Professional Documents
Culture Documents
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INTRODUGrION
One of the reasons I chose to teach Oil and Gas Law a number of
years ago was that I perceived it to be an advanced property course.!
While that perception is changing,2 I still believe that the heart, if not
the brains, behind any basic course in oil and gas law will still lie in
thousand-year-old common law property principles, which must be
mastered by the student if she is to understand how modern oil and
gas law and transactions are structured.
The fact that property principles, and to a great extent, real property principles, underlie oil and gas law has created many positive externalities for the industry. Some of the benefits were noted by the
Texas Supreme Court which, when interpreting an instrument to create an overriding royalty interest, rather than a mere contractual obligation to pay a sum certain, stated: "[overriding royalties] are
interests in land; and hence not subject to parol sale, but have the
protection of the statute of frauds, the statutes regulating conveyances
and mortgages of real estate, and the statutes requiring the record of
instruments affecting title to or liens on land."3
* Maddox Professor. Texas Tech.; A.B., 1968; J.D., 1972, V.C.L.A.; LL.M. 1975. Illinois.
1. I must confess that one of my dumbest decisions in law school was not taking the Oil
and Gas Law course taught by Richard Maxwell. What I did not learn in his course, I have tried
to pick up over the years through a careful reading of his many thought-provoking articles. In
addition, Dick has shown an amazing patience in responding to a continuous series of questions
about oil and gas that I have bombarded him with. I nonetheless was able to figure out that Oil
and Gas Law was largely taught by property scholars, leading me to believe that my interest in
property law would be rewarded by teaching the course.
2. You can compare the earlier editions of HOWARD WILLIAMS, ET AL., OIL AND GAS
LAW (1st through 3rd edit.) and WILLIAM HUIE, ET AL., CASES AND MATERIALS ON OIL AND
GAS LAW (1960) with their current versions to see a de-emphasis on traditional property law
concepts. See also EUGENE KUNTZ, ET AL., CASES AND MATERIALS ON OIL AND GAS LAW (2d
ed. 1992) for a more "modern" view of oil and gas law.
3. Tennant v. Dunn, 110 S.W.2d 53, 57 (Tex. Comm'n App. 1937). See also A.W. Walker,
Property Interests Created by Lease, 7 TEX. L. REV. 1,32-49 (1927).
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II.
A.
RESTATEMENT OF PROPERTY
9 (1936).
203
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treat the severed estate as a possessory or corporeal interest.? Obviously, in these states an owner of a severed oil and gas estate may
create any of the recognized estates that may be carved out of the fee
simple absolute.
Another group of states, including California, Indiana, Louisiana,
New York, Oklahoma'and Wyoming,S treat the severed mineral estate
as creating only a non-possessory interest, akin to a profit a prendre,
which gives the owner the right to explore for, search and then capture the oil or gas by bringing it to the surface. In these non-ownership states, therefore, the common law estate system should not be
applicable since the severed oil and gas estates can never become possessory. Notwithstanding the contradiction, courts in non-ownership
jurisdictions continue to employ the common law estates classification
scheme to describe various mineral and leasehold interests that may
be carved out of the oil and gas estate. 9
It is axiomatic in classical property jurisprudence that a person
can only transfer an interest equal to or smaller than the interest
owned. That axiom is reflected in the famous maxim, "nemo plus juris
transferre potest quam ipse habet" - No one can transfer a better
title than he himself has. to This concept applies to the size, nature and
duration of the property interest. Therefore, the owner of an incorporeal interest cannot assign or transfer a corporeal interest.l l Likewise
in non-ownership jurisdictions, or in jurisdictions such as Kansas
which treat the leasehold estate as an incorporeal interest,12 the royalty interest that is carved out of the lease should be classified as a
chattel real or a chose in action. 13 Yet royalty interests are universally
treated as incorporeal interests even in states which treat the lease as
7. See cases cited in 1 WILLIAMS AND MEYERS, supra note 6, at 44-50. The Texas Supreme
Court in Stephens County v. Mid-Kansas Oil & Gas Co., 254 S.W. 290 (Tex. 1923) concluded:
We do not regard it as an open question in this state that gas and oil in place are
minerals and realty, subject to ownership, severance, and sale, ... in like manner and to
the same extent as is coal. .... But it is earnestly insisted that the instruments conveyed only incorporeal hereditaments ... and that the terms of the instruments precluded the vesting of title to the gas and oil save as personalty after being brought to
the surface.
Ownership of the gas and oil in place meant having the exclusive right to possess,
use and dispose of the gas and oil.
[d. at 292.
8. See cases cited at 1 WILLIAMS & MEYERS, supra note 6, at 34-44.
9. For example in Gerhard v. Stephens, 442 P.2d 692 (Cal. 1968), the court found that an
oil and gas lease created a defeasible fee estate even though only an incorporeal hereditament
was created. See also, Callahan v. Martin, 43 P.2d 788 (Cal. 1935); Stewart v. Amerada Hess
Corp., 604 P.2d 854 (Okla. 1979).
10. BROWDER, ET AL., supra note 5, at 756.
11. RICHARD HEMINGWAY, THE LAW OF OIL AND GAS 60 (3d ed. 1992) [hereinafter
HEMINGWAY].
12. Lathrop v. Eyestone, 227 F.2d 136 (Kan. 1951).
13. JON BRUCE & JAMES ELY, JR., THE LAW OF EASEMENTS AND LICENSES 3-7 (1988);
HEMINGWAY, supra note 11, at 60.
