CHAPTER 1 ADVANCED MINERAL CONVEYANCING AND TITLE ISSUES - PART 1

• Jurisdiction: United States

Advanced Mineral Title Examination
(Jan 2014)
CHAPTER 1
ADVANCED MINERAL CONVEYANCING AND TITLE ISSUES - PART 1
Sheryl L. Howe
Scott L. Turner
Welborn Sullivan Meck & Tooley, P.C.
Denver, Colorado

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SHERYL L. HOWE is an attorney with the Denver law firm of Welborn Sullivan Meck & Tooley, P.C., where her practice focuses on oil and gas, including title, transactions, and royalty issues, along with a variety of other real property matters. She has practiced law in Denver since 1982 and has worked on oil and gas and natural resources matters throughout her legal career. Ms. Howe received her B.A. with honors from the University of Iowa in 1979. She attended the University of Colorado Law School and received her Juris Doctor in 1982. She is licensed to practice law in Colorado and Wyoming.

SCOTT TURNER is an associate with Welborn Sullivan Meck & Tooley, P.C. in Denver, Colorado. Since joining the Firm in 2010, his practice focuses on title examination, oil and gas transactional work, and business and real estate services. Scott received his Bachelor of Arts degree from Indiana University with distinction in 1998 and then worked as a business and information technology consultant with Accenture, LLP for seven years in locales throughout the United States and abroad. Scott then attended the University of Colorado Law School, where he served as the Technical Production Editor of the Colorado Law Review. Upon graduation, Scott began his legal career as a real estate and business transactional attorney with a small law firm based in Denver and Vail, Colorado. Scott is an active member of the Colorado, Wyoming, and American Bar Associations.

Table of Contents

I. Overview on How to Report Complicated Title Issues

II. Categorizing Conveyances of Oil and Gas Interests

A. Determining the Type of Interest Conveyed

B. Non-Participating Royalties in Wyoming

C. Non-Participating Royalties in Colorado

D. Comment and Requirement Drafting Tips

E. A Note on Fractional Royalties and Fractions of Royalties

III. Concurrent Ownership of Oil and Gas Interests

A. Creation of Concurrent Ownership Interests

1. Comment and Requirement Drafting Tips

B. Tenancies by the Entirety in Wyoming

1. Comment and Requirement Drafting Tips

C. Reservations to Strangers to Title

1. Comment and Requirement Drafting Tips

D. A Note on Oil and Gas Leases Executed by Both Spouses

IV. Future Rights and Successive Interests

A. The Rule Against Perpetuities

1. Comment and Requirement Drafting Tips

B. Life Estates and Future Interests

1. Leasing Successive Interests

2. Allocation of Proceeds

3. Comment and Requirement Drafting Tips

V. Complicated Conveyances

A. The Duhig Rule: Fulfilling the Grant and Reservation

1. Comment and Requirement Drafting Tips

B. Simultaneous Conveyances

1. Comment and Requirement Drafting Tips

C. Effective Dates

1. Comment and Requirement Drafting Tips

D. After-Acquired Title

1. Comment and Requirement Drafting Tips

E. A Note on Multiple Recorded Counterparts

VI. Anti-Washout Provisions, a.k.a. Extension and Renewal Clauses

A. Overview

B. Specific Issues Regarding Extension and Renewal Clauses

1. Is the New Lease an "Extension or Renewal"?

2. Effect of Royalty Increases on "Inclusive" Overriding Royalties

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3. Comment and Requirement Drafting Tips

VII. Community Leasing and Community Title

A. When Is a Lease a Community Lease?

1. Comment and Requirement Drafting Tips

B. How Are Royalties Apportioned in a Community Lease?

1. Comment and Requirement Drafting Tips

C. Cross-Assignments of Interests

1. Comment and Requirement Drafting Tips

VIII. Conclusion

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I. Overview on How to Report Complicated Title Issues

The first step in addressing tricky title issues is to recognize any complex or advanced issues in the chain of title. Often, these arise from documents where you read the document and wonder "what were they trying to do here?" or "how can they do that, they don't have that much mineral interest left?" Then, assuming that these issues are not resolved in the later chain of title, you need to analyze the issue, decide your interpretation for purposes of scheduling the ownership and then make a comment and requirement.

