BAR ESSAYS

Question 1

Greatest Possible Estate Rule

Answer 1

When there is no reservation of mineral rights contained in a deed, the grantee received the estate in fee simple absolute. This includes the mineral interest. Under the absolute ownership right, the landowner holds the surface and subsurface mineral rights in a fee simple estate. Both are severable and freely transferable.

Question 2

Rule of non-apportionment.

Answer 2

Followed by Texas, it means that if property subject to a mineral lease is later subdivided, the owners of the subdivided tracts are only entitled to royalties of wells on their tract and not adjoining tracts. The parties can avoid this rule by including an entirety clause in the lease or deed so that royalties are apportioned.

Question 3

Which estate is the dominant estate and what does it mean?

Answer 3

The mineral estate is the dominant estate which means that the mineral interest owner has the right to enter upon the surface and use as much as the surface as is reasonably necessary to develop the minerals under the tract.

Question 4

Accommodation doctrine.

Answer 4

The mineral interest owner must accommodate the surface owner if the mineral interest owner’s use substantially interferes with the pre-existing use of the surface estate, and there are alternative methods available on that tract for the mineral interest owner to develop his or her mineral estate.

Question 5

The primary purpose of an oil and gas lease is…

Answer 5

to make a profit for all parties. Generally, the landowner and the oil and gas company may enter into an agreement by which the landowner conveys the minerals to the oil and gas company and reserves a percentage of the production (a royalty).

Question 6

Royalty payments are payable to…

Answer 6

the lessor, generally at a fixed rate of production. The lessee must pay the lessor royalty payments once the lessee starts producing oil or gas.

Question 7

Landowner Royalty

Answer 7

If the owner of land owns both the surface and mineral estates, she may lease the mineral estate in exchange for landowner royalty rights. A landowner royalty is a percentage share of the gross production of minerals, free of the cost of production.

Question 8

Non-participating royalty interest.

Answer 8

A non-participating royalty is an interest in the royalty only, which is carved out of the landowner’s royalty. This interest owner owns only a right to receive royalties; she does not own a mineral interest. Because it is carved out of the landowner royalty, it is likewise free of the cost of production.

Question 9

Overriding royalty interest.

Answer 9

An overriding royalty interest is a royalty interest in the lessee’s (the oil producer’s) proportionate share of production (similar to an NPRI, except it is carved out of the lessee’s estate). For example, a broker may arrange a lease between an oil company and a landowner, in exchange for an ORRI. As with the NPRI, it is only an interest in the royalty and does not convey any interest in the actual minerals.

Question 10

Delay rental payments.

Answer 10

the sum of money payable to the lessor by the lessee for the privilege of deferring the commencement of drilling operations or the commencement of production during the primary term of the lease. The owner of a NPRI is not entitle to receive any delay rentals.

Question 11

Requirement to purchase only a mineral or royalty interest.

Answer 11

An offer must include a conspicuous statement printed in large type stating that by executing the document, the person is selling part or all of the mineral interest.

Question 12

A person who conveys a mineral or royalty interest may bring suit against the purchaser if:

Answer 12

(i) the purchaser did not give notice complying with the statutory requirements; and (ii) the person has given thirty days written notice to the purchaser that a suit will be filed.

Question 13

In a suit against the purchaser of a mineral or royalty interest, the person who prevails may recover the greater of:

Answer 13

(i) $100; or (ii) an amount up to the difference between the amount paid by the purchaser for the interest and the fair market value of the interest at the time of the sale.

Question 14

Primary Term

Answer 14

The primary term is the maximum period the lessee can hold the lease without drilling.

Question 15

Secondary Term

Answer 15

The period of time that the lease is maintained beyond the expiration of the primary term and will only begin upon certain conditions, usually marked by discovering minerals. The general rule is that in order to maintain the secondary term, the lessee must be actually producing minerals in paying quantities.

Question 16

Dry Hole

Answer 16

A dry hole is an exploratory well that produces no minerals.

Question 17

Dry Hole Clause

Answer 17

Provides the terms in which the lessee may extend the primary term of the lease if a dry hole is completed during the primary term. This is a type of savings clause because, in order to maintain the secondary term, there must be actual production. If the well does not produce, the lease would terminate unless saved by a dry hole provision. The lessee would then be given extra time to drill another well without a new lease.

Question 18

Executive Right

Answer 18

The right to lease and manage the mineral estate of real property. Only the holder of the executive right may execute a lease of the mineral estate. Leases executed by anyone other than the executive right owner are invalid. The executive right is an interest in land, and therefore it must be transferred under general real property principles. Under the Statute of Frauds, any interest in real property must be in writing.

Question 19

Implied Covenant to Protect Against Drainage

Answer 19

Exists for the lessee to prevent drainage or waste, despite the absence of a duty to produce in the primary term.

Question 20

Texas remedy for breach of an implied warranty.

Answer 20

Generally, Texas courts do not like to cancel leases for breach of implied covenants but would rather issue monetary damages in the form of lost royalties.

Question 21

Texas courts impose a duty upon lessees to:

Answer 21

ensure that leased properties are properly and fairly developed, maintained and administered. Lessees are subject to the objective standard of a reasonably prudent operator.