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On more than one occasion, several prominent attorneys representing oil companies have raised with me the issue of why attorneys
have accepted without question the notion that under a typical "unless" lease with a standard habendum clause, the lease would automatically terminate if the delay rentals are not paid either accurately
or timely or if production ceases in the secondary term. The history of
the development of the automatic termination doctrine suggests that
lawyers have been too deferential to that doctrine and probably could
have drafted clauses that would have avoided its harsh ramifications.
From an early date, the English common law recognized two different types of defeasible fee simple estates; the fee simple determina14. See, e.g., Callahan v. Martin, 43 P.2d 788 (Cal. 1935); Lathrop v. Eyestone, 227 P.2d 136
(Kan. 1951); White v. McVey, 31 P.2d 850 (Okla. 1934).
15. See, e.g., Gerhard v. Stephens, 449 P.2d 692 (Cal. 1968); Baker v. Vanderpool, 178
S.W.2d 189 (Ky. 1944) (royalty is an incorporeal hereditament); Back v. Ohio Fuel Gas Co., 113
N.E.2d 865 (Ohio 1953) (leasehold interest is an incorporeal hereditament).
16.. HEMINGWAY, supra note 11, at 60.
17. See, e.g., Lathrop, 227 P.2d 136. An analogous problem arose in Texas where by virtue
of Caruthers v. Leonard, 254 S.W. 779 (Tex. Comm'n App. 1923), overruled, Harris v. Currie,
176 S.W.2d 302 (Tex. 1943), the court found that a transfer of a mineral estate which had been
leased prior to the conveyance would not transfer either the delay rentals or the royalties payable under the existing lease. This spawned the use of the "subject to" clause in form deeds
which, in turn, created a generation of contentious litigation and irreconcilable opinions. See
generally Bruce Kramer, The Sisyphean Task of Interpreting Mineral Deeds and Leases: An Encyclopedia of Canons of Construction, 24 TEX. TECH L. REV. 1, 19-43 (1993) (hereinafter
Kramer, Sisyphean).
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ble and the fee simple subject to a condition subsequent,18 The major
difference between these two types of defeasible fee simple estates
relates to the differen~e between a limitation and a condition. 19 In
order to create a special limitation, durationallanguage, such as "unless," "so long as," or "until" must be used. 20 If the Grantor conveys
Blackacre to the Grantee and uses the following language: "0 to A
and his heirs so long as liquor is not sold on the premises," A has been
granted a fee simple determinable estate and 0 has retained a possibility of reverter.
In order to create a fee simple subject to a condition subsequent,
on the other hand, conditional, not durational, language needs to be
employed. Thus, if the Grantor conveys Blackacre to the Grantee and
uses the following language: "0 to A and his heirs on condition that
liquor is not sold on the premises and if sold 0 shall have the power to
terminate," A has been granted a fee simple subject to a condition
subsequent and 0 has retained a power of termination or right of
reentry.
In the first example, where A has received a fee simple determinable, if A breaches the limitation 0 becomes the owner of the fee
simple absolute estate automatically and A becomes an instantaneous
trespasser on O's present possessory estate. In the second example,
where A has received a fee simple subject to a condition subsequent,
if A breaches the condition A continues to own the possessory estate,
subject to being ousted by O's affirmative exercise of O's power of
termination.
The differences have been expressed as follows by A.W. Walker,
Jr.:
The difference between them as to their operative effect is well
established and ordinarily presents little difficulty. A limitation in
its generic sense is any provision delimiting the duration of an estate. The operative effect of the occurrence of the event named in a
clause of ... special limitation is ...: the estate granted automatically terminates without the necessity of any affirmative action on
the part of the grantor, or lessor, and, in fact, even without this
knowledge or against his express wishes. The happening of the
event named in a clause of condition subsequent, does not ipso
facto terminate the estate granted ... but merely gives the grantor,
or lessor, the option of terminating the estate. . . . . The estate
18. ROGER CUNNINGHAM, ET AL., THE LAW OF PROPERTY 39-45 (2d ed. 1993) (hereinafter
CUNNINGHAM, ET AL.).
19. THOMAS BERGIN & PAUL HASKELL, PREFACE TO ESTATES IN LAND AND FUTURE INTERESTS 50 (2d ed. 1984); CUNNINGHAM, ET AL., supra note 18, at 45-50.
20. CUNNINGHAM, ET AL., supra note 18, at 46; A.W. Walker, Jr., The Nature of the Property Interests Created by an Oil and Gas Lease in Texas, 7 TEX. L. REv. 539, 540-41 (1929). A.W.
Walker, Jr. wrote a series of three articles that were very influential in applying the common law
estate nomenclature to oil and gas transactions. See also A.W. Walker, Jr., 7 TEX. L. REV. 1
(1928), A.W. Walker, Jr., 8 TEX. L. REV. 463 (1930).
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continues after the happening of the event until the grantor, or lessor, takes affirmative steps to bring the estate to an end.21
As it affects the oil and gas lease, there are several important ramifications that flow from this distinction between a limitation and a condition. The owner of the possibility of reverter may not waive his right
to reclaim the possessory interest. The change in ownership occurs at
the moment the limitation occurs. 22 A power of termination, on the
other hand, may be waived by the owner if it is not promptly exercised. 23 More importantly, the exercise of the power of termination
was treated as a forfeiture, while the operation of the possibility of
reverter was considered to be the natural expiration of the vested estate. 24 Thus, equitable defenses, such as estoppel and waiver, would
not be applicable to defend against the termination of a fee simple
determinable estate.
