CHAPTER 12 MINERAL AND LEASEHOLD CONVEYANCE ISSUES
| Jurisdiction | United States |
(Apr 2015)
MINERAL AND LEASEHOLD CONVEYANCE ISSUES
Member
Dupuis & Polozola, LLC
The Woodlands, Texas
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JAMES H. DUPUIS, JR. is the managing member of Dupuis & Polozola, LLC in the firm's The Woodlands, Texas office. His practice focuses on oil and gas law in Texas and Louisiana, including drill site and division order title examination, contract negotiation, and due diligence in connection with the acquisition and divestiture of oil and gas properties. Before co-founding Dupuis & Polozola, he was a shareholder at Liskow & Lewis, where he practiced in the energy and natural resources section. He received a B.S. from the University of Louisiana at Lafayette in 1994, an M.S. from the University of Memphis in 1998, and a J.D. in 2001 from the Louisiana State University Paul M. Hebert School of Law, where he was a member of the Order of the Coif and the Louisiana Law Review. He is licensed to practice law in Texas, Louisiana, and Kansas. Mr. Dupuis is a member of the Louisiana Mineral Law Institute Advisory Council, and has given numerous seminar presentations to various professional associations, including the Louisiana Mineral Law Institute, American Association of Professional Landmen (AAPL) Gulf Coast Land Institute, AAPL's Next Generation Landmen Institute, Lafayette Association of Professional Landmen, North Houston Association of Professional Landmen, Southwest Land Institute, Ark-La-Tex Association of Professional Landmen, Baton Rouge Association of Professional Landmen, and Dallas-Ft. Worth Association of Lease and Title Analysts. Since 2005 he has been an adjunct professor at the University of Louisiana at Lafayette, where he teaches part of a course on petroleum land management.
This paper addresses select common mineral and leasehold issues encountered by a mineral title examiner. Specifically, it discusses recurrent problems regarding mineral reservations in favor of third parties, the use of the phrase "mineral acres" in deeds, the Duhig rule, merger of title, and, finally, wellbore assignments.1
Reservations to Third Parties
In some producing states, an attempted reservation or exception by a grantor in favor of a third party (a "stranger in title") in a conveyance will fail because an interest cannot be conveyed to a third party through a reservation in the absence of words of grant. This rule is a product of the common law. Because of the rule's so-called "primitive" nature, some states, such as Wyoming,2 have chosen to abandon it altogether, while others, such as Texas, Oklahoma, and North Dakota maintain the rule.3
In the states where the rule is still alive, it is important to remember that it applies to any interest reserved or excepted, including minerals, royalties, overriding royalties, and the like.
To illustrate, take the following scenario:
A owns Lease 1. B owns Lease 2.
A and B assign to C, reserving an overriding royalty interest (ORRI).
Does A get a share of the ORRI covering Lease 2, and does B get a share of the ORRI covering Lease 1?
Under the majority rule, A would not get a share of the ORRI covering Lease 2, and B would not get a share of the ORRI covering Lease 1. However, in states that have abandoned the rule, A and B could share in each others' interest. In jurisdictions where the rule is still applied, or where there is no controlling authority, the best practice would be to acquire a protective lease to cover the potential interest of the third party, or to have the third party
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execute a royalty division order to ensure that they do not claim an interest.4
Fractional Interests and Mineral Acres
In conveyances and reservations of oil and gas interests, instruments often designate the interest conveyed by the use of fractional interests, or by a number of "mineral acres," or sometimes, both. A fractional interest is simply a fraction or percentage used to describe the undivided interest being conveyed or reserved. A mineral acre, on the other hand, is the full mineral interest in one acre of land.5
For example, assuming a regular 640 acre section, the same conveyance can be styled as:
1) an undivided 1/2 interest, or
2) an undivided 50% interest, or
3) an undivided 320 mineral acres.
In all of these examples, the grantor would be conveying an undivided one-half interest in the section.
Discrepancies between the described acreage of a tract and the actual acreage of a tract can lead to conflict when the granting language is styled in terms of both a fractional interest and in mineral acres. Take, for example, a deed that grants a 1/2 mineral interest and also describes the property conveyed as being 20 mineral acres in a 40 acre tract.6 Here, if both the fraction and mineral acres are equal, no problem arises. But, what if the parties are incorrect and the described tract actually contains 45 acres instead of 40?7 In this case, the fractional interest is in conflict with the mineral acreage description.
Unfortunately, there is no steadfast rule as to how courts will decide this issue, but they can employ three general methods to resolve the dispute. First, a court could declare the deed ambiguous and admit parol (outside) evidence of the parties' intent to determine which measurement is correct. Second, a court could ignore the reference to the fractional interest and give effect to the mineral acres measurement. Third, a court could ignore the reference to mineral acres and only give effect to the fractional interest measurement.8 All three methods have their drawbacks, whether by the increased expense of litigation as with option one, or a finding that may be wholly unintended by one or even both of the parties as with options two and three.
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From the title examiners perspective, fractional conveyances are preferable because the exact tract acreage is often unknown, making it difficult to determine the interest being conveyed. If mineral acres are used, the examiner will often call for a stipulation to clarify the interests owned by the parties. Nevertheless, it is strongly recommended that drafters use one or the other, and refrain from describing the conveyance or reservation in terms of both fractional interests and mineral acres.
Duhig rule
The Duhig rule is a rule of deed construction so ubiquitous that it is referred to as the Duhig rule in almost every producing state, despite the fact that the rule's namesake is a Texas Supreme Court case.9 Many states have either adopted it outright or apply some form thereof in their jurisdictions. The following scenario represents the archetypical factual situation in which the Duhig rule will apply:
Grantor owns the surface and an undivided 50 percent of the minerals underlying the property;
Ownership of an undivided 50 percent of the minerals is outstanding in a third party;
Grantor conveys the surface to grantee by a general warranty deed reserving a one-half interest in the minerals.
It is simple enough to identify the issue. The grantor is retaining half of the minerals while simultaneously conveying the other half. The problem arises from the fact that the grantor owns only one-half of the minerals. There is no question that half of the minerals are owned by the third party with the outstanding interest. The issue revolves around who owns the other half. The Duhig rule operates to divest the grantor of the interest that he reserved on the basis that he purported to convey to the grantee one-half of the minerals underlying the property.
In Duhig, the grantor owned a one-half mineral interest, and reserved a one-half interest in the deed. Because the grant and the reservation could not both be satisfied, the reservation failed and the grantee acquired ownership of the one-half mineral interest the grantor intended to reserve. It is helpful to go through the Duhig analysis with other fractional interests in order to better understand how the rule operates. In the following two...
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