Final Exam Review Flashcards

Question

What are the dates for Rule 37?

Answer 1

Does not apply to voluntary subdivisions made before May 29, 1919.

Answer 2

1,200 feet between wells on the same tract.

Answer 3

There are no vertical depth requirements ( Gulfland).

Answer 4

When necessary to prevent either waste or confiscation of property. Can be both physical or economic waste.

Answer 5

Applicant must file a list of mailing addresses of all affected persons, including designated operator, all lessees of record , and all owners of record of unleased mineral interests, and adjacent owners.

Answer 6

Means ones correlative rights are being violated by drainage onto another's property. Must be either a separate tract or not a voluntary subdivision.

Answer 7

Any subdivision of property creating a tract of such size and shape that it is necessary to obtain an exception to the spacing rule before well can be drilled there on is a voluntary subdivision (VSD) and is not entitled to a permit to prevent confiscation if it were either, 1. (A) Segregated from a larger tract in contemplation of oil gas or geothermal resource development (Shell v. TXRRC); or 2. (B) Segregated by fee title conveyance from a larger tract after the spacing rule became effective and the voluntary subdivision rule attached. (Gulf Land)

Answer 8

If a tract has been voluntarily subdivided so no subdivisions can individually receive an exception, the parent tract as a whole may receive a permit. Must prove 1) Confiscation 2) First tract to get permit gets the oil, even if a subsequent application is a better option.

Answer 9

Pooling is the joining together or combination of small tracts or portions of tracts to create sufficient acreage and interests to receive a drilling permit under applicable state spacing rules and regulations (to get around Rule 37!), and for the purpose of sharing the production in a manner proportionate to the contribution from the pooled unit (surface acreage basis) among the pooled interest owners.

Answer 10

Compulsory pooling is when unleased mineral interests are combined, even without the consent of the mineral interest owner. The policy behind forced pooling is that a mineral interest owner who refuses to enter into a lease should not be permitted to forestall development and production of the oil and gas resources.

Answer 11

Yes, but not in Texas.

Answer 12

Through MIPA however it is a voluntary statute.

Answer 13

A unit shall not exceed 160 acres for an oil well or 640 acres for a gas well plus 10% for tolerance.

Answer 14

Going and asking a party to voluntarily pool

Answer 15

Authorizes RR Commission to pool all of the interest of a proration unit for two or more separately owned tracts of land that share a common O&G reservoir to prevent unnecessary drilling and waste if a voluntary pooling order is fair and reasonable.

Answer 16

Only applies to O&G, not other minerals. Does not apply to reservoirs discovered and produced before March 8, 1961 or public lands (e.g. lands owned by the State).

Answer 17

Multiple interests put together, for the joint operation of all or some portion of a producing reservoir, generally for secondary or tertiary production.

Answer 18

There needs to be a fair and reasonable offer before and other party said no. 1. Two or more separately owned tracks of land 2. Must be above a common reservoir 3. Must be in an existing proposed unit/ Has to be in a part of the world where drilling activity is on a proration unit 4. Owners have not agreed to pool their interests 5. At least one owner has drilled or proposed to drill a well on existing proration unit

Answer 19

An offer that takes into account all relevant facts at the time that a reasonable person could consider.

Answer 20

Your plot is too small to get a Rule 37 exception, to avoid waste, less risk

Answer 21

A land owner may inject into a formation substances which may migrate through the structure to the land of others, even if it thus results in the displacement under such land of more valuable substances with less valuable substances (e.g. dry gas displacing wet gas)

Answer 22

Trespass does not occur when the injected, secondary recovery forces move across lease lines, and the operations are not subject to an injunction on that basis. Policy: Necessary to protect correlative rights and prevent drainage.

Answer 23

People can hold out but lose the ability to recover for trespass. Possibly nuisance. Must compensate for unreasonable destruction that occurs as a result of approved secondary methods of recovery.

Answer 24

Improperly plugged wells are bad and hurting everyone. Need to plug holes better.

Answer 25

Possessor of the right to use and develop the mineral estate (lessee or mineral owner) can use as much of the surface as reasonably necessary to explore for minerals.

Answer 26

Mineral and surface rights can be severed in conveyance of real property. Must have constructive and actual knowledge of severance via deed.

Answer 27

A mineral owner is required to accommodate the surface owner when: 1) there is an existing use of the surface, 2) the mineral owner's use of the surface precludes/impairs the existing use of the surface, 3) there are alternative, reasonable, usual, and customary methods available to recover the minerals

Answer 28

Water belongs to surface owner but there is an implied grant of reasonable use that extends to use water from the leased premises in such amount that is reasonably necessary to carry out operations.

Answer 29

When a general grant or reservation is made of all minerals without qualifying language. Can sever mineral rights from surface.

Answer 30

Mineral estate can enjoy right through extraction of valuable substances. Surface estate owner can enjoy their rights through retention of such substances as are necessary for the use of the surface.

Answer 31

New Surface Test: If a hard mineral deposit lies near the surface the substance will not be granted as a 'mineral' for the mineral rights purpose if it shows that 1) any reasonable method of production at the time of conveyance or thereafter would 2) destroy or deplete the surface. Surface owner has burden to prove. Near surface is a deposit within 200 feet of the surface as a matter of law.

Answer 32

Ordinary Natural Meaning: A severance of minerals in an oil and gas and other minerals clause includes all substances within the ordinary and natural meaning of the word, whether their presence or value is known at the time of severance.

Answer 33

Pre-June 8, 1983: Use the Surface Destruction Test): Surface owner owns if production method could destroy surface, where mineral owner owns if the ONLY reasonable method would not destroy the surface. Post-June 8, 1983: Use the Ordinary and Natural Meaning Test Note: If mineral requiring strip mining: belongs to surface estate; If mineral not at surface, not requiring strip mining: belongs to mineral owner

Answer 34

Building stone, limestone, caliche, surface shale, fresh/salt water, sand, gravel, near surface lignite, near surface iron ore, near surface coal.

Answer 35

Primary oil recovery refers to the process of extracting oil either via the natural rise of hydrocarbons to the surface of the earth or via pump jacks and other artificial lift devices. Secondary Recovery: This method involves the injection of gas or water, which will displace the oil, force it to move from its resting place and bring it to the surface. Tertiary Recovery: Thermal Recovery. This is the most prevalent type of EOR in the USA and works by heating the oil to reduce its viscosity and allowing easier flow to the surface; Gas Injection. Either natural gas, nitrogen or carbon dioxide (increasingly the most popular option) are injected into the reservoir to mix with the oil, making it more viscous, whilst simultaneously pushing the oil to the surface (similar to secondary oil recovery). Chemical Injection. The least common method of EOR, chemical injection works by freeing trapped oil in the well.

