Head-scratchers: (1) Is a mineral reservation a fraction of royalty, or a fractional royalty? (2) Is there a difference? (3) Does it matter?

Answers: (1) It depends on how you phrase it. (2) Yes. (3) Yes, if you care about being paid on production, or you are the scrivener of deeds and assignments and want to avoid big trouble, or you pay people based on your interpretation of deeds and assignments and want to avoid big trouble. Otherwise, I guess not.

Moore v. Noble Energy is about the construction of a royalty reservation in a deed executed in 1955, and therefore about the answers to the three questions.

The Grantor reserved “a one-half non-participating royalty interest (one-half of one-eighth of production)”.

The Russells (grantee’s successors) entered into an oil and gas lease with Noble Energy that provided for the payment of a 3/16th royalty. Noble drilled four wells on the property. That’s about the  time everybody started paying attention.  

The Moores (grantor’s heirs) sued, asking the court to declare that they were entitled to one-half of the 3/16th royalty. The Russells argued that the Moores were only entitled to a fixed 1/16th royalty. The court agreed with the Russells.

The court contrasted a fraction of royalty with a fractional royalty:

“A fraction of royalty entitles the owner to a share of the mineral production equal to the stated fraction multiplied by the royalty retained in the lease.”

“A fractional royalty entitles the owner to the stated fraction of gross production, unaffected by the royalty reserved in the lease.”

The court then compared the language typically used to create these interests and concluded that the deed language was typical of that creating a fractional royalty. Given the absence any language indicating that the parties intended to create a fraction of royalty, the court held that the deed was unambiguous and the Moores were only entitled to a fixed 1/16 royalty.

The parenthetical was important in the construction of this reservation. The court observed that the “one-half non-participating royalty” without more would entitle the grantor to 50% of all production, thereby making it virtually impossible to lease in the future. The “(one-half of one-eighth of production)” cleared up any ambiguity, according to the court.

I compare this week’s  musical interlude to the passing game of this year’s LSU football Tigers. Progress is not always forward.  In 1955, the year of this deed, Bilboard’s No. 1 hit was Rock Around the Clock by Bill Haley and the Comets. My October 23rd post was about a 1963 deed. Bilboard’s chart-topper that year was Sugar Shack, by one-hit wonder Jimmy Gilmer and the Fireballs. You decide: Which has better field position?   

Thanks to Bill Drabble for his contribution to this post.

“If you want a successful gathering of long-lost kinfolks, just manage to find oil on the old homestead. They will come out from under logs, down trees, from out of the blue and down every road and byway, but they’ll get there — even some nobody ever suspected were kinfolks.”

Judge R. T.Brown, who presided over suits against Dad Joiner and H L Hunt over the Daisy Bradford No. 3 in the 1930’s.

I suggest to you that this observation also applies to claims over ancient, musty, faded property conveyances.

In 1963 (or, as the court aptly noted, “Almost a half century ago …”) Mr. Nix, the owner of property in East Texas, executed a deed that contained the following language:

“It being understood and agreed that all oil, gas, and other minerals, excluding coal, lignite, and clay, in and under the above described tract have heretofore been reserved and excepted, together with the right of ingress and egress for the purpose of exploring and drilling for, producing[,] storing [,] and removing the same herefrom.”

 Oops! The declaration that the minerals had been reserved was incorrect. No mineral interests had actually been reserved or conveyed before the deed was executed. The question before the court was whether the provision reserved the mineral estate for the grantor.

In Roberson v. El Paso Exploration & Prod. Co. the court held that it did not. The language merely stated, incorrectly, that the mineral estate had previously been conveyed. It did not reserve the mineral estate for the grantor. And, because courts construe deeds to convey the greatest estate permissible under its language, the deed conveyed the mineral estate to the grantee.

The Ambiguity Conundrum

The court’s job in a contract dispute is to determine the intent of the parties from the four corners of the deed. Sometimes that is not possible. A deed is ambiguous if it is subject to two or more reasonable interpretations. Here, both sides claimed that the deed was not ambiguous (that it can be given a definite or certain meaning), and was to be interpreted in their favor. Non-lawyers (you engineers particularly) who don’t make a living playing with words ask, How can this be?  I tend to agree in this case that it can’t be.

The losing party gets an “A” for effort, but a lower grade, shall we say, for the result. Where in the deed language do you see a reservation of minerals?

Thanks to Bill Drabble for his help on ths post.

Big Tex, 1952-2012, R.I.P.

 

Question: Can a landowner enforce a right of first refusal bargained for by his predecessor? Answer: It depends. (Note to self: Why do you always say that in your posts?  Because, as Texas Rangers’ manager Ron Washington might say, “That’s the way the law go”.)  The answer in MPH Production Co. v. Smith et al, was yes, he can. But that’s not always the result.

The Horans owned land in Harrison County, Texas. In 1979, they sold their mineral rights in the property, but reserved a first right of refusal – the opportunity to purchase the rights on the same terms as any future prospective buyer. Two years later the Horans sold their interest in the surface to the Smiths.

