CHAPTER 17 TITLE EXAMINATIONS ON UNITIZED LAND
| Jurisdiction | United States |
(Jan 1990)
TITLE EXAMINATIONS ON UNITIZED LAND
Jones, Waldo, Holbrook & McDonough
Salt Lake City, Utah
TABLE OF CONTENTS
Page
INTRODUCTION
I. GENERAL TITLE ISSUES
The Nature of Unitized Title
Rule Against Perpetuities
The Power to Unitize
Pooling Clauses
Timely Pooling
Ratification
Perpetuation of Leases
Segregation
Pugh Clauses
Implied Covenants
Term Interests
Joinder Requirements
Subsequent Joinder
Uncommitted Interests
Loss of Title
Disputed Title
Allocation of Production
Participating Areas
Prior Production
Zones of Production
Unleased Owners
Cost of Drilling
Non-Consent Provisions
Reduction of Excess Royalty
Preferential Right to Purchase
Renewal or Extension Leases
Non-Paying Unit Wells
Contraction of Unit Area
Farmout Agreements
II. TITLE EXAMINATION PROCEDURES
Federal Records
State Records
Indian Records
County Records
III. TYPES OF TITLE OPINIONS
IV. CONCLUSION
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The purpose of this paper is to discuss issues affecting title, and title examinations, when oil and gas interests are combined into a unit. The title of a party within a unit is of course subject to all the possible defects and problems of any other mineral interest owner.1 Certain title issues which particularly relate to units, however, will be discussed below. Title examination procedures for unitized interests will then be reviewed. Finally, special considerations for different types of title opinions on unitized land will be discussed.
I. GENERAL TITLE ISSUES.
THE NATURE OF UNITIZED TITLE
In some states, the execution of a community lease, a pooling agreement, or a unitization agreement is deemed to create a cross assignment of the underlying realty.2 In Texas, a line of cases culminated in Renwar Oil Corporation
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v. E. L. Lancaster,3 which stated that unitization agreements "are essentially a conveyance of an interest in realty". The effect of these cases is to constitute all the lessors of land in a unitized area as joint owners, or joint tenants, of all royalties reserved in each of the several leases in such area. Further, the owners of such royalty interests have an interest in the land since royalty is deemed to be an interest in realty.4
Several California cases hold that by executing a community lease, each lessor assigns to his co-lessors a portion of the oil produced from his land; and the royalty interest thus assigned is an incorporeal hereditament analogous to the right to receive future rents.5
Illinois and Mississippi cases also seem to adopt the cross-assignment theory.6
In a cross-assignment state, all parties to a unit may be indispensable parties to litigation or curative action involving title to one portion of the unit. Most courts,
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however, have found ways to hold that parties who own interests outside the tract in dispute are not indispensable.7
The cross-assignment theory also creates problems in regard to conveyances of an individual tract in a unit. In theory, all parties to the unit should execute such a conveyance.8
An attorney involved in conveying unitized lands in a cross-assignment state should obviously specify the interest being conveyed if there is any question under state law regarding the nature of the interest. In a cross-assignment state, a title examiner might also want to qualify his opinion to take into account the case law of the particular state involved.
There is considerable authority contrary to the cross-assignment theory. Most states hold (or the cases indicate) that each unitized party retains title to his land, and merely contracts with the owners of other lands to share production.9
In order to avoid the possibility that unitization creates cross-conveyances among the participants, many agreements contain express language designed to negate a cross-conveyance.10 The Federal Model Onshore Unit Agreement adopts the contract theory by providing that the Agreement
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shall not be construed to transfer title to any land or lease committed to the Unit.11
Some courts have given this type of provision weight in finding that no cross conveyance was effected by the agreement. For example, in the case of Phillips Petroleum Company v. Peterson,12 the Court stated:
Thus, it appears that the effect of unitization was to be only with respect to allocation of production and the computation of royalties and was not to effect cross-transfers of royalty interests.13
This was a case which arose in Utah, involving a federal unit.14
RULE AGAINST PERPETUITIES
A basic title issue is whether the pooling or unitization clause in an oil and gas lease violates the rule against perpetuities. The limited case law indicates that such a clause does not violate the rule.15
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One case deals with the rule in relation to federal leases. In Phillips Petroleum Co. v. Peterson,16 the court concluded that the unitization provision did not effect cross assignments of royalty interests, and therefore did not violate the rule against perpetuities. The court also held that there was an implied limitation of a "reasonable" time period for unitization, which was within the limitation of the rule against perpetuities.