Answer 36

For dominant mineral estate owners: consider customary and reasonable practices ion the industry like circumstances of time, place, and servient estate use. For servient surface owner consider: the conditions of the surface itself and the uses being made by the servient owner. If manner selected by dominant mineral estate owner is the only reasonable usual and customary method for mineral exploration then servient owner must yield.

Answer 37

Trespass by using seismic data to determine whether rock is permeable and able to produce oil. Mere vibrations are not a trespass. Plaintiff must show actual damage and there must be actual physical entry.

Answer 38

The use of whipstocking, or drilling in a slanted direction, to appropriate neighboring minerals. a.Railroad Commission is first line of defense to prevent crooked wells.

Answer 39

The rule of capture precludes recovery for drainage by hydraulic fracturing. [Example: Salinas’s only claim of injury (that Coastal’s fracing operation made it possible for gas to flow from Tract 13 to 12) is not an actionable trespass. (Fracking too valuable to the industry to call it trespass!)]

Answer 40

Actual damages, economic damages. Intentions of the trespasser are imperative in determining the amount of damages. When determining intentions, consider: a. If trespasser received advice from reputable counsel, b. Any doubt of exclusivity or cloud of title, c. The findings of another jurisdiction in a situation with similar facts, and d. Whether trespass was needed to remedy a delay or problem. e. Cannot be a good faith trespasser if a well is drilled while a title action from the potential true owner is pending or proceeding. (See Mecom Oil)

Answer 41

Good Faith. 1) Reasonably thought he had a valid lease, not on notice that he had reason to think there wasn’t a right to be there (clean hands) 2) Acted on advice of reputable counsel 3) Court had rendered judgment on prior identical facts 4) Urgent action

Answer 42

1) The uttering and publikshing 2) Of statements that are false 3) Done with malice i) Malice: act or refusal was deliberate conduct without reasonable cause 4) Causing special damages 5) To a person with the estate or interest in the property slandered P has burden to establish they suffered damages

Answer 43

Are payments that excuse production only if the well is actually capable of producing gas in paying quantities (PPQ).

Answer 44

1) Well capable of producing in PPQ 2) Lack of market that results in inability for PPQ 3) Reasonable prudent efforts to bring production to market

Answer 45

The surface owner owns all non-mineral molecules of land, i.e. the mass that undergirds the surface estate. An unauthorized interference with the place where the minerals are located constitutes a trespass as to the mineral estate only if the interference infringes on the mineral lessee’s ability to exercise its rights.

Answer 46

Use the Lightning v. Anadarco Balancing test – the relevant interests of society and the interests of the oil and gas industry as a whole v. the interest of the individual operator. Longstanding policy in TX to minimize waste and maximize recovery of minerals. - No doubt that individual interests in the oil and gas lost through being brought to the surface as part of drilling a well are outweighed by the interests of the industry as a whole and society in maximizing oil and gas recovery. - The loss of minerals Lightning will suffer by a well being drilled through its mineral estate is not a sufficient injury to support a claim for trespass.

Answer 47

1. the right to develop 2. the right to lease 3. the right to receive bonus payments 4. the right to receive delay rentals 5. the right to receive royalty payments

Answer 48

This trespasser will be able to recover production value minus reasonable costs of extraction, if the costs benefited the rightful owner. a.‘Reasonable costs’ is determined whether the trespasser’s expenditures benefit the true owner (unjust enrichment theory) or if the expenditures were made in exercise of business judgment (cotenant theory). i.A dry hole does not benefit the owner or produce any value. b.Mineral owner may sue the geophysical trespasser only in trespass. i.No conversion for information or the right to obtain it.

Answer 49

A landowner will not have to reimburse expenses incurred or benefits conferred from a bad-faith trespasser. a. Trespasser will not be permitted to plug and abandon a well capable of commercial production, unless the owner demands it. b. Some courts presume bad faith because the actions of a trespass are prima facie willful.

Answer 50

1. Tenancy in Common – separate but undivided interests in the property that are not identifiable unless partition is sought. 2. Joint Tenancy – whole property is owned, subject to the right of survivorship of the other owners. a. The last owner alive takes all the interest. b. Can be converted into a Tenancy in Common by conveyance. 3. Tenancy by the Entirety – only available between husband and wife. a. Subject to right to survivorship, but the spouses are treated as one person. b. One spouse cannot sever by conveyance because this has the unities of person, time, title, interest and possession. A divorce will break up the tenancy. c. If the mineral estate is separate property, bonus and royalties are also separate property, but delay rentals are community property.

Answer 51

Cotenants typically cannot trespass onto the commonly held property because cotenants have a right to be there. However, they can if they derogate the lease or their duties. Remember, a cotenant’s lessee is also a cotenant. a. It is possible if the cotenant’s lessee to be a trespasser, for example, if the lease expires and it wrongfully asserts having the right to utilize the mineral estate or wrongfully excludes a cotenant from developing the property. 1. Cotenant can recover loss of market value or accounting for minerals taken. 2. Reminder that Cotenants have the independent right to develop the land themselves or through a third party. Denial of this right is ouster and a trespass (See Kishi)

Answer 52

Developing cotenant must account to non-producing cotenant for his pro rata share of the net profits, which are calculated by the market value minus reasonable and necessary expense of developing, extracting, and marketing the minerals Each cotenant can develop the estate, but he cannot exclude his cotenants from doing the same and must provide a fair share of the value of extracted minerals to fellow cotenants. 1.No right to recover costs where there is a loss, such a dry hole, failed workover, etc because it does not benefit the common estate. 2.Only a right of reimbursement out of production, if any.

Answer 53

Has two options: 1. Retain the mineral interest and get proportionate share of the revenue minus the share of the costs, or a. Ex. If a cotenant has a 1/2 mineral interest, the cotenant is entitled to 1/2 the value of produced minerals minus 1/2 of the operation costs after proving the developing cotenant with 1/2 of well costs. b. A non-consenting cotenant is not liable for operation costs if the well is a dry hole or until the well turns a profit. 2. Lease the mineral estate to recover the non-participating royalty interest. a. Ex. A cotenant with a 1/2 mineral interest is entitled to 1/2 of the 1/8 royalties without costs. b. Can lease to another oil company, which would then treat each cotenant and respective lessee as non-consenting and follow the cotenant accounting. 3. Don’t forget a cotenant can always partition. Non-consenting cotenant may ride the well(s) down and cherry pick which ones to ratify.