The keys to drafting comments and requirements are to make them clear and concise. Those two words sometimes are at odds; in a complex issue, the facts and discussion are necessarily going to be longer than they would be for a simple issue. Nevertheless, it is important to continue to work to keep the comment and requirement clear and concise. This is not new advice. A 1977 paper states "[t]he discussion on title exceptions should be concise and to the point. The requirement should be specific. The title opinion is not the appropriate place for the attorney to expound his 'learning'. A long legal dissertation relative to the problem or problems encountered in the chain of title may be beneficial to the attorney in reaching his conclusion, but the proper place for it is in the title opinion file as a memo and not in the opinion itself."¹ As noted in the 1977 paper, the discussion should be practical and you should try to keep it readable.

While keeping in mind that the comment and requirement should be clear and concise, in the comment you need to include the relevant facts, such as the language in the pertinent documents, which caused the problem. Then, you need to discuss the law; there is no need to brief the issue, but it is often helpful to cite the most relevant cases. At times the landman will be taking the comment and requirement to the legal department and the case citations may be particularly helpful to those reviewing lawyers.

Different title examiners have different styles, but we generally discuss the issue in the comment and state the way to resolve the problem in the requirement. Thus, the requirement should not include any new facts or discussion. Often, the requirement will state alternative ways to resolve the issue.

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II. Categorizing Conveyances of Oil and Gas Interests

A. Determining the Type of Interest Conveyed

Title examiners often face difficult issues determining whether a conveyance is of a non-participating royalty or a mineral interest. Typically, an instrument that grants or reserves "the oil, gas and other minerals in, on and under" or "in and under and that may be produced from" the subject lands without further description creates a mineral interest.² The conveyance of a fractional interest in minerals "produced" or "produced and saved" from lands, with a reservation of bonus, rental and executive rights creates a royalty interest.³ A "royalty interest" in a mineral estate is nonparticipating in nature, and does not entitle the owner to any share of ordinary cash or other bonuses, or of delay rentals.⁴ A non-participating royalty interest is "perpetual" when a habendum clause granting to the "assignee, his heirs, successors or assigns" is included in the conveyance.⁵ The title examiner must be careful in categorizing interests as royalties or mineral interests in order to properly allocate production and costs of production.

However, when grantors have used variations of the phrases above, used them together or added additional provisions, courts have found both mineral interests and royalty interests to be created, basing their decisions on the intent of the parties and other facts and circumstances surrounding the conveyance. Courts agree that an instrument's title is not determinative as to the interest conveyed, holding that a "Mineral Deed" has created a royalty interest and a "Royalty Conveyance" has created a mineral interest.⁶ The form of the creation of the interest is also indeterminate, as a mineral interest or royalty can be created by grant or reservation or a royalty can be created by reservation to a lessor under an oil and gas lease.⁷ The difficulty that courts have had classifying an oil and gas interest is well illustrated by court interpretations of "non-participating royalties" in Wyoming and Colorado.

B. Non-Participating Royalties in Wyoming

Unlike in Colorado, Wyoming courts have clearly defined the requirements necessary for creating a non-participating royalty interest. A non-participating royalty interest is created through instruments that purport to convey "oil and gas produced and saved" from the subject lands.⁸ The non-participating royalty becomes perpetual upon the inclusion of a habendum clause conveying the interest to the "assignee and his heirs, successors and assigns."⁹ The reservation or grant of a royalty interest prior to the lease of the mineral interest "is generally termed a non-participating royalty, if no right is granted or reserved to participate in the making of future leases."¹⁰ Distinguishing characteristics of a non-participating royalty interest in

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Wyoming include (1) that the interest is not subject to costs of discovery or production; (2) that the assignee has no exploration or production rights; (3) that the owner has no right to grant leases; and (4) that the owner has no right to bonuses and delay rentals.¹¹ These characteristics are evidence of a non-participating royalty interest, even when the interest may be mislabeled as an "overriding royalty interest."¹² If the conveyance creating the interest is ambiguous, the Wyoming courts allow extrinsic evidence to show the intent of the parties. Because Wyoming has clearly defined rules regarding the classification of non-participating royalty interests, the title examiner has excellent guidelines to follow to assist her in properly identifying the mineral interest conveyed.

C. Non-Participating Royalties in Colorado

In Colorado, however, the courts have struggled to classify a non-participating royalty. Colorado courts have held that, at common law, the right to a share of profits from a...