in Fact vs. Implied in Law |
A covenant is implied in fact when its existence is derived form the written agreement and the circumstances surrounding its execution.
A covenant is implied in law when it is added to the contract by the court to promote fairness, justice and equity. |
|
|
Covenants Implied in Oil & Gas Lease
Reasonable Prudent Operator Standard |
Underlying all implied covenants is the reasonable prudent operator standard which requires the lessee to conduct itself as would a reasonable prudent operator under the circumstances (For example, to determine if lessee has breached the implied covenant to protect from drainage by not drilling an offset well, the inquiry is whether a reasonable prudent operator would have done so – similar to Tort law reasonable man standard).
|
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
In General |
Elements:
(1) substantial drainage from the leased premises and (2) probability of profit The duty only arises if a RPO would protect from such drainage by drilling a well and a RPO would have a reasonable expectation of producing gas in paying quantities. |
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
Production in Paying Quantities - Implied Covenant vs. Habendum Clause |
Under the implied covenant, “production in paying quantities” means in such quantities as would give the operator a reasonable profit after deducting all costs.
Under the habendum clause “production in paying quantities” mean production sufficient to exceed lifting costs. |
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
Is Notice Required? |
Sundheim v. Reef Oil Corp - Lessee’s did nothing for 4 years. The lessors argue that during that period, 145,000 barrels of oil was drained from their leasehold and that the lessee breached its implied covenant to protect from such drainage (says they should have drilled off-set wells to capture the oil).
Lessee argued that they were entitled to written notice or demand to drill as a precondition to the duty to drill. Court holds: 1. notice requirement is satisfied if the lessees had knowledge (actual or constrictive) of the drainage (if the lessor is seeking money damages). 2. Burden is on the lessor to show the lessee knew of the drainage. 3. An operator is deemed to have constructive knowledge when he is in possession of all the relevant facts and circumstances. |
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
RPO Must Consider What Factors In Determining Whether to Drill Offset Well? |
RPO must consider whether:
1. there has been substantial drainage? 2. will the lessee make profit? This means that the lessee must produce oil in sufficient quantities to repay the whole sum required to be expended (including cost of drilling, equipping, and operating the well in addition to paying a REASONABLE profit on the entire outlay) |
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
Express Clauses and Implied Covenants - In General |
An express clause relating to the obligation of the lessee to drill an offset well to prevent drainage will control over implied covenants.
|
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
Express Clauses and Implied Covenants - Common Lessee Exception |
If there is a common lessee of the two tracts of land, then an express clause limiting the obligation to drill an offset well WILL NOT control whether the lessee is causing drainage on adjacent land.
|
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
Express Clauses and Implied Covenants - Common Lessee Exception Effect on Overriding Royalty Interest (NOT TX, NM) |
Cook v. El Paso Natural Gas Co. - Cook owned an overriding royalty interest and sued her sub-lessee for causing drainage. Lessor of both tracts was the US. El Paso held leases for both tracts. Cook claimed that lessee was in breach of its duty to protect from drainage. El Paso argued that an overriding royalty interest owner does not have standing.
Crt held: Cook had standing to bring suit claiming violation of the implied covenant. Since El Paso are the assignees of Cook's O & G lease and also being the owners of a gas well located on an adjoining lease, there existed an implied covenant running to Cook to refrain from any action which would deplete. Cook essentially creates a new implied covenant when there is a creation of an overriding royalty (in order to protect the royalty owners interest, otherwise he is at the mercy of the lessee) and says that implied covenants that run with the land extend to overriding royalty owners. Also throw profitability test out the window - overriding royalty interest only has to show substantial drainage in a common lessee situation and the express clause will not relieve payment of royalties. |
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
Express Clauses and Implied Covenants - Common Lessee Exception - Texas Law |
Unclear.
Hutchinson v. Humble - Crt said the lessor could not recover agst the lessee for breach of an implied covenant if there was and express clause on offset wells and the lessor could not show tat the well could be drilled from profit. Shell v. Stansbury - DISAPPROVED Hutchinson, common lessee has SOME duty to protect the lessor from depletion by affirmative act in an adjacent tract. Question remained: (1) whether the profitability test applied or (2) whether the express provision was ineffective. |
|
|
Implied Covenant to Protect From Drainage (the Off-Set Well Covenant)
Express Clauses and Implied Covenants - Common Lessee Exception - Fieldwide Drainage v. Local Drainage |
Fieldwide drainage - drilling anywhere will effect the ENTIRE reservoir (FIELD)
Local drainage - the only tract you can drain on is an adjoining tract |
|
|
Implied Covenant to Protect from Drainage
Common Carrier - Obligation When Dealing w/Field Wide Drainage, BOP |
Amoco Production Co. v. Alexander - Amoco operated a series of well where some wells were "updip" (oil rises) and others "downdip" (more water) Alexander was lessor of down dip wells and when the wells watered out & became nonproductive, Alexander filed suit, claiming that Amoco slowed production on his field so more oil could be extracted on the updip leases.