The history of the "unless" clause is unclear. The earliest leases
did not contain provisions for delay rentals as a means of postponing
the drilling of wells. According to one text, annual "rentals" to postpone drilling first appeared in an 1874 lease.25 By the early twentieth
century, however, a delay rental clause in a nearly standard form became widespread, except in California. 26 At an early date this standard "unless" lease form was treated as creating a fee simple
determinable estate which automatically terminated upon failure to
make timely and accurate delay rental payments.27
21. Walker, 8 TEX. L. REV., supra note 20, at 484-85.
22. This creates problems with the reality that most wells do not continuously produce, but
have "downtimes" for scheduled maintenance, mechanical breakdowns or lack of markets. See
generally, Bruce Kramer, The Temporary Cessation Doctrine: A Practical Response to an Ideological Dilemma, 43 BAYLOR L. REv. 519 (1991) (hereinafter Kramer, Temporary Cessation).
23. CUNNINGHAM, ET AL., supra note 18, at 47-48.
24. Walker, 8 TEX. L. REV., supra note 20, at 486.
25. 1 E. BROWN, THE LAW OF OIL AND GAS LEASES 7-1 (1993), citing SAMUEL GLASSMIRE,
THE LAW OF OIL AND GAS LEASES AND ROYALTIES 199 (1935).
26. The following delay rental clause was included in a 1917 lease:
It is agreed that this lease shall remain in force for a term of three years from this
date, and as long thereafter as oil or gas, or either of them, is produced from said land
by lessee. .. .. If no well is completed on said land on or before the 17th day of
January, 1917, [1 year from date of execution of the lease] this lease shall terminate as
to both parties, unless the lessee on or before that date shall payor tender to the lessor,
... the sum of Three Hundred Eighty and no-100 dollars, which shall operate as a
rental and cover the privilege of deferring the completion of a well for twelve months
from said date.
RICHARD MAXWELL, ET AL., CASES AND MATERIALS ON OIL AND GAS LAW 356 (6th ed. 1993).
See also Leslie Moses, The Evolution and Development of the Oil and Gas Lease, 2 INST. ON OIL
AND GAS L. & TAX'N 1 (1951); 3 WILLIAMS & MEYERS, supra note 6, at 601-601.5 (1993).
27. Dean Sullivan notes that some other rationales were used to support the near-universal
finding that the "unless" lease was automatically terminable. ROBERT SULLIVAN, HANDBOOK
OF OIL & GAS LAW 107 (1955). He further concludes that since the "unless" language is a
special limitation substantial compliance is insufficient. Id. See, e.g., Phillips Petroleum Co. v.
Curtis, 182 F.2d 122 (10th Cir. 1950); W.T. Waggoner Estate v. Sigler Oil Co., 19 S.W.2d 27 (Tex.
1929).
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The fee simple determinable classification scheme led to some absurd results. 28 It also led to a host of exceptions to the rule of automatic termination, which clearly suggested that the courts were not
pleased that a lessee's interest might be terminated because of actions
taken by third parties. Thus came into existence the "mail box exception" which prevented termination if the lessee could show that the
check was mailed in sufficient time to reach the lessor or depository
bank, but did not. 29 But the reason why the payment didn't arrive
would be irrelevant under an automatic termination doctrine. The
payment is a limitation, not a condition, and substantial performance,
or incompetence by a third party should not prevent the lease from
terminating. Normally estoppel, waiver or other equitable defenses
would not be available to the owner of a fee simple determinable estate where the limitation has occurred. But by looking at fault some
courts were treating the lessor's action not as one based in trespass,
but one sounding in forfeiture.
One exception to the automatic termination rule that could be
justified was where the lessor herself caused the delay rental payment
to be erroneously tendered. This exception was accepted by the court
in Humble Oil & Refining Co. v. Harrison. 30 There the lessor had
conveyed a fractional interest to a third party after the lease. Unfortunately, the deed language was not clear as to the exact fraction.
Humble, on the advice of counsel, interpreted the deed to convey a
3/8 mineral estate, while the court eventually interpreted the deed to
convey a 1/2 mineral estate. Humble made the delay rental payments
to the respective parties based on its interpretation. The court refused
to allow the underpaid party to terminate the lease, claiming that the
cause of the underpayment was the lessor's own actions which could
not trigger the limitation.
Delay rental clauses are traps for the unwary. They sometimes
raise difficult questions about when the anniversary date falls. 31 They
also created problems since they were often tied to an acreage figure
which might not be readily ascertainable. 32 Further problems were
caused by post-lease conveyances by the lessor. 33 Since delay rentals
were a substitute for the commencement of the drilling of a well, lessees were also uncertain about whether their development activities
28. For example, in Young v. Jones, 222 S.W. 691 (Tex. Civ. App. 1920), the lease was
terminated when the lessee tendered $73.29 instead of $76.25.
29. See, e.g., Ballard v. Miller, 529 P.2d 752 (N.M. 1974); Corley v. Olympic Petroleum
Corp., 403 S.W.2d 537 (Tex. Civ. App. 1966).
30. Humble Oil & Refining Co. v. Harrison, 205 S.W.2d 355 (Tex. 1947).
31. See, e.g., Greer v. Stanolind Oil & Gas Co., 200 F.2d 920 (10th Cir. 1952); Hughes v.
Franklin, 29 So. 2d 79 (Miss. 1947).