Answer 54

Any joint owners of any equal dignity interests of any mineral may compel the division of the tenancy in common into as many shares as there are owners. i. This right is absolute to anyone having any possessory interest in the property but can be contracted away. A showing of inequities does not affect that the exercise of the right, but only how the property is to be partitioned.

Answer 55

Non-possessory rights like NPRI, NMPI, or possibility of reverter do not have the right to partition.

Answer 56

Where the partition can be fair and equitable. a. The law favors partition in kind but will not do so if the property produces or is likely to produce oil and gas. b. Courts will assume that each acre of land contains an equal amount of minerals if there has not been any development or exploration.

Answer 57

If the partition cannot be fair and equitable, the property should be partitioned by sale, either through the court or through a receiver. a. If oil has been discovered, the property must be partitioned by sale because partition in kind could ‘work incalculable damages’ to the oil-less owner and at least through sale, each party gets something (Fortney)

Answer 58

A non-consenting cotenant can be bound by a lease entered into by the other cotenants, despite not agreeing originally, if the non-consenting cotenant manifests an intention to confirm the contract. i. If a cotenant ratifies the lease, he or she is entitled to proportionate share of royalty payments.

Answer 59

Manifestations can be by agreeing to division orders that listed you as a royalty owner and accepting proportionate royalty checks without objection. 1. Unfair prejudice or change to the lessee is not required. Only look to intent of holdout. 2. The ratifying cotenant must have knowledge of material facts. 3. Ratification entitles the cotenant to the agreed contract terms, including royalties, bonuses, or down payments. a. It is unclear who must reimburse the bonuses.

Answer 60

Increase the value of the gas, including transporting, compressing, processing, cleaning, and severance and gross proceeds taxes.

Answer 61

When one adversely possesses property by using it ‘like an owner’ for a sufficient period of time, fairness and economic efficiency demand that the adverse possessor be recognized and legally protected. a. “Adverse possession” as “an actual and visible appropriation of real property, commenced and continued under a claim of right that is inconsistent with and is hostile to the claim of another person.” b. Requirements: Exclusive, actual, peaceable, open and notorious, continuous and hostile possession of minerals, under a claim of right, sufficient to put other parties on notice, for the statutory period.

Answer 62

If the estates are unsevered at time of entry, the adverse possessor gets both the surface and mineral estates by possession of only the surface. 1. In Texas, an oil and gas lease severs the estates because the estate in the oil and gas is conveyed to the lessee.

Answer 63

If severed, adverse possession of the mere surface does not work against the mineral estate. 1. The adverse possessor must exercise continuous dominion over the minerals, like drilling a well, that will provide notice to the owner of the mineral estate that the adverse possessor of the surface is claiming the minerals too for the entire statutory period.

Answer 64

The period starts when operations for drilling are commenced, and will not cease because of intermittent, but obviously unconcluded, operations. Ex. Lessee drilling a well on a property the adverse possessor is occupying would interrupt the adverse possession to the mineral estate because the drilling is juxtaposed to the adverse possessor’s claims.

Answer 65

The adverse possessor, if successful, only gets the same interests that they adversely and peaceably possessed. i.e. An oil company, former lessee, that adversely possesses the property after the lease expires by paying royalties only gets the leasehold estate (FSD with POR) instead of a fee simple (Pool)

Answer 66

The lessee must take an action that is hostile, which can either be not in accordance with the lease or holding over after the tenancy has been repudiated, to give notice, even constructive, to the lessor. A holdover lessee can only claim a “permissive tenancy” and cannot begin to adversely possess the severed mineral claim until giving the lessor actual or constructive notice of repudiation. Removal of minerals is hostile to lessor, even if royalties are still being paid, and provides constructive notice. If the AP wants more than a leasehold interest, don’t pay royalties and possess the entire mineral estate.

Answer 67

Life tenants own the current right to possess the estate for life, while the remainderman has a remainder interest and will gain possession when the life tenant dies. i. If the remainderman is the grantor, the future interest is a reversion.

Answer 68

Issues arise when the grantor of the life tenancy fails to express how the benefits from the mineral estate’s development are to be allocated. Reminder: Life Estate cannot do anything to create waste, such as depleting natural resources, for the remainderman. a. Grantor, or the Life Tenant and Remainderman, can always express how to allocate benefits. If a life tenancy in the mineral interest is created by instrument, the life tenant can be specifically given the right to grant an oil and gas lease.

Answer 69

Life Estate can be transferred but will last as long as the transferor/original grantee lives (pur autrie vie) Remainderman cannot lease the mineral estate for immediate exploration and production without consent of the life tenant. a. Without present consent, the lease provides a right to explore when the life tenant dies. b. Likewise, the Life tenant cannot drill new wells or lease for drilling. The Life Tenancy and remainderman may lease the land by a joint lease.

Answer 70

Life Tenant gets all the delay rentals plus interest on bonus or royalty. a. Delay rentals are given to the tenant because they do not deplete the mineral estate and are supplements to the surface. Remainderman gets the bonus and royalty. a. Remainderman’s royalty and bonus are put in an escrow account because his interest has not become possessory. i. The royalty and bonus are given to the remainderman because they are given in exchange for the right to sell or deplete the mineral estate. Remember: The interest from the escrow is given to the Life Tenant.

Answer 71

Life tenant get all benefits under the existing lease. (lease in effect) - Applies if there is a lease in place on the land when the life estate is created (even if the lease has no producing wells on it). BUT, it applies only to that lease. Life tenants cannot execute a new lease if the first one ends, absent express authority. - It is irrelevant if the life estate is conventional or legal. A homestead right is a life estate. Basically, if the mine was open at the creation of the life estate, the tenant can continue that mine.

Answer 72

Adverse possession

Answer 73

A dormant mineral estate exists when the mineral owner has not explored or developed the estate. Can exist because the mineral owner: 1. does not want to explore or develop, or 2. cannot be found.

Answer 74

Yes, Receivership may provide a solution for missing owners or contingent owners. i. Missing owners: 1. Diligent search. 2. Paid no taxes for five years. 3. File suit, serve by publication. 4. Attorney ad litem. 5. Receiver can lease. Contingent Owners – similar solution for interests arising by way of remainder, reversion, possibility of reverter, executory devise, or occurrence of condition subsequent.

Answer 75

The lease creates two different real property interests in the minerals — the ownership of the oil and gas, sometimes called the “working interest” or the “mineral leasehold estate,” in the lessee, and the royalty interest reserved by the lessor.

