Chapter 42 - § 42.5 • CONVEYANCE OF MINERAL, ROYALTY, AND LEASEHOLD INTERESTS

• Jurisdiction: Colorado

§ 42.5 • CONVEYANCE OF MINERAL, ROYALTY, AND LEASEHOLD INTERESTS

When an unsevered estate is conveyed without reference to a separate surface and mineral estate, the entire unsevered estate passes to the grantee. O'Brien v. Village Land Co., 794 P.2d 246, 249 (Colo. 1990). However, in Colorado, as in nearly all mineral-producing jurisdictions, minerals can be separated and severed from surface ownership. C. Krendl & J. Krendl, 1B Colo. Prac., Methods of Practice § 10.1 (5th ed.).⁹ Such severance is accomplished in Colorado through grant or reservation of minerals in a mineral deed or through the execution of an oil and gas lease. See Keller Cattle Co. v. Allison, 55 P.3d 257 (Colo. App. 2002).

Before addressing more specific issues relating to mineral interest conveyances, the following is a brief summary of the minimum requirements for a document that constitutes a conveyance of a mineral, royalty, or leasehold interest:

1) Must be a writing sufficient to satisfy the statute of frauds (C.R.S. § 38-10-108);¹⁰
2) Must contain appropriate words of grant (see, e.g., C.R.S. § 38-30-113);
3) Must contain identification of parties (grantor, grantee);
4) Must contain an adequate description of the lands/interest being conveyed (C.R.S. § 38-35-122);¹¹
5) Must be properly executed (Alpine Bank v. Moreno, 293 B.R. 777, 785 (Bankr. D. Colo. 2003) (any conveyance interest in real property must be signed by the party making that conveyance); see also C.R.S. § 38-10-108); and
6) Must be recorded (C.R.S. § 38-35-109).¹²

Williams & Meyers, supra at § 220.

The first things to consider in the context of all conveyances, including those involving oil and gas, are the general rules of construction utilized by the courts when construing such instruments. In Colorado, courts will strive to accomplish the intent of the parties, turning to extrinsic evidence only when the conveyance language is ambiguous.¹³ When ambiguity is found to exist, Colorado courts permit extrinsic evidence regarding the parties' intentions, and will construe any ambiguity against the grantor, with reservations being construed more strictly than grants.¹⁴ In addition, pursuant to Colorado statute, conveyances will be construed as encompassing all of the grantor's right, title, and interest to the property conveyed, unless specific words of limitation or reservation are contained therein. C.R.S. § 38-30-107. Consequently, it is important that conveyances contain sufficient specificity to accomplish the intent of the parties, without risking the courts' construing the conveyance in a contradictory fashion. However, as illustrated below, this is not always an easy task in the context of oil and gas conveyances.

§ 42.5.1—Impact of a Conveyance or Reservation of "Minerals"

In the context of mineral interest conveyances, a common issue is what type(s) of minerals are included within a general grant or reservation of "minerals." In making this determination, the primary function of the courts is to determine what substances the parties intended to include in the mineral grant or reservation. Keith v. Kinney, 140 P.3d 141 (Colo. App. 2005). In striving to ascertain this intent, at least one Colorado court has utilized the concept of ejusdem generis, which generally provides that, where an enumeration of specific things is followed by a more general word or phrase, such general word or phrase is held to refer to things of the same kind, or things that fall within the classification of the specific terms. Id. The Colorado Supreme Court has also held that the true test is what that word means in the vernacular of the mining world, the commercial world, and landowners at the time of the grant, and whether the particular substance was so regarded as a mineral. Farrell v. Sayre, 129 Colo. 368, 373 (Colo. 1954).