Crt held - while there is an implied duty on a leaseholder to protect a well from local drainage, the oil leaseholder is also under an obligation to prevent FIELD WIDE drainage from wells it operates. Lessor has BOP to prove subst drainage, that RPO would have acted to prevent the loss (including applying for Rule 37 exception), profitability. If this case, Amoco couldn't drill on the down drip tract bc of Rule 37, but a RPO would have applied for exception which Amoco DID NOT do. Alexander also put on evidence that if Amoco had applied, he probably would have gotten it. |
|
|
Implied Covenant to Protect from Drainage
Common Carrier - Rule 37 Exception |
Rule 37 - Statewide spacing rule providing for a minimum space of 1200 feet from any other well in the reservoir and that well be at least 467' from lease lines.
EXCEPTION - operator can get an exception to spacing requirements if operator can show via scientific evidence that conservation will be better served by different spacing rules. Can apply to field wide basis. |
|
|
Implied Covenant to Protect from Drainage
Damages Available |
Damages are measured by teh royalty the lessor WOULD HAVE obtained had the offset well been drilled. Damages ARE NOT measured by the amount of royalty oil that was drained away.
Punitive damages are generally not allowed. EXCEPTION - Pan American v. Hardy - The lessee misrep to the lessor and the RCC the presence of another formation. B/c the lessee knowing made the misreps, the court granted punitive damages against the lessee. |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Issue |
If you obtain production, the question arises whether the lessee has an obligation to drill additional wells.
|
|
|
Implied Covenants of Reasonable Development and Further Exploration
General Rule |
If there is no express provision the lessee does not have duty until production is obtained. Once production is obtained there will be a duty if RPO would cont to develop.
The duty usually arises during the primary & secondary term AND normally AFTER production is obtained. Duty CANNOT rise when the lease is being held by delay rentals or under an express rental clause under the lease. |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Reasonable Development |
What duty does the lessee have to drill additional wells in a proven field?
Test - 1. The probability that additional wells drilled would returns the costs of drilling, completing and operating (RPO standard), 2. and proof of profit |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Further Exploration |
What duty does the lessee have to drill in a potentially productive but unproven area?
|
|
|
Implied Covenants of Reasonable Development and Further Exploration
Reasonable Development - Remedies for Breach |
1. The lease may be canceled outright, save for the small area surrounding the existing producing wells.
2. Crt may order a conditional cancellation of the lease if breach is found. The lessee is then given a certain period of time within which to perform the covenant or the lease will be canceled. 3. The crt may award money damages. |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Relationship Between Express & Implied Development Covenants |
Gulf Production Co. v. Kishi - Kishi claimed that even though the # of wells called for in the lease had been drilled, more had to be drilled to comply w/the implied covenant of reasonable dev.
Crt held that if an O & G lease makes an EXPRESS provision for the dev of the premises through the # of wells to be drilled after the discovery well, teh lease IS NOT subject to an implied covenant. EXPRESS OVERRIDES IMPLIED. |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Further Exploration - Separate Duty after Discovery - 1959 |
1959 - 5th Cir - Sinclair Oil & Gas Co. Masterson - Oil rights held by Sinclair and gas rights held by Colorado. Colorado drilled for gas and encountered oil sands. Lessor INSISTED that Sinclair drill and he did but only where Colorado had spotted the oil sands. Lessor wanted Sinclair to FURTHER EXPLORE the large tract (90K acres) of land. Sinclair said he did not have a duty once he achieved production.
Crt held that a lessee CANNOT hold the major portion of a large amt of leasehold land indefinitely by production from or exploration of a small part of the land. Crt refuted Clifton v. Koontz saying that it does not apply b/c that crt did not address when a long time had passed and there was a large tract at issue. Seeming segregates the duty to further explore form the duty to reasonably develop. This case could be at odds w/Kishi b/c an express covenant exists for development. |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Further Exploration - Duty after Discovery - Large Acreage/Lengthy Time Passage - 1959 |
1959 - TX SC - Clifton v. Koonce - Have obligation to reasonably develop but no obligation to further explore.
REPUDIATED in Sinclair Oil. |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Separate Duty to Explore - 1986 |
Atlantic Richfield v. Gruy -
Gruy says ARCHO failed to develop w/due diligence. ARCO was attempting to hold the property for a long period of time after the initial discovery. Crt held that the lessor must prove that a RPO would further explore under similar circumstances and that he can make a profit - reaffirms CLIFTON. |
|
|
Implied Covenants of Reasonable Development and Further Exploration
Separate Duty to Explore - 1989 |
Sun Exploration and Production Co. v. Jackson - Jackson's counterclaimed for breach of implied covenants b/c Sun didnt explore all of tract.