32. Compare Schwartzenberger v. Hunt Trust Estate, 244 N.W.2d 711 (N.D. 1976) with
Norman Jessen & Assoc., Inc. v. Amoco Production Co., 305 N.W.2d 648 (N.D. 1981).
33. See, e.g., Atlantic Refining Co. v. Shell Oil Co., 46 So. 2d 907 (La. 1950).
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termination of the estate. The court itself noted that fact when it
stated:
It is well settled that with the usual "unless" lease, a failure of
the lessee either to begin a well or to pay the delay rentals, ipso
facto terminates the lease on the date set out for the action and the
estate reverts to the lessor without the necessity of reentry, declaration of forfeiture or legal action. 39
The result of Kincaid is in essence the creation of a new kind of estate
that governs the lease during the primary term. It is an estate that will
last until such time as the lessor notifies the lessee that the delay
rental obligations have been breached and the lessee fails to cure
within a 60-day period. 40 While courts should not allow the parties to
create new estates in land, the parties to a lease should be able to
avoid the harsh ramifications of the court's determination that the unless lease clause creates a fee simple determinable estate. Since states
seem unwilling to change their classification scheme for unless leases,
the drafting solution may be the only answer to the problem. 41
Insofar as the habendum clause is concerned, the language of the
standard clause, namely that the lease shall last "so long as oil or gas
are produced in paying quantities," also lent itself to being treated as a
fee simple determinable estate. While there was some differing treatment of the habendum clause in the early days of oil and gas law,42
most states followed the lead of Texas and called the leasehold estate
in the secondary term a fee simple determinable estate. 43 As with the
delay rental clause this led to some harsh results.
For example, if a lessee drilled a well and discovered gas in paying quantities which could not be marketed prior to the end of the
primary term, the lease would terminate. 44 . Likewise any cessation of
production in the secondary term would automatically terminate the
lease. 45 Estoppel, waiver or other equitable defenses would not be
available to the lessee to defeat the action brought by the lessor. 46
39. [d. at 255.
40. A similar result was reached in Woolley v. Standard Oil Co. of Texas, 230 F.2d 97 (5th
Cir. 1956).
41. One state, Oklahoma, has decided to abandon its prior classification scheme for delay
rental clauses and habendum clauses. After Stewart v. Amerada Hess Corp., 604 P.2d 854
(Okla. 1979), Oklahoma treats the lease as a fee simple on a condition subsequent allowing all
equitable defenses to be raised and placing the onus on the lessor to prove a forfeiture in an
action to enforce its power of termination.
42. 1 EUGENE KUNTZ, LAW OF OIL AND GAS 26.8(a) (1987) (hereinafter KUNTZ). Professor Kuntz identified two other approaches to the classification issue, both of which would not
have treated the lease as automatically terminating in the event production in paying quantities
was either not achieved or ceased.
43. Stephens County v. Mid-Kansas Oil & Gas Co., 254 S.W. 290 (Tex. 1923). See also
Baldwin v. Blue Stem Oil Co., 189 P. 920 (Kan. 1920).
44. See, e.g., Stanolind Oil & Gas Co. v. Barnhill, 107 S.W.2d 746 (Tex. Civ. App. 1937).
45. Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941).
46. For example, in Watson, 155 S.W.2d 783, the lessee shut-in a well because there was no
market for the oil because of the Depression and the poor quality of the oil being produced.
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quantities. 52 By only having to show discovery, the uncertainties relating to actual production and marketing which can lead to stoppages
no longer have the effect of automatically terminating the lessee's
estate.
Another judicial modification to the automatic termination rule is
the temporary cessation of production (TCOP) doctrine. 53 A number
of states which follow the automatic termination rule as to production
in the secondary term, nonetheless identify various excuses which
cause a cessation of production, but which nonetheless do not cause
the lease to automatically terminate. 54 The TCOP doctrine is clearly
antithetical to the notion that the lease automatically terminates when
production ceases. Actions taken by the lessee after a cessation of
production would be irrelevant under classic fee simple determinable
analysis. The limitation having occurred, the lessee becomes an instantaneous trespasser. But the TCOP doctrine delays the termination for a period of time that is deemed reasonable for an operator to
regain production. Thus, post-cessation actions become relevant in
determining the continued viability of the fee simple determinable estate. This is clearly inconsistent with the fee simple determinable estate concept. But the technical realities of oil and gas production and
marketing made it a viable option to avoid the harsh results of the
automatic termination rule. As I stated a few years ago:
While the TCOP doctrine adds some uncertainty to the law, it
does so in order to provide the lessee, and ultimately the lessor,
with some needed protection from the results of applying a thousand-year-old concept to the modern oil and gas industry. . . . .
[T]he common law is a wonderful machine. It changes as societal
needs change; it becomes flexible when flexibility is desired; but it
remains true to some basic values so as to provide a stability that is
necessary for the acceptance of the law as the rules that govern societal conduct,55
III.
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While admitting that the Williams interest should be an executory interest and thus void under the Rule, the court notes that only a few
other state courts had voided similar conveyances. 72 But driven by
the constitutional and statutory mandate, the majority could neither
ignore the Rule, create a legal fiction to avoid its application, or generally exempt oil and gas transactions from its application. Instead it
chose to mangle the "historical" features of common law estates
which clearly prohibit a remainder interest from following a defeasible
fee simple estate.