Answer 76

The part of an instrument that defines the extent of the interest being granted and any conditions affecting the grant. In oil and gas, the habendum clause defines how long the lessee’s interest will extend. It is indivisible so that production anywhere on the leased premises will hold the whole property.

Answer 77

Primary term: fixed period, lessee has the option (not obligation) to pay delay rentals and/or explore/produce O&G. No production necessary. Lease terminates if no production by term end, or unless there is a savings clause, or there is some sort of equitable doctrine that can save you.

Answer 78

Secondary term: when O&G is being produced Secondary term is typically based on production or a negotiated substitute, such as Shut-In Royalty, Savings Clause, or Force Majeure Clause.

Answer 79

If the quantity is sufficient to warrant use in the market and the income received from such production is in excess of the actual marketing cost, the production satisfies the term “in paying quantities”. Must only satisfy operating costs, not capital costs. Postproduction costs are calculated in before paying royalties.

Answer 80

Litmus Test: Is the income from production greater than marketing and operational expenses? a. PPQ is present if there is a profit, even small, of operating revenues greater than operating costs (in the black). b. All revenues to the lessee from the sale of production are counted. i. Do not consider return of capital, like sale of equipment, or the royalties paid the lessor. ii. An overriding royalty could be considered in the revenue but argue that it is more a capital cost because it is usually compensation for structuring ventures. If the lessee paid in cash instead of an overriding royalty, it would be a capital cost like wages. c. Costs of ‘lifting the oil’, or regular capital expenditures, are to be considered. i. This includes taxes, labor, electricity, pumping, repairs, etc. ii. Do not consider one-time expenses for acquiring or retaining the lease, royalties, costs of drilling and equipping wells, or depreciation of equipment. iii. Time period over which to analyze revenues and costs is very arbitrary and relates to equitable principles, but usually lasts at least a year. d. Profit over total investment, such as drilling, acquisition and completion costs, is not required.

Answer 81

If not profitable, would a reasonably prudent operator, in similar circumstances, continue the operation in the manner used to make a profit, and not speculation? a. If yes, then production is in paying quantities and the lease is preserved. b. Consider all factors relevant to a reasonable and prudent operator, including: i. Depletion of the reservoir, ii. Price of the market, iii. Relative profitability of the other wells in close proximity, iv. Operating and marketing costs of the lease, v. Net profit, vi. Lease provisions, vii. A reasonable period of time, viii. Any speculative purposes to hold the lease, ix. Any applicable RRC rules, such as prorationing.

Answer 82

If a lease specifically provides that a primary term is to last for a certain number of years and “as long thereafter as oil, gas, or other minerals are produced or can be / are capable of being produced,” actual production in paying quantities is not required.

Answer 83

Upon cessation of production after termination of the primary terms, the lease automatically terminates. But under TCOP - automatic termination rule is relaxed if… a. Only modified when a temporary cessation of production is due to sudden stoppage of the well or some mechanical breakdown of the equipment. b. Under such circumstances the lessee is entitled to a reasonable time in which to remedy the defect and resume production. c. A valid economic reason for nonproduction, if not contracted for, will terminate less and revert back to lessor

Answer 84

A provision allowing lessee to maintain the lease while there is no production from the property because the wells are shut-in, or, capped to combat oversupply of gas. i. Not actually a royalty, but a rent because it is paid as a substitute for production purposefully halted because there is no market.

Answer 85

Constructive production (i.e. shut-in royalties) are not covenants, but conditions to perpetuate the lease. Because gas requires extensive infrastructure to bring to market whereas oil just needs a truck.

Answer 86

Force Majeure Clause – a provision allocating risk of loss if performance becomes impossible or impracticable, especially because of an event that parties could not have foreseen or controlled. Generally, a court will extend a lease term if the lessor wrongfully interferes with the lessee’s operation by repudiating the lease, regardless of force majeure, because of the doctrine of obstruction. If a force majeure clause applies, the lessee is not required to make shut-in royalties.

Answer 87

Texas utilizes an unless clause that is structured to automatically terminate the lease unless the lessee 1) commences a drilling operations or 2) pays delay rentals prior to the date specified, assuming no other clauses apply. i. Creates a special limitation, a condition, on the primary term by modifying the habendum clause through periodic commencement of drilling operations or payment of delay rentals essential to hold the lease during the primary term. Ex. the lease shall terminate as to both parties, unless on or before such anniversary date Lessee shall pay or tender to Lessor the sum of $X, which shall cover privilege of deferring commencement of drilling operations for a period of Y.

Answer 88

A covenant that does not automatically terminate the lease if the lessee fails to commence drilling operations or pay rentals in a timely fashion. 1. Lessee will have an affirmative duty to pay delay rentals, the breach of which gives rise to contractual damages. 2. Lessor must either sue to recover the due rental payment or to rescind the lease. a. Lessor can include a forfeiture clause to circumvent the court by only providing notice and an opportunity to the lessee before declaring the lease forfeited.

Answer 89

For royalties, courts will imply an obligation on the lessee to continue production in paying quantities with reasonable diligence. However, this is a covenant that may give rise to damages for a breach. Preservation of the lease past the primary term is conditioned on production being in paying quantities.

Answer 90

A delay rental clause provides that the lease will terminate at the end of each year during the primary term unless the lessee either commences operations or production, or pays the lessor a delay rental.

Answer 91

Lessees pay, Lessees like delay rentals because the obligation to drill turns into an option to drill.

Answer 92

Lessors. Lessors like delay rentals because they are extra cash for not doing anything.

Answer 93

Because delay rentals are a condition, the lessee has no obligation to pay the delay rental, and the lease will expire if there is no production or operations and the delay rental is not paid to the appropriate time, party, quantities, and manner as required under the lease, unless agreed otherwise. 1. Underpayment or payment to the wrong person is fatal, just as nonpayment. a. A bounced check, even if delivered timely, is not effective. b. Due date is the lease’s effective date at the top of the lease. c. Mistakes made by the bank are not attributable to the lessee because the bank is the lessor’s agent. The bank cannot bind the lessor by accepting late or incorrect payment.

Answer 94

Equity requires protection of the lessee against termination where: i. Lessor causes late payment or underpayment, 1. Ex. Lessor creates an ambiguity and does not correct the lessee’s misrepresentation 2. Ex. A lessor that becomes aware of a mistake in the delay rental because of misinterpreting a deed the lessor was a party to but accepts the payment and remains silent is estopped from rescinding the lease. (Harrison) 3. The cooperation or implied covenant of good faith requires seasonable notification of a party’s mistake. ii. Payments are inadequate or incorrect and the lessor knowingly does not notify the lessee of its mistake until after the anniversary date passes, iii. Lessor knowingly accepts a late payment, or iv. Failure is due to the failure of an independent party, like the postal service.