In Colorado, as in most other jurisdictions, it has been held that a general grant or reservation of "minerals" or of "all minerals" will be inclusive of oil and gas and all constituent hydrocarbons. Krendl & Krendl, supra at § 10.1; McCormick v. Union Pac. Res. Co., 14 P.3d 346 (Colo. 2000). Other Colorado cases have held that the term "minerals" does not include oil shale, sand, or gravel. Bell Petroleum Co. v. Cross V. Cattle Co., 492 P.2d 80 (Colo. App.1971); Farrell, 129 Colo. at 373; Keith v. Kinney, 140 P.3d 141 (Colo. App. 2005). It is important to note, however, that these cases did not hold such minerals were or were not included within the term "minerals" as a matter of law. Rather, they were based on extrinsic evidence relating to, inter alia, the parties' intentions and Colorado history regarding the custom and usage of the term "minerals." In addition, by Colorado statute, reference to "minerals" or "mineral rights" does not include geothermal resources, unless specifically mentioned. C.R.S. § 38-35-121.

Accordingly, when reserving or granting oil and gas and/or hard rock minerals, it is best to be specific, identifying precisely what minerals are intended to be included within the scope of the conveyance or reservation. However, this task is not an easy one. If the practitioner over-describes and excessively enumerates the minerals granted or reserved, the courts may find that any mineral not listed is excluded because of the time-worn concept of ejusdem generis. "Conveying Oil and Gas Interests," 1B Colorado Methods of Practice § 10.1 (2014). Conversely, an overly simplified description may be found not to include a given mineral or minerals although the parties to the conveyance intended it to be included. Id.

While it is not possible to provide a simple formula that will encompass every situation, West's Colorado Practice Series suggests the following terminology when reserving or granting minerals and oil and gas:

For a grant or reservation of all minerals, including oil and gas: [granting/reserving] — "all minerals of whatsoever kind or character in, under, and upon or that might be produced from the herein described lands . . ."

For grants or reservations of only oil and gas: [granting/reserving] — "all oil, gas, and all constituents thereof in, under, and upon or that might be produced from the herein described lands . . ."

Krendl & Krendl, supra at § 10.1.

Although some authorities think that identifying specific minerals risks the danger ofjudicial limitation, id., the author is of the opinion that all of the specific minerals can be identified without incurring a limitation. An example would be a grant or reservation of "all minerals of whatsoever kind or character, including but not limited to, oil, gas, and their constituents thereof and coal, and . . . , in, under, and upon or that might be produced from the herein described lands. . . ."

§ 42.5.2—Mineral/Royalty Distinction

Another issue to be considered is whether a conveyance will be construed as a mineral conveyance or a royalty conveyance. Williams & Meyers, supra at § 304. In considering this issue, it is important to remember the distinction between a mineral interest and a royalty interest. The owner of a mineral fee estate has the right to enter the land to explore, drill, produce, and otherwise carry on mining activities. The owner also has the right to enter into an oil and gas lease covering his or her mineral interest. In contrast, the owner of a royalty interest has a right only to receive a share, if any, of production, free of costs of production. A royalty owner does not have the right to explore for minerals or grant an oil and gas lease. Such a royalty is usually the royalty reserved by the lessor of an oil and gas lease; however, most jurisdictions recognize that a "landowner royalty" can also be created in the absence of an oil and gas lease.

The issue presented is that, in a small minority of jurisdictions, the conveyance of a royalty interest (or the conveyance of the share of production, i.e., a royalty interest) has been interpreted as a conveyance of a fee mineral interest. Id. Whether Colorado follows the minority position remains unclear. The issue is best highlighted by two troubling Colorado Supreme Court decisions, Simson v. Langholf, 293 P.2d 302 (Colo. 1956), and Corlett v. Cox, 333 P.2d 619 (Colo. 1958). Both of these cases involved instruments that appeared to convey a royalty interest (or a share of production) in oil and gas leases that, while contemplated by the grantors, were not yet in existence at the time of the conveyances. In both cases, the court held that the conveyances involved — which evidence the intent to convey a pure royalty interest — had the effect of conveying a mineral fee estate. The rationale for these decisions appears to have been two-fold: first, the fact that the contemplated oil and gas leases were not yet in existence; and second, application of the feudal law principle enunciated by Lord Coke that "if a man seised of lands in fee by his deed granteth to another the profit of those lands, . . . the whole land itself doth pass; for what is the land but the profits thereof. . . ." This rule of the sixteenth century apparently had the consequence of forbidding the creation of a pure royalty interest. Williams &...