THE POWER TO UNITIZE
There is no particular uniformity in pooling and unitization clauses contained in oil and gas leases. Although many standard form leases in the Rocky Mountain area allow the lessee to pool or unitize the lease, there may be acreage and other limitations on this power.17 Federal, Indian and State leases do not provide this power to the lessee at all.
In some states, this problem is addressed by the use of separate agreements between the royalty owners and the working interest owners. The royalty owners agreement essentially assures that the mineral owners' interests are committed to the unit, and ratifies the participation formula. The operators agreement covers operating matters and participation in production among the working interests.18 These agreements are utilized especially in states such as Texas which hold that the power to lease does not carry with it the power to pool.19
The courts in other states, however, have held that the power to lease includes the power to pool, although this
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may depend upon the terms of the particular oil and gas lease.20
The title examiner must assure that all necessary parties have committed their interests to the unit. If necessary, an uncommitted party should ratify the appropriate agreements. Ratification may be by execution of the original unitization agreement, or by execution of a separate document. In order to avoid the expense of filing numerous counterparts, one page ratification forms may be utilized.
The acceptance of royalty payments with knowledge of what the payments are for, and that the payments are made on a unitized basis, may constitute ratification of a unit agreement.21
POOLING CLAUSES
The typical pooling clause in a fee lease allows the working interest owner to pool or unitize the lease within certain parameters. Such a provision may only allow commitment of the interest to a unit with a maximum size of 640 acres. This would not be sufficient authority to commit the lease to a larger federal unit. Further, the typical pooling provision requires the working interest owner to record a declaration of pooling and/or to provide a copy thereof to the lessor. Courts have held that compliance with this provision is mandatory in order for the pooling to be effective.22 The title examiner should therefore confirm that the appropriate declarations have been actually recorded and/or copies thereof provided to the lessor.
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TIMELY POOLING
If pooling is not finalized prior to the end of the lease's primary term, the lease will automatically terminate at the end of its primary term. For example, in the case of Sauder v. Frye,23 the pooling agreement was entered into, and drilling was commenced, prior to the end of the primary term. However, the declaration of pooling was not recorded until after the primary term. The court held that the lease terminated due to the late recordation.24
RATIFICATION
It has been the practice of some companies to rely upon execution of a unit agreement by the lessor as a ratification of an expired lease. In Westbrook v. Atlantic Richfield Co.,25 the court held that the execution of a unit agreement was not sufficient to revive a terminated lease where the lessor did not sufficiently identify nor expressly recognize the validity of the terminated lease.
It is a general practice, however, to rely upon such a ratification as long as it contains language which clearly indicates that the lessor is aware of the effect of the ratification on the otherwise terminated lease.
Thus, the title examiner should confirm that all appropriate pooling or unitization actions have been finalized before the end of each lease's primary term. If pooling or unitization is not accomplished prior to the end of the primary term, the lessor should be asked to execute the pooling agreement and to ratify the continuing existence of the lease.26
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Indian leases which are not communitized prior to the end of their primary term, terminate automatically. A very instructive case is Kenai Oil & Gas Inc. v. Department of the Interior.27 In that case, Indian lands were within a state spacing area, and a well was drilled on fee lands within the spacing area prior to the expiration of the Indian lease. A communitization agreement was proposed, but was not approved prior to the expiration of the Indian lease. The Bureau of Indian Affairs refused to approve the communitization agreement after the lease expired. The court upheld the Bureau's decision, which was clearly based upon a desire by the Bureau to receive a higher bonus and royalty upon re-leasing of...
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