Answer 95

No, because it can ratify a delay rental and a lease.

Answer 96

Commencement of Drilling Operations is a grey area, but courts are deferential to the lessee. Look to whether: i. There are objective, physical acts done by the lessee that are in preparation of actual drilling, ii. Lessee acted in good faith, and iii. Lessee acted diligently in pursuing the drilling

Answer 97

Actual drilling is not required but driving and looking around is too little. Substantial surface preparations to drill, such as building a road to the well location, making and clearing the well location, or delivering equipment, are sufficient. Rule of Thumb: if the act is something the lessee couldn’t do by him or herself, it is sufficient.

Answer 98

Where a portion of the leased acreage is pooled, production in paying quantities during the primary term will, even if from a well not on the leased acreage, maintain the lease as to the land not included in the pooling unit.

Answer 99

PUGH CLAUSE: “Production from a unit well shall hold the lease in effect only as to the land included in the pooled unit.” * Terminates the lease as to any unpooled portions of a lease after the primary term ends. * Horizontal Pugh clause; “depth severance clause”: creates a horizontal severance for zones that are not producing in the pooled unit. Holds a lease only to the stratum from which production has been secured in the unit during the primary term of the lease. a. Often written as severance of rights 100-300 ft. below the stratigraphic equivalent of the base of the deepest formation

Answer 100

A pooling clause modifies the habendum clause by allowing for constructive production and obligates the lessor to accept royalty proportionate to the amount of the leased land included in the pooled unit.

Answer 101

TXRRC RULE: Units pooled for oil shall not exceed 40 acres in each area. Absent express authority, a lessee has no power to pool interest in the estate retained by the lessor with those of other lessors. The pooling provision confers authority on the lessee (Δ) to pool the lessor’s (π) land, but the lessor’s land may be pooled only to the extent expressly stipulated in the lease. Reminder: a lease without pooling power needs a well in production on the premises in paying quantities to extend the secondary term.

Answer 102

Lessee must exercise “good faith” toward the lessor and royalty owners in making a pooling designation. Look to lessee’s plans to develop, timing of the pooling in relation to primary term, gerrymandered units with only small bits in leases, justifications of design, and inclusion of unproductive acreage Determination is a fact question to be determined by the fact finder. Lessor has the burden of proving bad faith pooling.

Answer 103

o Unit boundaries drawn to hold as many O&G Leases as possible o Pooling shortly before the end of P.T. o Testimony that lessee didn’t consider geologic factors in forming the unit o Absence of plans for additional development o Pooling acreage that’s sufficient for unit with other leased acreage / excluded parts o Including acreage not likely to be productive / excluding acreage likely to be productive

Answer 104

Cross-Conveyance: Each person whose interests are affected by the pooling acquires a proportionate property interest in the land of the others.

Answer 105

1. Owners of the pooled interests become necessary parties to suits involving the land pooled or unitized. 2. All persons with an operating or non-operating interest in the property have the right to ratify the pooling/unitization agreement.

Answer 106

Lease termination does not terminate the pooling unit automatically. The intent of the parties controls. (Wagner and Brown) 1. The pooling must be proper, meaning in good faith and allowed by the lease. 2. The language in the lease must be particular. If the parties want pooling to expire or not upon termination of the lease, they should say so. a. Authorization to pool the premises/land, instead of the leased interests, will allow the pooling to exist past the termination of the lease because the lessor’s possibility of reverter in the premise is pooled. b. In such a case, the lessor on the terminated lease is treated as a cotenant, meaning the lessor is entitled to the agreed production royalty (1/8) of the respective pooled ownership minus the costs of production.

Answer 107

Implied Covenant to Develop Implied Covenant to Protect Against Drainage Implied Covenant to Administer and Manage the Leasehold

Answer 108

The lessee must develop with reasonable diligence. i. Must drill an initial well, and reasonably develop the lease after production has been secured. 1. This covenant can be disclaimed through express lease terms, such as: a. Requiring certain development, such as stipulating the number of wells to be drilled following a successful well, or b. Delay Rentals. c. Shut-In Royalties should not disclaim this covenant. 2. A lessee should surrender the portion of the lease it does not want to develop. ii. Reasonable diligence is a question of fact

Answer 109

Must protect the leasehold against drainage and must not depreciate the lessor’s interests. i. Drainage includes all local and field-wide, and regardless of whether the lessee is common to all relevant lessors ii. The duty to protect against drainage remains intact even when the lessee is common to all lessors. 1. The lessee must treat all lessors individually and discretely. iii. However, the obligation to drill an offset well to prevent drainage must be express and very detailed in location and purpose in the lease. 1. An Offset Well Clause does not also satisfy the obligation to protect against drainage where the lessee is operator of the draining well on the adjacent property (Stansbury). 2. Delay Rentals do not preclude this covenant, even if the offset well would be the first well drilled on the property.

Answer 110

Lessor must show: i. Additional development probably would have been economically viable, and 1. I.e., there would be a reasonable expectation of profit, or that the lessee would have recovered drilling and operational costs with a reasonable return. a. Must show that a viable stratum exists, and further development is needed. b. This is incredibly burdensome for the lessor because many experts are required. 2. A reasonably prudent operator would not drill a well without reasonably expecting a profit, so look to the probability of success, not the expected value. a. “Additional wells” includes those in the producing formation or in a formation different from that which production is being obtained. ii. The lessee acted imprudently in failing to develop the lease. 1. This includes all additional drilling requirements after production has been obtained, except for offset wells that are draining the premise.

Answer 111

Lessor must prove: i. There was or is substantial drainage from the lessor’s property, and 1. ‘Substantial Drainage’ is not settled, but it should be an amount large enough under the circumstances to be reasonably of concern to the lessor. a. This is typically a small amount. b. In Texas, Lessor does not waive implied covenant to protect by accepting delay rentals. 2. An example of notice of drainage is a neighbor’s well close to the property boundary producing in paying quantities. ii. That a reasonably prudent operator would have acted to prevent the drainage and the lessee did not (Alexander).

Answer 112

This catchall provision covers everything that the lessee failed to do that a reasonably prudent operator would have done, including: i. Produce and market, ii. Operate with reasonable care, iii. To use successful modern methods of production and development, and iv. To see favorable administrative action.