Question 22

Texas courts imply a duty in all oil and gas leases to…

Answer 22

drill an initial well and reasonably develop the lease after production has been acquired. In addition lessees have a duty to prevent drainage or waste.

Question 23

A pooling clause allows:

Answer 23

an oil company to combine fractional mineral interests or small tracts for drilling on a “spacing unit” to satisfy the production requirement, because production anywhere within the pooled unit is constructive production. A lessor must accept royalties proportionate to the amount of the leased land in the pooled unit.

Question 24

Pugh Clause

Answer 24

Provides that if only a portion of the leased premises is included in a pooled unit, only the portion of the leased premises that are included in the pooled unit will remain in the lease. For example, if an oil company leases 600 acres, but includes only 20 acres within a pooled unit that begins producing oil, only the 20 acres remains subject to the lease after the primary term of the lease.
This clause protects the lessor from the lessee pooling only a portion of the leased premises, but maintaining the lease covering the entire leased premises. In Texas, production on any portion of the leased premises will hold the entire tract, unless a Pugh clause is included.

Question 25

Division Order

Answer 25

The division order indicates how the royalties are to be calculated and describes the lessor’s ownership interest. The lessee requests the lessor to sign a division order to ensure that the lessor agrees on how the lessee is going to pay the royalties. If the lessor refuses to sign a division order that complies with the statutory requirements, the lessee may suspend royalty payments.

Question 26

Plugging Wells

Answer 26

Pursuant to the authority and goals of the Texas Railroad Commission, the commission oversees the prevention of oil and gas production pollution, the plugging of abandoned wells, and regulation of waste discharge through fees and an industry-wide fund. The plugging of wells is the primary responsibility of the operator, who must do so within one year of cessation of operations. In certain circumstances, non-operators can also be liable, but not landowners or royalty interest holders.

Question 27

Implied Blanket Easement

Answer 27

The mineral estate is the dominant estate, which means that the mineral interest owner has the right to enter upon the surface estate and use as much of the surface estate as is reasonably necessary to develop the minerals under that tract.

Question 28

pooling clause

Answer 28

A pooling clause typically allows a lessee to combine fractional mineral interests or small tracts to create a pooled unit. Production from anywhere on a pooled unit will be considered to be production on each tract within the pooled unit.

Question 29

implied covenant to protect against drainage

Answer 29

Texas courts impose duties upon lessees to ensure that leased properties are properly and fairly developed, maintained, and administered. Absent express provisions to the contrary, Texas courts impose an implied covenant to protect against drainage. Accordingly, Oil Co., as the lessee of two tracts of land, has the duty to prevent drainage or waste despite the absence of a duty to produce in the primary term. To maintain the action, the complainant would need to show (i) substantial drainage, (ii) that a reasonably prudent operator would drill to protect against drainage, and (iii) damages measured by the yield of production absent waste.

Question 30

Mother Hubbard Clause

Answer 30

a MHC is a lease provision that grants the lessee an interest in small strips of land, adjacent or contiguous to the described land, which were accidentally omitted from the legal description of the property.

Question 31

Shut-in royalty clause

Answer 31

a type of savings clause that allows for payments of shut-in royalties when wells are capable of producing but are not actually producing.

Question 32

Unless vs Or Clauses

Answer 32

when a lease provides for the payment of a delay rental or shut in royalty, and the provision uses “unless” rather than “or,” failure to pay will constitute a breach of a CONDITION and will result in termination of the lease.
In leases that use “or,” failure to pay or produce will result in the breach of a COVENANT and will not terminate the lease, but may invoke a breach of K suit.

Question 33

Entirety clause

Answer 33

Texas follows the rule of non-apportionment, which means that if a property subject to a mineral lease is later subdivided, the owners of the subdivided tracts are only entitled to royalties of wells on their tract and not adjoining tracts. The entirety lease provision is a way around this rule, so that royalties are apportioned in the event of subdivision of the property after execution of the lease.

Question 34

Covenant to market

Answer 34

the general duty exists to market production for the prevailing market price with a reasonable period of time.

Question 35

Covenant for reasonable development

Answer 35

lessees have a general duty, upon discovery of oil and gas reserves, to use the best technology to begin production and produce a profit.

Question 36

Common implied covenants

Answer 36

covenant to protect against drainage, covenant to market, covenant for reasonable development, to further explore, to test, to operate diligently and properly.

Question 37

leasehold interest/ working interest

Answer 37

granted by a fee simple determinable conveyance; it is created by establishing both express and implied duties on the lessee by way of an oil and gas lease. The interest bears all of the risk and cost of production.

Question 38

Relinquishment Act

Answer 38

The Relinquishment Act stated that all public lands sold between 1895 and 1931 relinquish 15/16 of the mineral rights to the current surface owner. The consequence is that a landowner can only lease mineral rights and forward (as a fiduciary) a 1/16 royalty to the State. This requires offsetting wells and filing of any lease with the State.
Under the Relinquishment Act, a landowner can lease mineral rights and forward only a 1/16 royalty to the State. The landowner may not sell a fee interest, they may only lease the oil and gas interest.

Question 39

Assignment

Answer 39

Generally, an assignment is a complete transfer of one’s rights and duties for the remaining lease term.