CHAPTER 11 ASSIGNMENTS AND CONVEYANCES

• Jurisdiction: United States

Oil and Gas Agreements: The Exploration Phase
(Mar 2010)
CHAPTER 11
ASSIGNMENTS AND CONVEYANCES
Robert L. Theriot
Jana L. Grauberger
Liskow & Lewis
Houston, Texas

Robert L. Theriot is a shareholder with the firm of Liskow & Lewis in their Houston office. His practice for the past 22 years has focused on oil and gas transactions and litigation. Mr. Theriot is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization. In addition to being a regular presenter for the Rocky Mountain Mineral Law Foundation, he also serves as Chair for the South Texas College of Law Energy Institute, Vice-Chair for the Oil & Gas Section of the Houston Bar Association, and on the Advisory Committee for the Institute for Energy Law of CAIL. He graduated summa cum laude from the University of Southwestern Louisiana and Tulane Law School and clerked for the Honorably John Minor Wisdom on the United States Court of Appeals for the Fifth Circuit.

Jana L. Grauberger is a shareholder at Liskow & Lewis. She practices energy and commercial litigation in the firm's Houston office, and she also provides advice and counsel to clients on a variety of oil and gas matters, including compliance with federal offshore statutes and regulations. Ms. Grauberger is currently Vice-President of the Women's Energy Network of Houston. Her undergraduate degrees in Journalism and French Literature are from the University of Kansas, and she graduated magna cum laude from Tulane University School of Law. Ms. Grauberger clerked for the Honorable Walter F. Marcus, Jr. on the Louisiana Supreme Court. She is licensed in both Texas and Louisiana.

I. Formal Requirements for Conveyances and Statute of Frauds

II. Types of Interests Assigned/Reserved

A. Minerals

B. Royalty

C. Leasehold Interests

D. Overriding Royalties

E. Production Payment

F. Net Profits Interest

III. Assignment/Reservation of Interests Other Than Oil and Gas

IV. Recordation

V. Property Description Issues

A. Adequacy of Description

B. Specific Property Description Versus "all Grantor's right, title and interest"

C. Coordination of Granting and Description Clauses

D. Cover-All Clauses

VI. Warranties

A. General

B. Specific Warranty

C. Quitclaim

D. Exceptions to Warranty

E. After-Acquired Title Doctrine

VII. Reservations, Exceptions, and "Subject To" Clauses

A. The Problem - Conveyances of Fractional Interests

B. Reservations and Exceptions

C. Double Fractions

D. Reservations in Favor of Strangers

E. Duhig Rule and Overconveyances

F. Reservations in "Lands Described" Versus "Lands Conveyed"

G. "Subject to" Clauses and the "Two-Grant" Theory

VIII. Unclear Terms of Art

A. "Wellbore" Assignments

B. "Royalty Acres

IX. A Mineral Right Granted Cannot Be Greater Than the Right From Which it Was Carved

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In transactions involving oil and gas interests, the task of defining just what is being assigned and conveyed, using fractions correctly, and understanding issues related to property descriptions, warranties, and reservations can be like navigating a dirt road filled with potholes after a rainstorm. This paper explores the basics of assignments involving minerals, leasehold interests, and royalty and offers suggestions on how to successfully draft agreements creating and conveying such interests.

I. Formal Requirements for Conveyances and Statute of Frauds

Regardless of whether the particular interest being assigned is classified as a real or personal interest, recordation statutes in many states and the statute of frauds in most states necessitate certain basic requirements for conveyance of oil and gas interests. These include: (1) the agreement must be in writing; (2) it must contain words of grant; (3) the parties to the transaction must be identified; (4) there must be an adequate property description; and (5) the agreement must be properly executed. The assignment must also be delivered by the grantor or his agent to the grantee.¹

Because conveyances of oil and gas interests involve interests in real property, compliance with recording statutes becomes the primary way to avoid loss of an interest to a bona fide purchaser. Generally, unless it is properly recorded, a transfer is void "as to a creditor or subsequent purchaser for valuable consideration without notice."² In the context of the oil and gas business, this impacts unrecorded interests such as the operator's lien under an operating agreement, farmees that have earned interests under a farmout agreement that have not yet been assigned, and investors that have unassigned rights to a share of the working interest.³ Parties such as farmees and investors hold equitable rights, but those rights can be extinguished by a bona fide purchaser at any time before legal title is acquired.⁴ Also, a creditor can attach a lien to a recorded lease, and likely acquire rights superior to an investor with equitable rights.⁵ In the