Crt held there was NO implied covenant of further exploration INDEPENDENT of the implied covenant of reasonably development. In order to enforce the covenant, the critical question is profitability. If a RPO would have drilled expecting to make a profit, then the obligation to further explore would fall w/in the covenant to reasonably develop w/out regard to whether the well be classified as exploratory development. PUTS CLIFTON TO REST: There is an implied covenant to further explore, but it does not exist apart from the duty to reasonably develop. |
|
|
Notice, Demand and Judicial Ascertainment Clause
In General |
Various forms of this clause require the lessor to give notice to the lessee of some breach or violation of lessee's obligations under the lease. However, the lessor DOES NOT have an obligation to give notice when the lessee has violated the habendum or the delay rentals clause.
|
|
|
Notice, Demand and Judicial Ascertainment Clause
Remedies for Breach of a Covenant |
1. Equitable Relieft - Cancellation of lease
2. Actual Damages which equal the value of the royalty the lessor would have received had the breach not occurred; 3. Exemplary damages which may be only recovered when the lessee's breach amounts to an independent tort |
|
|
Notice, Demand and Judicial Ascertainment Clause
Notice |
Where the only remedy is damages, NO notice is required by the lessor prior to suit.
Where equitable relief is sought in whole or in part notice is required and a demand is required before filing the action. Texas Oil & Gas v. Vela - The lessor IS NOT required to give notice prior to a suit for damages for breach of an implied covenant. The purpose of the notice provisions is to protect the lessee from forfeiture. |
|
|
Implied Covenant to Manage and Administer
In General |
"Catch all covenant" - Have to act in a manner to conform to the terms of the lease. (would RPO do this)
|
|
|
Implied Covenant to Reasonably Develop and Further Explore
3 Implied Covenants Established by TX SC |
Amoco v. Alexander
1. Covenant to protect 2. Covenant to develop 3. Covenant to Manage and Administer Lease |
|
|
Other Implied Covenants
Implied Covenant to Market (Kansas 1990) |
Robbins v. Chevron USA - Robbins contended that Chevron breached the implied covenant to market the gas it obtained while the O & G lease was in force. Robbins sought equitable relief (cancellation of lease).
Crt held that once an O 7 G lease is discovered in paying quantities, the lessee under a lease agreement has an implied obligation to produce and market production diligently. Must conform to RPO standard. |
|
|
Remedies for Breach of Express Drilling Agreements
In General |
A covenant, implied or express, is a promise. If it is breached, the lessor is entitled to damages.
If the lessee violated a special limitation, the lease would terminate. |
|
|
Remedies for Breach of Express Drilling Agreements
How to Interpret Provision |
Treat as a covenant (promise thus can get damages if breached) or as a special limitation (so if fail to perform, lease automatically terminates) or as a condition subsequent so that the lessor has to reenter to terminate?
Generally interpreted as a COVENANT so if breached you are entitled to damages. However, you can provide in the lease that such an express provision is to be treated as a special limitation. Joyce v. Waynt - Mix of promissory language and limitation language. Wyant failed to drill 3 out of 4 wells. The problem was what language to interpret b/c remedies differ. Crt held that if an O & G lease provides that it will remain in force for a set primary term and as long as thereafter as lessee complies with his obligations thereunder, the failure to comply with the obligation to drill a certain # of wells will simply result in a termination of the lease and will not give rise to an action in damages for breach. |
|
|
Remedies for Breach of Express Drilling Agreements
Types of Damages Sought |
1. Cost of Drilling (easier to prove)
2. Lost royalty (TX view)(hard to prove) |
|
|
Remedies for Breach of Express Drilling Agreements
Lost Royalties |
TX View - hard to prove
Guardian Trust v. Brothers - crt awarded the royalty the lessor would have received on the well if it had been drilled as required. The burden is on plf' to show that he would have sold the royalty interest and the value for which he would have sold it for. |
|
|
Remedies for Breach of Express Drilling Agreements
Cost of Drilling |
Fisher v. Tomlinson Oil. Co (Kan. 1974) - Fisher had assigned his rights under oil and gas leases to Tomlinson, which then failed to live up to its express obligation to drill a well before a certain date.
Crt awarded the cost of drilling b/c they reasoned that you have to drill in order to find it; if the lessee failed to drill, you should make them pay the cost of drilling. |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Interest Created by Landowners |
1. Mineral Interest
2. Royalty Interest 3. Non Executive Mineral Interest |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Interest Created by Landowners - Mineral Interests |
They are created by MINERAL deeds or by reservation. The lease owner has the same right as the owner did before the severance; concurrent owners share ALL rights.
|
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Interest Created by Landowners - Royalty Interests |
Created by a ROYALTY deed or reservation. The duration varies. The owner has the right to receive a certain part of the oil and gas free of the costs of production. There is no right to develop or lease.
|
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Interest Created by Landowners - Non Executive Mineral Interest |
Often parties to an oil and gas conveyance prefer that the executive right be lodged in the hands of one person.
