Implied Covenants and Conveyancing Problems Flashcards
Implied Covenant: Reasonably Prudent Operator
O/G leases contain an implied covenant that lessee acts as a reasonably prudent operator
≠ fiduciary standard
Operators do not have to drill and produce if they would not make a profit. Lessor would have burden to prove that lessee can recover O/G at a profit
Implied Covenant to Protect Against Drainage
Lessee must act as a reasonably prudent operator to protect the leased premises against drainage
Lessor must prove:
- substantial drainage
- lessee could drill a profitable well to offset drainage, and
- damages
Profitability = expected revenues exceed drilling and production costs
Remedies:
- Damages in amount of royalties would have received from offset well, AND
- Conditional decree forcing Big Oil to drill or forfeit lease
Implied Covenant to Market
Lessee has an implied covenant to market the O/G w/in a reasonable time and at the best price realizable
Lessee’s actions in marketing are judged by the reasonably prudent operator standard
Implied Covenant to Develop
Implied covenant to develop an O/G lease
Test for breach = whether the lessor can prove a reasonable expectation of profit from additional drilling, regardless of where the proposed well is located (high burden)
*Executive Right Owner vs. Non-Participating Interests
Non-participating interest owners rely on the executive right owner to realize income from their interests. Executive right holders’ duty depends in part on their conduct
- Utmost good faith and fair dealing = usual duty owed to NP interest owners. Executive right holder must act w/ due regard for the NP owners, and be willing to execute a lease on the same terms as a reasonably prudent landowner would if there was no NP interest
- Fiduciary standard = when executive engages in egregious self-dealing, courts will impose a fiduciary standard, meaning the executive must subordinate his interests to those of the NP interests
Remedies = cancellation of the exec right, cancellation of certain leases, and damages
*What is included in the mineral estate?
O/G are minerals as a matter of law
(a) Surface destruction test = if any reasonable method of extracting the substance would destroy the surface, it belongs to the surface estate
- Building stone
- Limestone
- Caliche
- Surface shale
- Sand
- Gravel
- Water* (this has been tested; surface estate owns, not mineral estate)
- Near-surface lignite
- Iron ore
(b) Ordinary and natural meaning test = in 1983, SCofTx changed the test to one asking whether the substance is a “mineral” in its ordinary and natural meaning; did not disturb rule re: 9 substances
If lease is silent or ambiguous re: ownership of certain substances, consider the following:
- Step 1: is the substance one of the nine that belong to the surface as a matter of law?
- Step 2: if not, is the date of the ambiguous conveyance after 1983?
a. if pre-1983, use surface destruction test
b. if post-1983, use ordinary and natural meaning
Non-Apportionment Rule
When property is subdivided AFTER an O/G lease has been entered into, the owners of the subdivided interest are not entitled to apportioned royalty payments. They are entitled to an apportioned delay rental
*Community Lease
Where two or more contiguous property owners enter into a single lease covering all of their property
Has the effect of an implied pooling agreement (lessors share royalties in proportion to ownership interests)
General Rules re: Deeds
(a) Deeds are construed against the grantor - if deed is ambiguous, grantor usually loses
(b) Four corners rule requires that courts try to harmonize all the clauses in a deed to give effect to each clause
(c) Courts read the terms of the deed very literally - e.g., there is a difference b/w “the land conveyed” and “the land described”
*Duhig Doctrine
In a three or more party chain of conveyances in which the grantor seemingly conveys more than 100% of the mineral or royalty interest, the grantor will bear the loss
*Conveyance of a Mineral Interest vs. Royalty Interest
Royalty language = “Oil, gas, and other minerals produced and saved”
Mineral language = “Oil, gas, and other minerals in, on, or under Blackacre”
Mixed language = indicates a mineral interest
*Homestead
in order to properly convey a property right to a homestead, both parties must sign
Homestead not defeated merely because the lots are not contigious (can be miles apart)
*Can holder of the executive right claim that the mineral lease is not effective because she never “delivered” a gift deed to him.
Under Texas Property law, to convey interests in real property, the transferor generally must
convey a deed. For the deed to be effective, it must be “delivered.” In Texas, a deed need not be
physically delivered; rather, the grantor must merely intend to make a present transfer to the
grantee.
BUT must meet statute of frauds* (e.g. in writing, signed against the party enforcing)
*How must an offer by mail for a purchase of royalty interests be done?
when an offeror wants to purchase a royalty interest it must
- send a cover letter indicating the purpose of the letter, include in the letter head that it is an offer
to purchase a royalty interest, and that the document enclosed is a conveying instrument (deed).
The deed must include a description of the land, the names of the buyer and seller, it must state
in conspicuous language (14 point size) that it is purporting to convey a royalty interest in oil,
gas, and other minerals.
The grantor will have a cause of action for failure to disclose conspiciously.
The grantor is required to send a written pre-suit notice informing the buyer that he intends to file a lawsuit for his failure to disclose, at least 30 days before filing the lawsuit.
*Non-participating royalty interest
only allowed to get royalties, not delay rentals