The linchpin in the majority's analysis is its conclusion that unlike
the typical executory interest, which may last forever, the Williams
interest is certain to become possessory when the production of minerals terminates. However, the Rule did not invalidate eternal contingent future interests, but those interests which would vest or fail to
vest within a life in being plus 21 years. Minerals may be produced for
67. OLIVER HOLMES, THE COMMON LAW (1881).
68. This position was noted by the Alabama Supreme Court in Earle v. International Paper
Co., 429 So. 2d 989 (Ala. 1983) (discussed infra notes 87-89 and accompanying text).
69. The court noted the historic differences between limitations and conditions. Williams,
668 P.2d at 628. The court also referred to Baker v. Hugoton Production Co., 320 P.2d 772 (Kan.
1958), which correctly identified the interests in a defeasible term deed as a fee simple determinable coupled with a possibility of reverter. In Baker, the grantee received the present possessory estate which was to last for twenty years and so long thereafter as oil or gas were produced
in paying quantities. In Williams, on the other hand, the grantor retained the present possessory
estate.
70. See RESTATEMENT OF PROPERTY, supra note 4, 154(3); LEWIS SIMES AND ALLAN F.
SMITH, THE LAW OF FUTURE INTERESTS 281 (2d ed. 1956) [hereinafter SIMES & SMITH).
71. See generally THOMAS BERGIN & PAUL HASKELL, PREFACE TO ESTATES IN LAND AND
FUTURE INTERESTS 62-66 (2d ed. 1984); SIMES & SMITH, supra note 70, at 103; RESTATEMENT OF
PROPERTY, supra note 4, 15, 154(3), 158.
72. See cases cited in 2 WILLIAMS & MEYERS, supra note 6, at 335.
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In other words, the court will wait to see if the term-for-years segment
of the grant will be extended into the indefinite-term segment. If not,
the original grant can be construed as retaining a term for years followed by a indefeasibly vested remainder. In this case, the future interest did vest within the period allowed by the Rule and therefore
invalidation was not warranted. While achieving the same result as
the majority, the analysis applies generally accepted property tenets
which do less violence to basic property jurisprudence.84
78. RESTATEMENT OF PROPERTY, supra note 4, 157 cmt. on cl. d; CUNNINGHAM, ET AL.
supra note 18, at 103. A contingent remainder may be so classified because the takers are unascertained at the time of the transfer. That is sometimes treated as a form of condition precedent.
See generally id.
79. See generally SIMES & SMITH, supra note 70, at 1236, 1239; 2 WILLIAMS & MEYERS,
supra note 6, at 335. The exclusion of the possibility of reverter from the application of the Rule
has been labelled an historical accident with no basis in policy. VI AMERICAN LAW OF PROP.
ERTY 24.1, at 7 n.3 (1952).
80. Williams v. Watt, 668 P.2d 620, 634 (Wyo. 1983) (Thomas, J., specially concurring).
81. [d. at 633-34. Justice Thomas unfortunately refers to the Land Bank's interest as a fee
simple determinable, rather than a fee simple subject to a condition subsequent. See supra notes
69-70 and accompanying text.
82. CUNNINGHAM, ET AL., supra note 18, at 143-44.
83. Williams, 668 P.2d at 637.
84. A similar approach was adopted by a four-judge concurring opinion in Earle v. International Paper Co., 429 So. 2d 989, 996-97 (Ala. 1983) (Jones, J., concurring specially). In Earle,
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A third approach which employs a legal fiction to avoid application of the Rule has been followed in a number of states. 85 I am not in
favor of creating legal fictions. If the existing common law rule is no
longer appropriate it should be reversed by judicial or legislative action. Creating a legal fiction takes something away from the law by
creating an image of outcome-oriented decisions, rather than a careful
analysis of the issues and rules raised by a particular common law
doctrine.
There is some basis for the legal fiction approach because at one
time there was a significant difference in the way the law treated an
"excepted" versus a "reserved" interest. As noted in Powell on Real
Property: "An 'exception' exists when some part of the ownership of
the grantor is never parted with, while a 'reservation' is the term applicable when the instrument transfers all that the grantor had but
recreates in him some specified interest with respect to the land
transferred."86
The problem with this historical anomaly is that most modern
deed forms use the term "excepting and reserving" which should
make it impossible to determine whether the grantor really intended
to use one or both of these mechanisms.
Where a grantor excepts or reserves a present possessory estate
for a fixed period of time and so long thereafter as oil or gas is produced in paying quantities, if the court finds that a reservation was
intended, it could hold that the entire interest passed to the grantee
who then regranted the mineral estate back to the grantor. With that
fictional regrant the grantee would be retaining the future interest,
which would be a possibility of reverter and, therefore, not subject to
the Rule.
The problem, of course, is determining whether the instrument
was a reservation or exception. The Alabama Supreme Court was
frank and candid about attempting to divine the intent of the parties
to such an instrument when it stated: "Realistically, [the grantor] had
no intent regarding any distinction between withholding an interest
and receiving the same interest from his grantee. He would simply
have intended to convey the property while retaining limited mineral
rights by whatever form of words the lawyers said would be effective."87 The court identified several factors which led it to conclude
the concurring opinion would not technically wait and see. They would validate the retained
interest for the fixed period of time and invalidate it for the indefinite period which followed.
The grantor's retained interest would be severed into valid and invalid segments where there
were two contingencies, one of which would violate the Rule.
85. See e.g., Earle v. International Paper Co., 429 So. 2d 989 (Ala. 1983); Bagby v.
Bredthauer, 627 S.W.2d 190 (Tex. Civ. App. 1981).