Created by grant or by reservation in a deed w/specific language that governs the sharing of bonus, rental, and excluding all but one person from participating in the execution of the leases. The owners rights are spelled out in the lease but the owner does not have the right to develop or execute leases. |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Mineral Estate Owner - General |
The mineral estate may be granted, conveyed or reserved separate and apart from the surface state and each estate is a separate fee simple estate.
|
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Mineral Estate Owner - Rights Associated w/this Ownership |
1. The right to sell or convey all or part of the minerals;
2. The right to develop including all easements which are reasonably necessary to develop the mineral estate (mineral estate is the dominant estate) 3. The right to execute and O & G lease; (the executive right) 4. the right to fractionalize the mineral estate; 5. the right to give away the estate by devise or descent |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Mineral Estate Owner - Rights to Receive as Lessor |
1. The right to receive bonus
2. The right to receive delay rentals 3. The right to royalties 4. The right to a reversionary interest 5. the right to the benefit of the covenants in the lease |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Mineral Estate Owner - Types Bonus He Can Receive |
Cash bonus - cash consideration or down payment, paid or agreed to be paid, for the execution of the O & G lease. Usually fixed per acre basis.
Production payment (also called an O & G royalty bonus)- the sus to be paid or the units to be delivered are fixed in amt and they are derived from the production of minerals. The lessor is paid if and when production is obtained. |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Non Executive Mineral Interests - In General |
The mineral estate owner can create non executive interest. They take 3 forms:
1. those that contain perpetual duration 2. those that are fixed but will continue so long as there is production 3. those that are fixed Day v. Texland Petro - A&B conveyed 80 acres to Day and reserved 1/2 nonparticipating mineral interest. Thus A&B owned 1/2 of the mineral interest stripped of executory rights and Day owned the surface 1/2 of the minerals and ALL executory rights. Day sells 10 acres to Shoafs and reserves 1/4 mineral interest for A&B. Texland leases and gets production. Day claims that Texland failed to pay delay rentals to A&B and that Texland and Day owned 3/4s of the executive rights. Shoafs and Texland disagree b/c there was no mention of reserving executive rights. Crt held that the executive right, severed from the 1/2 mineral interest reserved by the owners passed under the general warranty deed to the grantee b/c there was no language in the deed reserving or excepting the interest. EXECUTIVE RT IS NOT IN THE NATURE OF A CONTRACT |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Non Executive Mineral Interests - Royalty Interests |
Can be created before or after a lease is executed. One can share in existing lease or future leases. Can create a present interest in royalties deferred until an O & G lease is executed.
3 forms: 1. perpetual duration 2. fixed period and so long thereafter 3. fixed period and no longer |
|
|
Title Conveyancing Problems Arising From Transfers by Fee Owners and Lessors
Formalities of Conveying and Severing Minerals |
1. the appropriate words of grant must be used;
2. it must be in writing to satisfy SOF; 3. must be delivery and acceptance 4. the usual reqs of jurisdiction applicable to conveyances of realty concerning acknowledgement of the instrument must be met; 5. the interest must be recorded or listed |
|
|
Interpretation of the word “Minerals”
|
Most conveyances contain the language “oil, gas and other minerals”. There has been considerable litigation over what “minerals” is.
The traditional approach is to look for the specific intent of the parties by objective tests. In TX - oil & gas are minerals as a matter of law. |
|
|
Interpretation of the word “Minerals”
History - ordinary and natural meaning |
1949 - Heinatz v. Allen - Testator devised minerals to plf' and surface estate to daughter. Daughter started quarrying for limestone and plf' claims its a mineral
Crt held that limestone is not a mineral & that it would look to the "ordinary and natural" meaning of the word unless its intended to have more/less signficance. Crt held it CANNOT look at scientific or technical definitions b/c it would extend the ordinary meaning too far. Minerals = oil, gas, salt Not Minerals = substances used as building stone and cliche, gravel, limestone, surface shale, water, sand |
|
|
Interpretation of the word “Minerals”
History - surface destruction test |
1971 Acker v. Quinn (Tex Sup Crt) - first of a number of decisions that altered the meaning of mineral as governed by Heinatz test.
Acker sought a determination that a conveyance of a mineral estate included iron ore. Crt held that where removal of a substance would destroy the surface estate, it is considered as belonging to the surface estate and NOT the mineral estate. RULE - an unnamed substance is not a mineral if substantial quantities of that substance lie so near the surface that production would entail the destruction of the surface. |
|
|
Interpretation of the word “Minerals”
History - substance located at surface |
Reed v. Wylie 1 (1977)- Involved coal and lignite and 1/4 mineral interest.