Answer 113

i. Lessee damaged the property by negligence or incompetence, 1. Ex. Lessee breached the covenant because a reasonably prudent operator would have used reasonable diligence to avoid destruction of the well by water encroachment a mere 2 and a half feet underneath the well. ii. Lessee prematurely abandoned a well capable of producing in paying quantities, iii. Lessee failed to use advanced protection techniques, or 1. A reasonably prudent operator would use enhanced techniques where such techniques are being successfully utilized nearby. 2. Protection techniques include pooling or unitization. iv. Lessee failed to seek favorable regulatory action.

Answer 114

Yes it is owed by the executive right owner to the NPMI. It is the duty of good faith w/ ordinary care and diligence.

Answer 115

Imposes the duty, in a proceeds royalty lease, to use due diligence to market oil and gas produced within a reasonable time and at a reasonable price. i. Here, the reasonably prudent operator is a businessperson and will seek to maximize profits. The covenant serves to protect the lessor from the lessee’s self-dealing or negligence. ii. The lessee cannot trade off interests of its lessors, even if doing so is better for business. iii. Problems usually revolve around the sale of natural gas, and not oil, because gas requires infrastructure and treatment to get to market, gas is sold through month long contracts, and gas royalties are not in kind, meaning the lessor will always get a percentage of value or amount realized.

Answer 116

Royalty payment is a covenant in the lease. Courts can order forfeiture of the lease, but generally damages is the remedy for breach of unpaid royalties.

Answer 117

There is no covenant to explore in Texas, but if a reasonably prudent operator would have drilled a well and the lessee did not, then the covenant to develop is breached, even if the potential well would be exploratory or developmental

Answer 118

Clifton Exception: Where the lease covers several thousand acres and an effort is being made to hold such vast acreage by showing production from a comparatively small area, a duty to explore may be imposed.

Answer 119

Offset well clause – if Lessor A/Oil Co. A drills in a shared formation, lessor B will sign with Oil Co. B an offset well clause in the contract that will give Oil Co. B safety in fulfilling their duty to protect Lessor B from drainage by drilling an offset well to match Lessor A’s production.

Answer 120

Royalty clause: Lessee owes to the lessor a fractional share (usually 1/8) of the oil and gas produced from the lease, usually remitted as payment for 1/8 of the revenues from the sale of the hydrocarbons. Free of all costs of production

Answer 121

They are operating expenses because they come before production costs.

Answer 122

Market price is to be determined by sales of gas comparable in time, quality, & availability to marketing outlets. Prices paid by other purchasers in comparable sales. o Determined by sales of gas comparable in time o Quality and availability of marketing outlets o MP affected by type, quality, pressures, reserves and deliverability “Market price at the well” means market price received by lessee less the necessary expense, if any, of processing and transporting the gas from the well to pipeline of purchaser.

Answer 123

Lessee Exxon: sale at the plant (not located on the leases, but within the field formation) is “a sale at the wells.” Lessors: plant is not on the leased premises, so royalties should be based on market value, b/c sale off the leased premises is not a “sale at the wells.”

Answer 124

In Tx: means sold at the wells within the lease, and not sold at the wells within the fields

Answer 125

Gas which is sold outside the leased premises.

Answer 126

Gas is “used” when delivered or consumed. The time gas is “sold” is the same time gas is “used” – when it is delivered.

Answer 127

To determine MV, gas should be valued as though it is free and available for sale. Calculated using comparable sales (comparable in time, quality, quantity and availability of marketing outlets). See Vela.

Answer 128

DIVISION ORDER: A simple document that tells each owner of proceeds from a well (both working interest and royalty owners) how the well proceeds will be divided (to the 6th decimal point). a. Lessee and lessor are bound by it until it is modified. b. Look out for orders that contain more than they should!

Answer 129

It is a good idea for the lessor to include language in the lease so that the lessee may not require execution of a division order as a condition for payment of royalties, and that no division order signed by the lessor will be construed to modify the terms of the lease.

Answer 130

D/O protects the purchaser and those who distribute the proceeds of a sale by requiring those to be paid to warrant title and agree to indemnify. a. Based on detrimental reliance (promissory estoppel) by lessee, who would have to pay double for relying on affirmations made by a royalty owner

Answer 131

While division orders do not convey royalty interests nor do they rewrite leases, they do bind underpaid royalty owners until revoked.

Answer 132

They cannot alter an underlying lease. HOWEVER, in cases where an operator erroneously prepares an order to purposely underpay a royalty owner and unjustly enrich himself that order is not binding

Answer 133

A royalty owner does not need to sign the D/O as a condition to receive payment because the right to receive royalties is in the lease. Additionally, the D/O is not a contract.

Answer 134

1. Modified the earlier statute to include any persons legally entitled to payment from the proceeds, including unleased mineral owners. 2. It provides that D/O cannot be used to modify leases, and it gives the companies the right to require execution of a division order, as long as it does not seek to modify the lease. a. However, a D/O may be used to clarify royalty settlement terms in the lease. b. “Market Value”, “Market Price”, and “Prevailing Price in the Field” is amount realized when used as basis of valuation with respect to oil and gas sold in the field where produced or in immediate vicinity. c. If a lessee is seeking to modify the lease, use a lease amendment and not a D/O. 3. It also provides that any provision of a D/O … which is in contradiction with any provision of an oil and gas lease is invalid to the extent of the contradiction. 4. If a company uses a division order that meets the requirements of the statute, it can refuse to pay the royalty owner until the royalty owner has signed the division order. a. Payor can be a purchaser, operator, or lessee. b. Payor may withhold payment without interest if the owner refuses to sign a D/O FOR OIL PAYMENTS that includes only: i. Effective date of the instrument, ii. Description of the property, iii. Fractional/decimal interest and the type of interest in production claimed by payee, iv. Authorization to suspend payment until resolution of title dispute or adverse claim, v. Name, address, and tax info of payee, vi. Provisions for the valuation and timing of settlement of oil and gas production to payee, and vii. Notification to the payee of other statutory rights available regarding payment. c. If the owner will not sign a D/O because it adds provisions other than those above, then the payor cannot withhold payment solely because of the refusal.

Answer 135

Executive Interests are those with the executive right (E/R): the power to lease and conduct operations.

Answer 136

Nonexecutives have the authority to only gather information.