Many years and many conveyances later, MPH purchased the minerals without first giving the Smiths the opportunity to match the offer. The Smiths attempted to enforce the right of first refusal and to purchase the minerals from MPH. MPH refused and the Smiths sued.

The issue was whether the first right of refusal was a covenant running with the land. If the right of the Horans – the original reserving party – to buy back the minerals was connected to the land, then the Smiths acquired the right when they acquired the surface.

The Law

In Texas, a covenant runs with land when:

(1) it touches and concerns the land,

(2) it relates to a thing in existence or specifically binds the parties and their assigns,

(3) it is intended by the original parties to run with the land,

(4) the successor to the burden has notice, and

(5) the parties are in privity of estate when the covenant was established.

Rights that do not run with land are personal to the parties to the agreement in which the rights were creted, and subsequent owners cannot enforce them.

The Law and This Case

The answer to the question depended on the intent of the parties in the 1979 deed, which did not state explicitly that the obligations of the grantees (MPH’s predecessors) would bind subsequent owners. Without this express reservation, the court had to rely on Texas case law implying restrictions by law. The court found that the Horans and the Smiths were in privity of estate, so that the Horans’ right of refusal was included in the “bundle” of rights transferred to the Smiths in the 1981 Deed. Thus, the answer to the question ws that the right of first refusal was a covenant running with the land.

The Takeaway:

If you are a party to a deed, say what you mean.  Courts look to the language of the agreement to divine the parties’ intent. If you want a reservation – or any other right or obligation – to be a covenant to run with the land, make your intent clear. Some lawyers would suggest that the parties specify that the rights apply to the grantor/ee, and their successors and assigns. Or that the deed say that it is the parties’ intention that this reservation be a covenant running with the land.

If you are buying minerals and see a right of first refusal in the chain of title, be mindful of this case.

It ‘s tough to find an interesting picture of a title dispute, so here’s a musical interlude.  You never can tell how the court will construe a complicated property deed. 

Can the seller of land retain half of the minerals he owns in the property if he doesn’t actually reserve anything? Yes, he can, says Hunsaker v. Brown Distributing, Ltd.. This is another mineral title decision that could cost you lots of money if you don’t pay attention. 

Hunsaker owned 1,120 acres in La Salle County, Texas, which he conveyed to Brown by warranty deed. He conveyed either his entire one quarter mineral interest, or only one half of his one quarter. We can all agree there is a big difference.

The Deed

In the deed, Hunsaker “grants, sells, and conveys” land in Exhibit A. Exhibit A described the property by metes and bounds, and then said: “There is also included in this conveyance one-half (1/) of all oil, gas and other minerals . . . now owned by Grantor”. At the end of the deed, was the following: “This conveyance is made and accepted subject to all reservations, . . . now outstanding and of record”. The deed then listed reservations, including “An undivided one-quarter (1/4) interest in and to all of the oil, gas and other minerals and mineral rights reserved as set out in a particular deed”, and “One-half of all oil gas and other minerals in [another particular deed was identified and the specific language was quoted]”. (emphases is mine)

The Analysis

Brown argued that the deed conveyed Hunsaker’s entire one quarter mineral interest, because Hunsaker did not specifically reserve any minerals. Hunsaker responded that he did not reserve one half of his mineral interest, but emphasized that he was not required to reserve anything, because the deed conveyed only one half of his mineral interest.

The court construed the deed to convey one half of Hunsaker’s one quarter. Given the outstanding reservations at the time of the deed, it was clear that Hunsaker could not have owned half of the minerals because at least that portion had already reserved in prior deeds. Therefore he could not have conveyed one-half. The conveyance must have been one half of what the owned.

The Takeaway

There are two.  First, draft the conveyance and reservation language, and then read it again. Better yet, let your colleague read it and tell you if he or she comes up with the result you intended. 

Second, the court is unlikely to let you rely on one provision that gives the result you want if doing so will negate the effect of other, contrary provisions.  The court’s job when construing a deed is to “harmonize all parts” of the document and determine the parties’ intent from the entire document. If there is a construction that gives meaning to all of the seemingly conflicting provisions, the court is likely to apply it.

The contract of sale for the property mentions that you, the seller, intend to reserve the hard minerals, but not the oil and gas beneath the property. The deed to close the transaction contains no reservation of anything.

Cornerstone Land, Ltd. v. Pierce 2010 WL 4243677 (Tex. App.—Waco 2010)

Shouldn’t the reservation in the contract of sale put the buyer on notice of the your intent to reserve the minerals? That’s what the buyer gargued to the court. But it doesn’t. The seller retained the hard minerals.

As title lawyers know, a purchaser is bound by every recital, reference and reservation contained in or fairly disclosed by any instrument which forms an essential link in the chain of title under which he claims. However, this court chose not to agree that the contract of sale was an essential link in the buyer’s chain of title. Rather, it was no link at all. When the deed was signed, the contract of sale was merged into the deed and thus, in essence disappeared.

This case reminds those of us who prepare contracts, and the others of us who intend to be bound by them, to slow down, read the document carefully, and be certain it says what we intend for it to say.

Cornerstone Land, Ltd. v. Pierce 2010 WL 4243677 (Tex. App.-Waco 2010).