Crt held two parts: (1) if substance is near the surface then the surface owner must prove that the substance is at the surface AS OF THE DATE OF THE INSTRUMENT and the method of extraction would destroy the surface; and (2) that if a substance is AT THE surface (as opposed to Acker's "near the surface"), the surface owner owns it at the surface and extending to all depths. No BOP req. Problem: what is the surface? |
|
|
Interpretation of the word “Minerals”
History - substance located near surface |
Reed II -
"Near the surface" - Any coal or lignite found near the surface is not a mineral and belongs to the surface owner if any reasonable method of production will destroy, consume or deplete the surface. The term near the surface means within 200 feet of the surface. (3) Any coal or lignite situated both within and below 200 feet of the surface again belongs to the surface owner if production will destroy, consume or deplete the surface. At the surface - if substance exists at some depth in there is an outcrop and the substance belongs to surface estate at all depths |
|
|
Interpretation of the word “Minerals”
Return to the Ordinary and Natural Meaning test |
Moser v. U.S. Steel Co (Tex Sup 1984) - Owner reserved rights to "oil, gas and other minerals" and uranium was found on tract.
Crt held that uranium will be considered a mineral. The court looks to see whether the substance is a mineral within the natural meaning of the term. APPLIED PROACTIVELY - thus anyting before June 8, 1983 still applies Reed II. |
|
|
Interpretation of the word “Minerals”
History - Summary |
If a NAMED substance is specifically included in a grant or reservation, then the named substance is a part of the mineral estate even if removing it will destroy the surface.
Grant or reserv. of an UNNAMED subst under teh term "minerals" will not include unnamed subst found at teh surface and there is NO BOP. A grant or reserv of an UNNAMED subst found near teh surface does not include subst if teh surface owner sustainsthe BOP that any reasonable method of extraction would destroy the surface (a subst is near teh surface as a matter of law if its within 200' -- Thus if it is and the surface owner can prove that any REASONABLE method of extraction would destroy the surface, then he owns to all depths) |
|
|
How to interpret "minerals"
Accomodation Doctrine |
When the mineral owner owns an unnamed substance and its removal would be surface destructive, the mineral owner must compensate the surface owner for that destruction (must act w/due regard to surface owner)
|
|
|
How to interpret "minerals"
Negligence |
Mineral owner's liability is restricted to negligently inflicted damage or excessive use of the surface estate ONLY for specific conveyances.
|
|
|
How to interpret "minerals"
Return to Ordinary and Natural Meaning Test - Favoritism to Certain Parties |
Schwartz v. State - when the state is a party to the transaction, public policy requires that the legislative grant be resolved in favor of the state. If the term mineral is ambiguous, the court simply interprets in favor of the state.
Noffsinger v. Brown - Noffsinger's ancestor conveyed land to Midland Townsite Co. in a deed reserving the coal and the mineral rights but incorrectly stating that the minerals rights had been previously conveyed. Crt held that if "coal and mineral rights" are reserved in a deed which incorrectly states that the mineral rights have been previously conveyed, the mineral rights remain w/the grantor. |
|
|
Conveyancing Problems in Severing Minerals
Easements - In General |
The mineral owner and owner of the leasehold estate have the benefit of the exploration thus the development of easements. Even if the grant or reservation is silent, they arise by implication. The parties may use so much of the estate as is reasonably necessary to explore and develop.
EXCEPTION - Mineral owner or lessee of the mineral estate own the dominant estate and they must enjoy their right to such easements w/due regard to the surface owners. Under certain situation the owner of the servient estate will be afforded certain accommodation ("Accommodation Doctrine") |
|
|
Conveyancing Problems in Severing Minerals
Easements - Use of Airspace |
Getty v. Jones - Getty owned mineral estate, Jones owned surface estate. Jones had irrigation system that required nothing to be built over 7'. Getty wanted to build well equipment that reach 17'. Jones brings suit to prevent erection. Getty argues that b/c he has dominant estate, he can use as much of the surface estate as reasonably necessary and that air space isnt included in this standard.
Crt held that the mineral owner's easement was restricted to the reasonable use of lateral space as well as the air space. Owner of the dominant estate has an implied right to use so much of the surface as is reasonable necessary, but the rights implied in favor of the mineral estate are to be exercised w/due regard of the owner of the servient estate. HOWEVER - where there is only one manner of use of the surface estate where minerals are being produced, the mineral owner has a right to produce regardless of surface damage. But, the rules of reasonable use require adoption of an alt recovery method which does not preclude or impair the use of the surface. Getty could have used other equipment which would not exceed 7' but Jones could not use any other irrigation method. BOP on surface owner. |
|
|
Conveyancing Problems in Severing Minerals
Easements - Use of Underground Water |
Sun Oil v. Whitaker (Tex Sup 1972) - Sun Oil, owner of the mineral leasehold, wnated to use the water beneath Whitaker's surface estate to inject and produce pressure which would aid in oil production.