86. 6A RICHARD R. POWELL, LAW OF REAL PROPERTY 887[5] (Rohan rev. 1982).
87. International Paper Co., 429 So. 2d at 993.
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that the deed created a reservation rather than an exception. The first
was the use of words of inheritance, ("heirs and assigns") in the deed.
Again, at common law a reservation technically lasted only for the life
of the reserver while the exception retained the full interest in the
grantor. 88 Thus if the parties intended to create an exception the
words of inheritance would be superfluous. A reality check would undoubtedly uncover the fact that a form deed was used which contains
the words of inheritance not in order to make the reservation perpetual but because words of inheritance have traditionally been included
in deeds for several hundred years. 89
B.
Top Leases
The use of top leases in the oil and gas industry has raised several
questions. One of them entails the appropriate role for attorneys in
the transaction, since one could posit a situation where a lessor is actively trying to disengage herself from an existing lease in order to
receive the benefits of a second lease, when no appropriate grounds
for terminating the first lease exist. But the focus here relates to the
application of the Rule to the typical top-leasing situation.
Depending on the court's characterization, a top lease can be described as a springing executory interest,90 or merely a transfer of a
part of the lessor's possibility of reverter. 91 If the top lease is treated
as a springing executory interest it would run afoul of the Rule. Such
a conclusion was reached by the Texas Supreme Court in Peveto v.
Starkey,92 although the court was interpreting a top deed rather than a
top lease. The analysis, however, would be the same if the language of
the top deed or lease clearly made the conveyance dependent upon
the termination of the prior interest, be it a lease or a defeasible term
interest as in Peveto. If Peveto were generally followed, the practice
of giving top leases would cease. Regardless of the terms of the top
lease or top deed, the practical effect of either instrument is to postpone vesting of the interest in possession until the bottom lease or
deed expires. Since in most cases the bottom lease or deed will expire
88. 6A POWELL, supra note 86, 887[5]. See also 1 KUNTZ, supra note 42, at 406-08, where
the author notes that "[i]n modern conveyancing, both terms are used in a cumulative fashion in
most instruments, without regard to any distinction." Id. at 407.
89. The Alabama court also emphasized the fact that the term deed and the leasehold habendum clause used similar language. From that the court inferred that the grantor's retained
interest was significantly restricted in favor the of the grantee's interest. Given the fact that the
grantor had retained the full executive power over both the granted and retained interest, I fail
to see the importance of this similarity in terms. International Paper Co., 429 So. 2d at 994.
90. See, e.g., Envirogas, Inc. v. Consolidated Gas Supply Corp., 464 N.Y.S.2d 141 (Sup.Ct.),
affd, 469 N.Y.S.2d 499 (1983); Siniard v. Davis, 678 P.2d 1197 (Okla. Ct. App. 1984); Peveto v.
Starkey, 645 S.W.2d 770 (Tex. 1982).
91. Greenshields v. Superior Oil Co., 233 P.2d 959 (Okla. 1951).
92. 645 S.W.2d 770 (Tex. 1982).
558
[Vol. 33
only because of the lack of, or cessation of, production, the future
interest granted to the top lessee will violate the Rule.
If the top lease is treated as merely a conveyance of part of the
possibility of reverter held by the lessor, then no violation of the Rule
occurs. One who owns a possibility of reverter, which, if it becomes
possessory, will be a fee simple absolute, can presently transfer part of
that interest in the form of a possibility of reverter that will become a
fee simple determinable. The key to this transaction is the present
alienation of an existing future interest, the possibility of reverter. 93
Another way of dealing with top leases is to treat them as commercial transactions falling outside the purview of the Rule. 94 In
Nantt v. Puckett Energy Co. ,95 the top lessor was suing the top lessee
for failing to make certain agreed-to payments after the bottom lease
expired. The top lease provided in part:
This lease is presently subordinate to an existing oil and gas
lease .... Notwithstanding anything to the contrary contained in
this lease, the effective date of this lease shall be the date(s) upon
which the existing lease terminates, for whatever reason, and as to
any or all of the lands contained therein. 96
North Dakota has a statutory Rule, which should have restricted the
court's ability to find exceptions to the Rule's coverage. 97 Even after
admitting that oil and gas leases involve interests in real property, the
court focused in on the commercial nature of leasing and top leasing.
In addition, it applied the canon of construction that favors interpretations which validate rather than invalidate conveyances. The court
does not take the giant step of excising from the Rule's tentacles all
"commercial" options which may affect real property and which have
historically been invalid under the Rule. Instead, it opts for a modified "wait-and-see" approach, noting that in this case the future interest did actually vest within the Rule's period since the bottom lease
expired within 2 years of the execution of the top lease. 98
C.
Conclusion
1994]
559
problems relating to pooling clauses and top leases, the Rule has
caused many an oil and gas attorney to prematurely age. This does
not have to be the case. Insofar as oil and gas are treated as estates in
land, an oil and gas attorney should be expected to know that certain
future interests would violate the Rule. Parties who create defeasible
term interests, in which the grantor retains the present possessory estate and conveys to the grantee the future interest, should not come
running to the courts for relief from their lack of property law competency.99 Careful drafting and a knowledge of the Rule's application
should avoid most problems.