Answer 137

Nonparticipating Royalty Interest (NPRI): only have a non-possessory right to royalty without costs of production, but not to bonuses or rentals, when the executive leases the minerals 1. Deed will usually state that the grantor reserves an interest “in and to the royalty rights” or refers to a share of oil or gas produced, rather than oil and gas in place under the ground, 2. Excludes any interest in bonuses, rentals, or profit-sharing, 3. An NPRI’s right to royalty is determined by a fixed percentage of production carved out of (subtracted from) the mineral interest (which is bifurcated to a royalty interest when leased)

Answer 138

Nonparticipating Mineral Interest (NPMI): A hybrid between a royalty and mineral interest. NPMI Owner owns the minerals in place but does not have the right to lease them. 1. Attributes include: being called a mineral interest, referring to “minerals in, on or under the ground”, and referring to right to receive bonus, rentals or royalties from leases. 2. Can also refer to profit-sharing between parties, an attribute of cotenancy accounting. ii. Created, for example, when the deed describes the entire mineral estate then reserves all interests except the royalty, such as in French. 3. The owner is entitled to bonus, rentals, and the proportionate share of the royalty of production minus proportionate share of reasonable costs. Remember: An NPMI’s right to royalty is determined to be a percentage of royalty based on production.

Answer 139

The ‘controlling inquiry’ in ascertaining whether an executive breached his duty to a non-executive is whether the executive engaged in acts of self-dealing that unfairly diminished the value of the non-executive interest. The duty is to “acquire for the non-executive every benefit that he exacts himself” (Manges) and to act as an owner that is interested in leasing. 1. An executive generally does not breach his duty by declining a lease in honest anticipation of obtaining better terms for all. a. Typical examples of a breach are where the mineral owner leases for a below-market royalty in order to obtain a benefit for himself, such as a larger bonus or benefits to the surface estate (Manges) b. Disparate benefits are not inherently unfair. It must be something that diminishes or tries to render worthless someone’s interest to benefit someone else’s interest. Exam Tip: Be able to defend against claims of breach of the duty of utmost good faith and fair dealing. 2. The duty arises from the executive and non-executive relationship, and not from express or implied terms of the contract or deed. 3. The executive has a duty to inform non-executive owner of pooling agreement with a well off the lease and allow them an opportunity to ratify it. Failure to do so is a breach because the executive gains more to the detriment of the nonexecutive who would not receive anything This duty of utmost good faith is not fiduciary because: 1. It does not require the executive to subvert his interests for those of the nonexecutive, as a fiduciary would have to, and 2. Breach of this duty does not lead to disgorgement of all benefits.

Answer 140

A royalty is a reservation or a payment of a part or percentage of production under a lease which is to continue throughout the life of the lease. A bonus is any sum paid or contracted as an additional consideration for a lease over and above the usual royalty. Think Bonus, Shut-In Royalty, or Delay Rentals.

Answer 141

A royalty for a stated term, which may be fixed (e.g., for 15 years) and/or defeasible (e.g., and so long thereafter as there is production from the premises). 1. Lease will not extend the term royalty deed unless defeasible. a. Without defeasible language, NPRI gets nothing if there is no production within term of the royalty. i. Even if defeasible, shut-in payments will not keep term NPRI alive, although the lease is kept alive. 2. Pooling Clause and production from a well on an adjoining tract keep both lease and term NPRI alive if the pooling extends production from “said land/premise” to the pooled unit

Answer 142

Yes, mineral interest w/o executive right

Answer 143

Pooling allows for joint ownership of royalty interest in all of the pooled lands. However, if a NPRI refuses to join the pooling of interests he is neither divested of his current royalty interest nor does he own any royalty interest in the neighboring pooled lands

Answer 144

Montgomery v. Rittersbacher (ratification of NPRI): NPRI has the option to ratify or repudiate a lease containing provisions regarding his interest that the executive holder had no authority to insert in the lease. If the non-executive is aware of the pooling from the beginning, he or she will only receive the pooled share of royalties at ratification onwards. 2. However, if the non-executive is not aware and never offered the opportunity to ratify, he or she will secure retroactive payments from the E/R. iv. It is wise for E/R to include the following clause in a lease agreement because it provides that lessor’s royalty will only be encumbered to the extent that non-executive ratifies the pooling, even if in actuality they do not: 1. It is expressly provided however, that should lessor’s interest in any lands covered by this lease be subject to a non-participating royalty or non-executive mineral interest, lessor’s royalty shall proportionately bear such non-participating royalty or non-executive mineral interests to the extent, and only to the extent, that such interests would be borne by the lessor if the owners of those interests adopted and ratified all the terms of this lease, whether or not such adoption or ratification has in fact occurred. Note: a lease that tries to pool without authorization is an offer by the lessor to create a community lease by ratification. The lease would then be a cross conveyance of royalty interests.

Answer 145

1. “out of” means subtract 2. “of” means multiply Ex. Grantor owns a ½ mineral interest and conveys to grantee “1/4 of the minerals that I own”, Grantee receives a 1/8 mineral interest : ½ x ¼ = 1/8

Answer 146

A vacuum cleaner clause. Its intended use is to prevent the leaving of small unleased pieces or strips of land which may exist without the knowledge of one or both of the parties by reason of incorrect surveying, careless location of fences, or other mistakes. Reminder: No SOF issues although SOF requires that all real estate conveyance be made in writing. Here the individual real estate conveyances are not made fully in writing. Ultimately courts don’t care about this .

Answer 147

Mineral interest attributes: o Says it is a mineral interest o Refers to minerals in, on, or under the ground o Refers to the right to receive bonus, delay rentals, and royalties from leases o Refers to profit sharing between the parties (and attribute of co tenancy accounting in the right to self-develop) o Refers to the executive right to lease o Refers to possessory rights of ingress and egress that allow physical possession of the leased premises (right to develop) Royalty interest attributes: o calls the interest “royalty” o refers to a share of oil or gas produced and marketed, rather than oil or gas in place under the ground o excludes any interest in bonus, rentals, or profit sharing o excludes any interest in executive rights, the right to participate in leasing, or the right to physically occupy the leased premises

Answer 148

i. “Land Described” reserves a fraction of minerals/production from the entire land described in the deed (Ex. ¼ x 1/8) because it refers to the entire property and not just the grantor’s interest. 1. A Subject-To Clause (Ex. Less, however, and subject to an undivided ½ interest in the oil or gas...) does not change the description of the land but rather does affect the ownership of the undivided shares of minerals. 2. Ex. Grantor reserves ¼ royalty on all oil and gas produces from the lands described above. “Above/Land Conveyed” reserves a fraction of the mineral interest in production owned at the time of conveyance (Ex. ¼ x 1/8 x 1/2) because the land conveyed is the scope. 1. Refers to the interest described. 2. Ex. Grantor reserves ¼ of the royalty on the land above conveyed would reserve a total ¼ NPRI, instead of ¼ of the fractional interest conveyed

Answer 149

A problem arises when the interest in a provision, such as the subject-to clause or the future interest clause, is inconsistent with the interest in the granting clause. i. The issue is whether the subject-to/future interest clause states an exception to the warranty or describes a second grant, in addition to the one in the granting clause. Ex. The granting clause conveyed the mineral estate of a portion of their property already subject to a lease, but the subject-to clause expressed “½ of all oil royalty and gas rental or royalty under the terms of the lease.” This granted a reversionary right in the mineral interest in that portion AND a right to ½ of the benefits in the entire property under the existing lease.