Crt held that UNLESS otherwise provided by contractual provisions, an O & G lease has an implied right or easement to make such use of underground water as may be reasonably necessary to effectuate the purposes of the lease, having due regard for the rights of the owner of the surface estate. Dissent (Lytton LOVES) - Sun Oil's actions unnecessarily depletes the water supply. The surface estate was being diminished w/out compensation. This conflicts w/Getty. |
|
|
Conveyancing Problems in Severing Minerals
Easements - Advanced Exploration Techniques |
Implied easement to develop and explore extends to advanced exploration techniques which were not known at the time the lease was entered.
|
|
|
The Mother Hubbard (or Cover-all) Clause
|
Clause allows the lessee to claim right to small tracts of land, which are adjacent to the leased property, but which may not be specifically included in the lease description.
Jones v. Callan (Tex.) - Tract 1 contained 68 acres and 28 mineral acres. Tract 2 contained 49 acres and 20 mineral acres. Lessor owned all of the land and these mineral acres under both tracts. lessor executed a lease which only described Tract 2, but named more mineral acres than were available in Tract 2. Lessee then claimed that it was the intention of the parties to include part of the mineral estate in Tract 1 and it should be included under Mother Hubbard Clause. Crt held that the lease only covered Tract 2. The Mother Hubbard Clause ONLY covers small unleased adjacent pieces or strips of land which may exist w/out the knowledge of one or more parties, regardless of what the parties intended. In this case, both parties were aware. |
|
|
Definition
Mineral Acre |
The full mineral interest in 1 acre of land.
Example - Own 100 acres in fee simple and sell 1/2 of the minerals you are agreeing to sell 50 mineral acres. |
|
|
Grants and Reservations of Fraction Interests
In General |
The fee owner or the lessor or may convey or reserve an undivided royalty interest. The mineral interest owner by royalty deed can also convey a fraction of a royalty.
What does the fractional interest entitle you to? Will the interest increase or decrease as other leases are acquired? Dawdle v. Fridge (Ala 1983) - A dispute arose as to extent to which a royalty deed granted mineral deeds. Crt held that a royalty deed will be construed according to its plain language. |
|
|
Grants and Reservations of Fraction Interests
Calculate Royalty Interest |
Two Ways:
(1). A royalty acre - 1/8th royalty in the full mineral interest in one acre of land. Example - A owns 5 royalty acres in 10 acre tract of land. A then has an interest in 1/2 of the tract. A royalty acre is 1/8th royalty on one acre. Therefore, to determine A's royalty interest, you multiply 1/2 x 1/8, which equals 1/16th. (2) Royalty Lease - you divide the lease by the percentage you own. If you have 1/8 royalty interest in the lease, then you are entitled to 12.5% of the royalties received. |
|
|
Grants and Reservations of Fraction Interests
Dudley v. Fridge |
O conveys O & G lease to X 1/8R (100 acre tract)
O conveys to A (plf) surface + 1/2 minerals subject to O & G lease A (plf) conveys by royalty deed to def' 1/10 royalty interest in minerals he own. Plf executes new O & G lease on his 1/2 interest to ABC for a 1/4 Royalty. |
|
|
How to interpret "minerals"
Accomodation Doctrine |
When the mineral owner owns an unnamed substance and its removal would be surface destructive, the mineral owner must compensate the surface owner for that destruction (must act w/due regard to surface owner)
|
|
|
How to interpret "minerals"
Negligence |
Mineral owner's liability is restricted to negligently inflicted damage or excessive use of the surface estate ONLY for specific conveyances.
|
|
|
How to interpret "minerals"
Return to Ordinary and Natural Meaning Test - Favoritism to Certain Parties |
Schwartz v. State - when the state is a party to the transaction, public policy requires that the legislative grant be resolved in favor of the state. If the term mineral is ambiguous, the court simply interprets in favor of the state.
Noffsinger v. Brown - Noffsinger's ancestor conveyed land to Midland Townsite Co. in a deed reserving the coal and the mineral rights but incorrectly stating that the minerals rights had been previously conveyed. Crt held that if "coal and mineral rights" are reserved in a deed which incorrectly states that the mineral rights have been previously conveyed, the mineral rights remain w/the grantor. |
|
|
Conveyancing Problems in Severing Minerals
Easements - In General |
The mineral owner and owner of the leasehold estate have the benefit of the exploration thus the development of easements. Even if the grant or reservation is silent, they arise by implication. The parties may use so much of the estate as is reasonably necessary to explore and develop.
