Real Property/ONG

Question 1

“grants” and “conveys”

Answer 1

under Tx Property Code provides 2 implied covenants of title: (1) promise that grantor has not conveyed any interest or estate in land previously (title) and (2) a promise that no encumbrances exist on land (no encumbrances)

Question 2

General Warranty

Answer 2

Grantor opens themselves up to liability for any title defect that exists at the time of his promise even if cause by a remote grantor

Question 3

Valid Deed

Answer 3

writing, signed by a grantor, designate a grantee, contain words of grant, contain an adequate legal description, and be delivered and accepted by the grantee
• Recording a deed is not essential to the conveyance of title to real property but the failure to record may result in the loss or impairment of the interest conveyed to a subsequent BFP who takes without notice (actual or constructive) and pays valuable consideration of the prior conveyance

Question 4

Shelter Doctrine

Answer 4

Purchaser from BFP will take good title even if not innocent purchaser/had notice

Question 5

Quitclaim

Answer 5

selling interest, whatever that may be) are valid in TX. These prevent grantee from establishing BFP status—thus no protection from recording statute

Question 6

Executor Binding on Land

Answer 6

An Executor cannot bind the estate to any promises or obligations no matter the quality of the title to the land. Best Executor can do is a quitclaim deed (no protection from recording statute)

Question 7

Homestead

Answer 7

Land and improvements thereon that serve as a person’s primary residence (a) intent to be homestead and (b) requisite occupancy to impress homestead character on the land (can’t lease the land)
o Just need some title or ownership in the property (can be life estate)

Question 8

Urban Homestead

Answer 8

10 contiguous acres
• “Urban”— must be within muni limits, its extra-territorial juris, or a platted subdivision AND must receive police, paid or volunteer fire dept protections and at least 3 of: electric, natural gas, sewer, storm sewer, and water
• Urban business if necessary and essential business and less than 10 acres. Need some ownership or title in prop (life estate is enough)

Question 9

Rural Homestead

Answer 9

100 (200 if married) can be non-contiguous (if non-contiguous then must reside on and have to use additional parcels to support family)

If doesn’t meet statutory definition of urban then it’s rural

If has more than limit—MUST designate and describe, at some point in time, what portion of land is homestead

Question 10

Debts that can Attach to a Homestead

Answer 10

PMSI, tax liens, mechanic’s liens, refinance of otherwise permissible lien, owelty of partition liens, home equity loans and lines of credit, reverse mortgages, and refinance of a chattel mortgage w/land’s mortgage
• To encumber must: join owner of property AND their spouse (even if SP)

Question 11

Non-judicial Foreclosure

Answer 11

sale must be in county where real property located

Lender who forecloses is not liable for senior debts. By examining the records, buyer should obtain notice and take steps to address the problem or elect not to purchase (note: IRS has 120 days after foreclosure to redeem or it loses right to enforce)

Question 12

Rescission

Answer 12

is not auto (not favored by law) and is accomplished by giving proper and timely notice and restoring or offering to restore, any consideration seller received under the deed

Upon valid rescission, seller is relieved of its obligation under the deed, and title to the property and right to possession are reinvested in seller as though deed never made.

Must institute a suit for recission if not accomplished by mutual agreement. Judicial foreclosure of lien requires filing a lawsuit to obtain a court order to foreclose the lien against the property.

Question 13

LL/T (SoF)

Answer 13

Arises from an agreement in which a property owner gives another person exclusive possession of certain property during an agreed term. In consideration for this right, T pays rent and complies with other conditions and covenants of the agreement.

Longer than 1 year, must be in writing (SoF) and signed by person to be charged with promise—no requirement lease be recorded to be valid

Question 14

LL/T Repairs

Answer 14

TX Property Code defines rights and duties of residential LL and T regarding premises—LL must make diligent effort to repair or remedy any condition that materially affects the physical health or safety of an ordinary T as long as T gives notice of the condition to the LL and is not, at time of notice, delinquent in rent payments

Statutory duty in a residential rental agreement to make a diligent effort to repair certain conditions that materially affect the physical health or safety of an ordinary T unless condition is caused by T—notice not required in writing unless lease is in writing and requires written notice.

