According to Darkhorse Water LP v. Birch Operations Inc. et al., the form of an instrument affecting real property in Texas does not affect the interest conveyed by the instrument. It’s what the document says about the transaction, not what the document calls itself. And you are reminded (because you know should this) that, other than for good reasons in limited occasions, nothing good comes from failing to promptly record an agreement affecting real property in the public records.

The dueling agreements

When Billie Pat McCaskle signed a Saltwater Reclamation, Treatment, Water Purchase and Saltwater Disposal Agreement with Darkhorse on his (or hers, not sure, don’t make me say “their”, there’s only one of ’em) 20 percent interest in a tract of land. The agreement was promptly recorded in the Public Records of Martin County, Texas.  Three weeks before the Darkhorse agreement, Billie Pat and the other McCaskles signed a Surface Lease Agreement with two Birch entities. That agreement was not recorded until 19 months later.

The Darkhorse Agreement granted to Darkhorse the exclusive right to

  • Drill for, produce, treat and transport water for sale to third parties;
  • Utilize the property for disposal of saltwater and other waste produced from oil and gas leases;
  • Drill and equip brine wells and freshwater wells, or saltwater disposal wells;
  • Use and operate the facilities to reclaim or treat wastewater, produced brine water and fresh water.
  • Construct pipelines and flow lines to transport produced water;
  • Construct roads and facilities convenient for Darkhorse’s enjoyment of the conferred rights.

Billie Pat would be paid royalties of a percentage of the amounts received by Darkhorse from its operations. There was a habendum clause (“… for as long thereafter, … ) similar to that found in an oil and gas lease.

It was a sale of reservoir storage space

Did the Darkhorse agreement grant an ownership interest in the property sufficient to allow Darkhorse to assert a claim to quiet title against Birch? To answer that question the court had to determine if the Darkhorse agreement was a sale of an ownership interest in real property or a merely a traditional occupancy lease.

The Darkhorse Agreement was a grant of a determinable fee interest in the subsurface reservoir storage space, or the subsurface matrix, of the property. The exclusive ownership of Billie Pat’s undivided interest in the reservoir storage space was conveyed to Darkhorse during the life of the agreement for the purpose of saltwater disposal. Accordingly, Darkhorse had a sufficient property interest under its agreement with Billie Pat to bring an action to quiet title against Birch.

Was Darkhorse a bona fide purchaser?

Time, and a trial after remand, will tell. The court declined to render judgment on Darkhorse’s suit to quiet title. Such a claim is based on Darkhorse not having prior notice of the Surface Lease Agreement. It seems like Birch could have avoided this entire mess by timely recording its agreement in the Official Public Records of the county.

A bona fide purchaser is one who acquires property in good faith, for value, without notice, constructive or actual, of any third-party claims or interests. A bona fide purchaser prevails over a holder of a prior unrecorded deed or other unrecorded interest in the same property. Darkhorse had not met its burden at the trial court to establish that it was a bona fide purchaser. The court of appeals remanded to determine Darkhorse’s claim to quiet title and for an accounting.

Your musical interlude