EXCEPTION - Mineral owner or lessee of the mineral estate own the dominant estate and they must enjoy their right to such easements w/due regard to the surface owners. Under certain situation the owner of the servient estate will be afforded certain accommodation ("Accommodation Doctrine") |
|
|
Conveyancing Problems in Severing Minerals
Easements - Use of Airspace |
Getty v. Jones - Getty owned mineral estate, Jones owned surface estate. Jones had irrigation system that required nothing to be built over 7'. Getty wanted to build well equipment that reach 17'. Jones brings suit to prevent erection. Getty argues that b/c he has dominant estate, he can use as much of the surface estate as reasonably necessary and that air space isnt included in this standard.
Crt held that the mineral owner's easement was restricted to the reasonable use of lateral space as well as the air space. Owner of the dominant estate has an implied right to use so much of the surface as is reasonable necessary, but the rights implied in favor of the mineral estate are to be exercised w/due regard of the owner of the servient estate. HOWEVER - where there is only one manner of use of the surface estate where minerals are being produced, the mineral owner has a right to produce regardless of surface damage. But, the rules of reasonable use require adoption of an alt recovery method which does not preclude or impair the use of the surface. Getty could have used other equipment which would not exceed 7' but Jones could not use any other irrigation method. BOP on surface owner. |
|
|
Conveyancing Problems in Severing Minerals
Easements - Use of Underground Water |
Sun Oil v. Whitaker (Tex Sup 1972) - Sun Oil, owner of the mineral leasehold, wnated to use the water beneath Whitaker's surface estate to inject and produce pressure which would aid in oil production.
Crt held that UNLESS otherwise provided by contractual provisions, an O & G lease has an implied right or easement to make such use of underground water as may be reasonably necessary to effectuate the purposes of the lease, having due regard for the rights of the owner of the surface estate. Dissent (Lytton LOVES) - Sun Oil's actions unnecessarily depletes the water supply. The surface estate was being diminished w/out compensation. This conflicts w/Getty. |
|
|
Conveyancing Problems in Severing Minerals
Easements - Advanced Exploration Techniques |
Implied easement to develop and explore extends to advanced exploration techniques which were not known at the time the lease was entered.
|
|
|
The Mother Hubbard (or Cover-all) Clause
|
Clause allows the lessee to claim right to small tracts of land, which are adjacent to the leased property, but which may not be specifically included in the lease description.
Jones v. Callan (Tex.) - Tract 1 contained 68 acres and 28 mineral acres. Tract 2 contained 49 acres and 20 mineral acres. Lessor owned all of the land and these mineral acres under both tracts. lessor executed a lease which only described Tract 2, but named more mineral acres than were available in Tract 2. Lessee then claimed that it was the intention of the parties to include part of the mineral estate in Tract 1 and it should be included under Mother Hubbard Clause. Crt held that the lease only covered Tract 2. The Mother Hubbard Clause ONLY covers small unleased adjacent pieces or strips of land which may exist w/out the knowledge of one or more parties, regardless of what the parties intended. In this case, both parties were aware. |
|
|
Definition
Mineral Acre |
The full mineral interest in 1 acre of land.
Example - Own 100 acres in fee simple and sell 1/2 of the minerals you are agreeing to sell 50 mineral acres. |
|
|
Grants and Reservations of Fraction Interests
In General |
The fee owner or the lessor or may convey or reserve an undivided royalty interest. The mineral interest owner by royalty deed can also convey a fraction of a royalty.
What does the fractional interest entitle you to? Will the interest increase or decrease as other leases are acquired? Dawdle v. Fridge (Ala 1983) - A dispute arose as to extent to which a royalty deed granted mineral deeds. Crt held that a royalty deed will be construed according to its plain language. |
|
|
Grants and Reservations of Fraction Interests
Calculate Royalty Interest |
Two Ways:
(1). A royalty acre - 1/8th royalty in the full mineral interest in one acre of land. Example - A owns 5 royalty acres in 10 acre tract of land. A then has an interest in 1/2 of the tract. A royalty acre is 1/8th royalty on one acre. Therefore, to determine A's royalty interest, you multiply 1/2 x 1/8, which equals 1/16th. (2) Royalty Lease - you divide the lease by the percentage you own. If you have 1/8 royalty interest in the lease, then you are entitled to 12.5% of the royalties received. |
|
|
Grants and Reservations of Fraction Interests
Dudley v. Fridge |
O conveys O & G lease to X 1/8R (100 acre tract)
O conveys to A (plf) surface + 1/2 minerals subject to O & G lease A (plf) conveys by royalty deed to def' 1/10 royalty interest in minerals he own. Plf executes new O & G lease on his 1/2 interest to ABC for a 1/4 Royalty. NEED HELP WITH THIS |
|
|
Grants and Reservations of Fraction Interests
Estoppel by Deed |
Duhig v. Peavy Moore Lumber Co. - O deeded to Duhig 1/2 of the mineral interests in BA. Duhig deeded 1/2 of the mineral interests to Peavy, but did not reference the original deed from O. Thus, it was no clear whether Peavy was entitled to 1/2 of the mineral interest in BA or 1/2 of Duhig's 1/2 interest.