Drafting can also avoid Rule problems that are caused by the fact
that oil and gas interests are property interests, even though a particular transaction may be more like a commercial deal than a transfer of
a property interest. lOO A wholesale exemption for these types of
transactions from the application of the Rule is unwarranted. Likewise unwarranted is the mangling of the Rule and other property tenets that have been described in the earlier paragraphs. Use of existing
exceptions to the Rule, such as the wait-and-see doctrine may ameliorate some of the harsh impacts of the Rule. But the Rule still serves
important public goals. If it did not, legislatures and courts would
have overturned the Rule long ago. As stated in an early oil and gas
case:
The rule against perpetuities springs from considerations of
public policy. The underlying reason for and purpose of the rule is
to avoid fettering real property with future interests dependent
upon contingencies unduly remote which isolate the property and
exclude it from commerce and development for long periods of
time, thus working an indirect restraint upon alienation, which is
regarded at common law as a public evi1. 101
The Rule still serves those purposes in the oil and gas patch and
should not be abandoned to allow the fettering and encumbering of
property interests with future estates that have the possibility of not
vesting for a lengthy period of time.
IV.
Oil and gas conveyancing law has been struggling with the problem of describing the nature of the interests owned by the lessor and
the lessee after a lease has been executed. Nowhere has the struggle
99. 2 WILLIAMS & MEYERS, supra note 6, at 16.1.
100. Williams and Meyers note that top leases, successive oil payments, certain provisions in
joint operating agreements which give the operator a power to transform property interests at a
later date, non-consent well provisions, and future acquisition provisions all create Rule difficulties. [d. at 13-14. I would add options to purchase and creation of a pooling or unitization
power to the list. See, e.g., Phillips Petroleum Co. v. Peterson, 218 F.2d 926 (10th Cir. 1954), cert.
denied, 349 U.S. 947 (1955).
101. Weber v. Texas Co., 83 F.2d 807, 808 (5th Cir. 1936).
560
[Vol. 33
been more intense and led to more confusion than in Texas. 102 This
difficulty arose because a number of early decisions identified the
lessee's estate as only encompassing a 7/8th mineral interesU 03 The
law had to account for the remaining 1/8th mineral interest, so it often
labeled the lessor as the owner, even though the lessor only owned a
1/8th non-possessory royalty interest. In Texas, this 7/8th-1/8th division led to the creation of the so-called "multiple-grant" deed
whereby a grantor who has leased his mineral estate and who wants to
convey his property interests uses a form which describes three different interests. For example, in Alford v. Krum,104 the granting clause
of the deed conveyed "one-half of the one-eighth interest" in the mineral estate, the subject-to clause conveyed "1/16 of all the oil royalty
and gas rental or royalty due" and the future lease clause provided
that the grantee would own "a one-half interest" in the mineral estate. lOS The use of this type of confusing language was caused in part
by the general misunderstanding that the lessor owns a 1/8th interest
after leasing, as well as by a conveyancing rule that did not allow the
present lease benefits to be conveyed in a mere transfer of the mineral
estate. 106
A recent' decision of the Texas Supreme Court brings into focus
the folly of not treating the leasing transaction according to appropriate property law tenets. After a lease has been executed the lessor
has conveyed his entire (100%) possessory estate in the minerals. In a
non-possessory state the lessor has conveyed his entire interest in the
right to search for and capture minerals. The conveyance of a possessory estate, however, is burdened by the lessee's obligation to pay, in
kind or in value, a fractional share of production, if any, that is free of
the costs of production. In addition, the lessee's 100% possessory interest is burdened by any other financial obligations contained in the
lease such as delay rental payments. The lessor retains in most states
100% of the mineral estate as a possibility of reverter. In Oklahoma,
the lessor would retain 100% of the mineral estate as a right of reentry or power of termination. The mineral owner after leasing owns
no part of the present estate, be it possessory or non-possessory.
102. See generally Kramer, Sisyphean, supra note 17, 19-43.
103. See, e.g., W.T. Waggoner Estate v. Wichita County, 273 U.S. 113 (1927); Sheffield v.
Hogg, 77 S.W.2d 1021 (Tex. 1934); Tipps v. Bodine, 101 S.W.2d 1076 (Tex. Civ. App. 1936).
104. 671 S.W.2d 870 (Tex. 1984), overruled, Luckel v. White, 819 S.W.2d 459 (Tex. 1991).
105. Alford, 671 S.W.2d at 871.
106. See generally Kramer, Sisyphean, supra note 17, at 39-40. At the time that many of
these deeds were drafted, Texas followed the rule that a transfer of a mineral interest that had
been leased did not transfer either the delay rentals or the royalties payable under the existing
lease. Caruthers v. Leonard, 254 S.W. 779 (Tex. Comm'n App. 1923). Caruthers was overruled
in Harris v. Currie, 176 S.W.2d 302 (Tex. 1943), but the use of the multiple-grant deed form has
not been abandoned.
1994]
561
In Jupiter Oil Co. v. Snow,107 the Texas Supreme Court in interpreting a multiple-grant deed revived the notion that the lessor magically retains some part of the mineral estate after a lease has been
executed. The granting clause of a deed conveyed a 1/16 mineral interest. The subject-to clause contained the following language:
"[grantee was to] receive 1/16 part of the oil, gas or other mineral ...
produced by the holder of the lease . . ., that grantors herein now
intend to convey 1/2 of the interest they now have." The future-lease
clause conveyed "an undivided 1/2 of all [the oil]."lo8
There is a conflict between the granting clause and the first part
of the subject-to clause, and the other part of the subject-to clause and
the future lease clause. The former clauses evince an intent to transfer
a 1/16th mineral interest while the latter clauses evince an intent to
transfer a 1/2 mineral interest. The court concluded that the parties
intended to transfer a 1/2 mineral estate. Instead of supporting that
interpretation by giving preemptive weight to the future lease clause,
the court tried to give meaning to all of the provisions of the deed. In
so doing it invoked the 7/8-1/8 false prophet.