Answer 150

a. Not using the subject-to clause to reserve an interest, b. Making the fractional interests in the granting clause and subject-to clause consistent, or c. A Hoffman Clause stating the grantee shall enjoy benefits under said lease “insofar as it covers the above-described land.” i. This limits the lease benefits to only the portion of the property being conveyed, instead of the grantor’s whole leased property. ii. This also avoids having to input fractions because it refers to the granting clause.

Answer 151

Duhig Rule – A rule of title interpretation developed to deal with the frequent problem of overconveyances of fractional interests. If there is any overconveyance, there is a Duhig problem. i. Provides that where a grantor does not own enough interest to give the full effect of both the granted interest and to a reserved interest, courts will give priority to the granted interest until fully satisfied.

Answer 152

First, A deeds Blackacre to B, but reserves ½ mineral interest. B then deeds Blackacre to C, reserving a ½ mineral interest. i. B purported to pass all of Blackacre to Charlie and then reserve half of only the minerals. Thus, C thought he was obtaining the entire surface and half of the minerals under a warranty clause in the deed. 1. B will be estopped to deny the conveyance to C because B did not expressly state that B’s reservation is in addition to any prior mineral reservations. 2. C will gain B’s interest/title to make him whole and also have a cause of action for damages for any missing interest he thought he was receiving. a. If title runs short and C still requires damages, he could: 1) refund C over and above the interest they received on a $/acre basis, 2) deter B ii. Therefore, under the Duhig Rule: A has a ½ mineral interest, B has nothing, and C has ½ mineral interest and surface estate. 1. A’s interest will not be touched because he is first in time, first in right, unless there is a Recording Act problem.

Answer 153

1. The deed will be reformed to give the grantee, C in the above example what was bargained for out of what the grantor, B, hoped to reserve. 2. If deed reformation does not work because grantor cannot make C whole, then C can sue for damages or automatically receive any after-acquired title from B until whole.

Answer 154

Non-Apportionment Rule – Royalties accruing under a lease on property that has been subdivided after the lease grant are not to be shared by the owners of the various subdivisions but belong exclusively to the owner of the subdivision where the producing well is located.

Answer 155

A grantor who transfers property subject to an existing oil and gas lease generally transfers unaccrued lease payments. This leads to the non-apportionment rule if only a portion of the property is transferred. Note: unless explicitly reserved, rents (delay rentals) are to be split amongst the owners of the land. This rule is supported by the rule of capture and that royalties belong to the owner of the producing well. Therefore, RRC spacing rules do not affect apportionment.

Answer 156

Can be modified by an Entirety Clause in the pre-existing lease that states the agreement of the parties that royalties are to be apportioned in the event that the property is subdivided after the lease is granted. a. If the lease premises are ever owned severally or in separate tracts, all royalties shall be treated as an entirety and paid to the separate owners on a surface acreage basis. b. Therefore, if grantee wants to be safe, he or she should make sure the lease includes an Entirety Clause before buying a subdivision

Answer 157

A community lease, where owners of separate, adjoining tracts sign a single lease as if they were one lessor, will also negate the non-apportionment rule. a. Community lessors share royalties pro rata by surface acreage. b. A community lease is the only example in Texas of an implied pooling effect.

Answer 158

Fixed means the royalty is stated as a right to a specific fraction of gross production 1. e.g., 1/32; 1/32 of 8/8 of production; 1/32 of all production 2. Not affected by the size of the lease royalty

Answer 159

Floating means the royalty is stated as a right to a fraction of the present or future lease royalty. E.g., ¼ of any lease royalty 2. The size is affected by changes in the size of the lease royalty. a. Ex. “1/4 of any lease royalty” would be 1/32 if the decided royalty was 1/8, but would be 1/16 if the royalty was ¼. Note: if a grantor intended the royalty interest to be based on 1/8 royalty, they should put the royalty as fixed (1/16, 1/24, etc.) and not 1/x of 1/8.

Answer 160

Use an analytical holistic approach by considering the entire conveying instrument, instead of a mathematical approach of disregarding 1/8 royalty grants. 1. Remember Estate Misconception left many deeds stating a 1/8 royalty, but this is not dispositive. There needs some other intent to point to a result. Note that where the royalty is negotiated to be equal to that mentioned in the lease, say the usual 1/8, then there are no issues. Generally, a reservation “in” royalty is fixed and a reservation “of” royalty is floating.

Answer 161

RAP: no interest is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest. i. If it as all possible that the interest conveyed will vest later than 21 years after someone in the conveyance, the interest is invalid. ii. Does not apply to present interests or vested future interests, like Possibility of Reverter.

Answer 162

Drafting solutions to avoid the Rule Against Perpetuities when drafting top leases (that wait over bottom leases until they expire). o Lookout for Duhig onverconveyance issues! o Lessor on top lease would have to make grant to lessee subject to bottom lease’s interests.  Lessee avoids bidding war and lease certainty; lessor gets non-refundable bonus payment and any paid-up delay rentals as consideration. o State that “the top lease will terminate two years from the date of its execution (or use any number of years less than 21 years).” o State that the top lease “is subject to a prior lease and shall become effective upon the expiration of the prior lease; However, if the existing lease has not expired within one year after its primary term, the top lease shall terminate automatically.” State that “This lease is granted on lessor’s reversionary interest in said premises and is hereby vested in interest, but is subject to an existing oil and gas lease between ____ (lessor) and ______ (lessee), dated ______and recorded in _____. The interest covered shall vest in possession upon termination of this lease.”

Answer 163

* The state owns all unleased oil and gas in place on Relinquishment Act land * Any attempted reservation of a mineral fee interest is void * The surface owner of Relinquishment Act land has the right to decide whether or not to lease the oil and gas under his surface and to negotiate the terms of any such lease. * The surface owner’s agency duties impose a fiduciary standard on the owner when he or she negotiates a lease. Any conflict of interest must be resolved by putting the interests of the State before the interests of the owner of the soil. * The surface owner must protect the Relinquishment Act land against drainage by drilling offset wells or paying compensatory royalties.

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