Crt held that bc Duhig DID NOT REFERENCE the original deed from O and Duhig warranted what he deeded, Duhig was ESTOPPED from asserting title to the 1/2 interest. Other issues: (1) Even if Peavy had knowledge of the previous deed, if it is not mentioned in the warranty deed, the estoppel still applies if it arises from the warranty. (2) If the deed does not mention the outstanding interest in O, but the second deed references the first deed "for all purposes" estoppel does not apply |
|
|
Grants and Reservations of Fractional Interests
Overconveyance - beyond express warranty |
Blanton v. Bruce - although Duhig applied to an executed warranty deed, the court held that if a grantor represents ownership then grantor is estopped from asserting title
|
|
|
Grants and Reservations of Fractional Interests
Overconveyance - application of Duhig |
Body v. McDonald (Wyoming 1959) - O conveys to McDonald and reserves 1/4 minerals. McDonald by deed conveys to Body and reserves 1/5 but there is no reference to O's resrvation and he wattanted the whole.
Body's heirs want to arge they own 3/4 and O owns 1/4. Court held in favor of heirs based on Duhig. Effect of deed to Body was plain and unambiguous and could NOT BE ALTERED by parol evidence. |
|
|
Grants and Reservations of Fractional Interests
Land Conveyed v. Land Described |
The question is whether the grantor reserved interest out of the entire estate or whether he reserved something out of what he had at the time of the conveyance. The quantum (how much) depends on whether grantor conveyed the "land conveyed" or the "land described".
|
|
|
Grants and Reservations of Fractional Interests
Definition: "Out of the land conveyed" |
The interest that the grantor has in the land at the time of the conveyance; a fraction of the estate actually owned by the grantor.
Hooks v. Neill (Tex 1929) - O deeded BA to A, reserving 1/2 mineral interest. A leases BA to B, reserving a 1/4 mineral interest "out of the land conveyed". Teh question is whether A retained 1/8th (1/4x1/2) or 1/4th. Crt focused on the word conveyed and found that it applied only to the interest A had at the time A made the conveyance to B. Thus, A only reserved a fraction of the part of the mineral estate, of which A owned 1/2. |
|
|
Grants and Reservations of Fractional Interests
Definition: "Out of the land described" |
A fraction of the interest under the entire physical tract.
Black v. Shell Oil Co. - O conveyed 1/2 mineral interest to A and conveyed 1/2 mineral interest to B, conveying a undivied 1/2 mineral interest in and to all the oil and gas. The intention clause stated that A intended to convey 1/2 of A's interest in the land described. Crt held that A conveyed all of A's interest; thus, B owned half and O owned half. The court that despite intention statement, the elase was clear. In a deed conveying a fractional mineral interest "out of" the grantor's interest, that phrase indicates the source of the interest rather than the quantum. The intention clause indicates the source of title which title was to be taken and did not operate to reduce the amount of the mineral interest. |
|
|
Grants and Reservations of Fractional Interests
Reservation by a Lease - Warranty and Proportionate Reduction Clause |
This clause reduces the proportion of the royalty that A is entitled to by the percentage of the estate that A owns.
(payments to the lessor will be reduced if interest is less than the full fee or what he purports to own) |
|
|
Grants and Reservations of Fractional Interests
Reservation by a Lease - Warranty and Proportionate Reduction Clause - Case |
McMahon v. Christmann (Tex. 1957) - When the body of a mineral lease contains a proportionate reduction clause but a rider thereto provides that overriding royalties will be paid w/out reduction, the overriding royalty is not subject to reduction. (Duhig does not apply b/c this is a lease)
Crt got around Duhig by saying that deeds are normally prepared by the grantor whereas the lessee normally prepares the lease and lessee's customarily put in a clause purporting to grant a full interest and then rely on the proportion reduction clause. |
|
|
Characteristics of Mineral and Royalty Interests
In General |
Royalty deed conveys a nonoperating interest if and when the operator produces. A mineral deed conveys all of the rights, powers and immunities of a fee simple owner except those powers which are specifically limited by the document.
Problem occurs when there is mixed language. While no one factor is sufficient to establish the intent of the parties to whether a conveyance is of a mineral or a royalty interest, a specific statement either in the granting clause or the intent clause that follows will probably be given more weight than any other factor including the words in the grant. The words "thereunder and thereon" often mean a conveyance of a mineral interest but this can be altered by a stated intention. |
|
|
Characteristics of Mineral and Royalty Interests
Difference between a 1/8th Royalty and 1/8th of a Royalty |
1/8th Royalty: entitles the owner to 1 out of every 8 barrels produced regardless of the size of the lease
1/8th of a royalty - entitled the owner to 1/8th of a 1/8th royalty; actually entitled to 1/64th |