The granting clause unequivocally conveyed a 1/16 mineral interest. What did that mean? According to the court, the granting clause
"immediately gave the grantee a 1/16 interest in the mineral estate."109 An immediate transfer of the possessory estate was not possible since the lessee was the owner of the grantor's entire interest.
What could the lessor/grantor convey? All or a part of his possibility
of reverter. If the court is saying that the deed presently transfers a
1/16th interest in the possibility of reverter how did the court ultimately conclude that a full 1/2 mineral estate was conveyed? It did so
by stating that the future lease clause transferred 1/2 of 7/8 of the possibility of reverter. This conclusion is implicitly based on the erroneous presumption that the grantor retained a 1/16 present possessory
estate after the lease. If not, then the grantor/lessor had a 15/16 interest, the granting clause having transferred a 1/16th interest, which
would attribute to the future lease clause a 1/2 of 15/16 or a 15/32
transfer. If you add the 1/16 transferred by virtue of the granting
clause and the 15/32 transferred by virtue of the future lease clause,
the grantee received a 17/32 mineral estate and not a 1/2 mineral estate. The judicial conundrum was caused in part by the court's desire
to avoid giving preemptive weight to either the granting or future
lease clauses when they are in conflict. But where a multiple-grant
deed form is used and the granting and future lease clauses use incon107. 819 S.W.2d 466 (Tex. 1991).
108. [d. at 467. The subject-to clause was reproduced in the court of appeals decision. Snow
v. Jupiter Oil Co., 802 S.W.2d 354, 356 (Tex. Civ. App. 1990), rev'd, 819 S.W.2d 466 (Tex. 1991).
109. Jupiter Oil, 819 S.W.2d at 468-69.
562
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1994]
563
564
[Vol. 33
between the lessee and its successor was not as clear in providing for
the assumption of the burdens of the various implied or express covenants. While admitting that a lessor cannot ordinarily sue a sublessee
directly for money rental, the court determined that such a rule would
have a deleterious impact on lessors who were claiming that oil or gas
was being drained from their premises. The court stated:
But where rent or royalty under an oil lease is a percentage of
the oil produced, or the proceeds therefrom, it would seem, in line
with certain decisions involving other royalty problems, that the lessor has a definite property right in specific property, in the royalty
percentage ... and that the lessee by executing a sublease rather
than an assignment cannot defeat the lessor's direct right against the
party by whom the oil has been produced. .... It would be but a
step to hold that the lessor, upon breach of a covenant to protect
against drainage, may sue the sublessee to recover his lessor's percentage upon oil not removed through wells on the leased premises,
but drained from said premises by the sublessee through his wells
on adjoining land. 12o
With one fell swoop the law of real covenants has been changed for oil
and gas leases. The court never undertook to analyze the policies that
restrict the enforcement of the burden of real covenants to successors
in interest of the estate being burdened. The court did not expressly
limit its vertical privity exception to the implied covenant to prevent
drainage, which suggests that all of the implied covenants may be enforced against sublessees even though there is an absence of vertical
privity.
VI.
1994]
565
566
[Vol. 33
sible for the drafting of the deed. 127 But the leading case which lent
its name to the rule that is applied in these fractional-conveyancing
situations rejected the canon approach and instead opted to adopt a
rule of law that would apply if several conditions were met. Thus, the
court in Duhig v. Peavy-Moore Lumber CO.,128 found that E was the
owner of the 1/2 mineral estate while R had retained nothing. 129 This
was treated as a rule of law, not a canon of construction by many of
the courts which adopted the "Duhig rule."130 Thus, if the deed form
used does not expressly cover the impact of the outstanding fractional
mineral interest, a reservation of a similar fractional interest in the
deed will not inure to the grantor. Instead, the grantee will take the
fractional mineral interest which is determined by subtracting the reserved fraction from 100 percent.
Drafters can easily avoid this problem by either specifically noting the existence of the outstanding fractional interest and stating that
the reservation in the grant is in addition to the outstanding interest or
by merely denoting in the deed what fractional interest, if any, the
grantee is supposed to receive. But since lawyers are creatures of
habit, the deed forms used tend not to allow for such "creative" writing and Duhig-type problems continue to plague the court system.
Once a jurisdiction adopts the Duhig rule, title certainty should
be achieved. If the prior fractional mineral interest is recorded the
grantor who executes a warranty deed will retain nothing under the
hypothetical fractions used above even where the grantee had actual
knowledge of the outstanding mineral interest. l3l But in North Dakota the jurisprudence is, unfortunately, not so clear. North Dakota
initially followed the Duhig rule in the case of a fractional reservation
where there was an outstanding fractional interest not specifically
127. [d. at 103-05, 108-17.
1994]
567
568
grantor purported to transfer. 137 One reason why the court may have
shifted grounds so quickly was identified by several academicians who
commented as follows on the aftermath of Gilbertson:
An explosion of title research reportedly took place after the
North Dakota Supreme Court's decision in the Gilbertson case.
The court's rejection of a settled rule of property had a domino effect upon the titles of other persons. Landmen made extensive
searches of deed records in an attempt to find Duhig fact situations,
and then acquired leases from grantors who had reserved an interest in minerals at a time when an interest existed in a third party.D8
VII.