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bankruptcy context, such a creditor may be treated as a secured creditor while holders of equitable rights - i.e., the farmee before assignment and recordation of its interest - would be unsecured creditors.⁶

The statute of frauds provides that certain agreements are unenforceable unless they are in writing and signed by the promisor.⁷ In Texas, for example, the statute of frauds applies to contracts for the sale of real estate, leases of a duration greater than one year, and any contract involving performance that will not be accomplished within one year.⁸ Contracts for the assignment of oil and gas interests are typically subject to the statute of frauds.⁹ To satisfy the statute of frauds, the writing "'must furnish within itself, or by reference to some other existing writing'" the identity of the property being conveyed "'with reasonable certainty.'"¹⁰ Reference to extrinsic evidence may only be used to identify the property with reasonable certainty from the data found in the contract, and not for the purpose of providing the location or description of the property conveyed.¹¹ As a result, an assignment identifying the property covered as a certain amount of acreage within a larger tract - "50+ leases covering approximately 2100+ net mineral acres in the Dirgin and Oak Hill Field areas" with reference to an attached Exhibit "A" containing no information identifying the specific property covered - is insufficient to satisfy the statute of frauds.¹² Similarly, a conveyance of a set number of acres, a specific land section, or even "the north 60 acres" of a section may not be sufficiently specific to allow a person to identify with reasonable certainty the property being transferred. Problems may also be encountered with respect to horizontal severances of the mineral estate and area of mutual interest provisions.¹³

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The following is a sample assignment of mineral interests sufficient to satisfy the requirements identified above:

SAMPLE DEED

STATE OF TEXAS COUNTY OF HARRIS KNOW ALL PERSONS BY THESE PRESENTS:

GRANTOR

That We, HOMER J. SIMPSON and MARJORIE BOUVIER SIMPSON, husband and wife, of the County of Harris, State of Texas, Grantors, whose mailing address is 2366 Bolsover Street, Houston, Texas 77005, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration,

GRANTING CLAUSE

HAVE GRANTED, SOLD and CONVEYED, and by these presents do GRANT, SELL AND CONVEY

GRANTEE

unto FLANDERS OIL AND GAS PROPERTIES, LLC, a Texas Limited Liability Corporation, located at 1001 W. Alabama Street, Houston, Harris County, Texas 77008, Grantee,

PROPERTY DESCRIPTION

Section 200, Block 2, Wiggum & Co. Survey, Harris Country, Texas, containing 640 acres more or less, limited to a depth from the surface of the ground to 5,000 feet below the surface of the ground, and reserving to the Grantors and Grantors' heirs or assigns all minerals below such depth.

PROPERLY EXECUTED

Signatures

Acknowledgments

II. Types of Interests Assigned/Reserved

It is important to understand and define precisely the type of interests that are being transferred to the grantee and/or retained by the grantor in a reservation. Common forms of ownership are discussed below, including mineral interests, working interests, royalty, and overriding royalty interests, as well as more specialized industry arrangements such as farmouts, farm-in arrangements, production payments, and net profits interests.

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A. Minerals

The mineral estate can be severed from the surface estate by grant or reservation, in whole or in part, and an assignment of a mineral interest creates a property interest that gives the interest holder the right to explore, drill, and produce the minerals that are the subject of the conveyance.¹⁴ This, in effect, gives the holder of mineral interests the right to lease (unless such rights are excluded), the right to receive bonus payments, delay rentals, and the right to receive royalty payments due it as lessor.¹⁵ The mineral estate can be granted in fee simple, fee simple determinable, for life, or for a fixed term.¹⁶ To the extent that there are multiple fractional interest mineral owners, any of them can explore, drill, and produce, and there is no requirement of consent from other co-owners.¹⁷

The right to develop, which includes the right to explore, drill, produce, store, and market, includes an implied right to use the surface estate to the extent reasonably necessary to carry out such operations.¹⁸ This might include things such as conducting seismic operations, building roads, using water for drilling or secondary recovery operation, or locating storage tanks on the surface property.¹⁹ The owner of a mineral estate can exercise these rights by authorizing someone else to perform these activities.²⁰ Most often, the right to develop is transferred to an oil and gas company by way of entering into an oil and gas lease.²¹ The right to lease, also called

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