Caused by wear and tear rather than unauthorized disruption or misuse and damage by T

Question 15

LL/T Security Deposit

Answer 15

After T gives LL written statement of T’s forwarding address for purpose of refunding security deposit, LL must refund a security deposit to T or give T written description of damages and charges within 30 days after T surrenders premises.

Question 16

LL/T Security Devices

Answer 16

LL’s duty to equip residential dwelling with security devices even in absence of T’s request. LL must repair or replace a security device on request or notification by T that device is inoperable or in need of repair or replacement.

• When a surrender occurs, T is no longer entitled to possession and LL no longer has a lease w/T. must be re-keyed no later than 7th day after turnover.
• LL may require payment by T if such repairs are necessitated by misuse or damage by T

Question 17

LL/T Condemnation

Answer 17

Lease does not terminate on condemnation, T must continue to pay rent and must seek portion of condemnation award for compensation. Entitled to share in award to extent he was damaged by such condemnation (actual damages)

Question 18

LL/T Waste

Answer 18

unauthorized alterations to the property. Recovery does not depend on contractual language. If waste already occurred, then judgment for amount of damages caused to the property—not forfeiture of possession of property by termination of lease.

Question 19

Buyer of LL/T premises

Answer 19

not in privity unless assignment occurs. Tenancy for years ends auto based on written lease. Need factual basis for early termination—must take property subject to o/s lease and wait for lease to expire

Question 20

Rule of Capture

Answer 20

A rule of nonliability for causing ONG to migrate across property lines, resulting in “drainage” of ONG from under another person’s land.

Limits: “correlative rights” means that every ONG owner has the right to a fair opportunity to produce ONG from a common reservoir underlying his property. Thus, rule n/a (1) negligently drilled ONG; (2) illegally drained ONG; and (3) stored gas (personal prop; burden on storer)

Question 21

FS Interest and Severance

Answer 21

A FS owner of property owns both the surface and the minerals below the surface. Property owner, however, may transfer less than this through severance

Question 22

Mineral Interest’s Rights

Answer 22

Development Right: Exclusive right to explore, produce, and develop the minerals

Executive Right: Right to lease the minerals

The Economic Benefits: under an ONG lease, incl:
—Bonus (upfront payment for signing the lease usually based on $/acre leased);
—Royalty (fractional share of any ONG produced that is free of costs of production usually 1/8);
—Delay Rentals (compensation for deferring drilling during primary term of the lease usually based on acreage)

Question 23

The Dominant Mineral Estate and the Accommodation Doctrine

Answer 23

Mineral Estate is dominant when the mineral estate has been severed from the surface estate. Owner of the mineral estate can use the surface as is reasonably necessary to develop ONG.

Accommodation Doctrine: Requires mineral owner to accommodate surface uses for: (1) surface owner has preexisting use of the surface; (2) mineral estate (or lessee) has a reasonable alternative method of developing the ONG that is less destructive of surface but still allows mineral estate to drill and produce econ (not unreasonably costly); (3) reasonable alt is available on the leased tract

Question 24

Interests Created by ONG Leases

Answer 24

ONG lease conveys a FSD: Lease may last forever but it may terminate if there is no production at end of specified time.

2 interests:

(1) working interest gives lessee (Oil Co) the exclusive right to explore, develop, and produce from property as well as obligation to pay all costs of production and
(2) the royalty interest gives the lessor a share of production free of production costs.

Question 25

NPRI

Answer 25

A right to receive royalty payments held by someone other than the mineral interest owner. If mineral owner conveys her right to receive royalty payments to another but retains ownership of the mineral estate, that person has NPRI. May not “participate” in any leasing transaction

NOT entitled to delay rentals, bonuses, or any payments other than their fractional share of production in paying quantities from any well on a leased tract

Question 26

Concurrent Ownership: Co-Tenancy (Ratification; Partition)

Answer 26

Every Co-T can drill and produce or lease his undivided interest without consent of Co-Ts but he must account to the others for their rightful share of the profits from production
—Dry hole costs not included against unleased Co-T

Ratification: Co-T can always ratify the underlying lease. However, once ratified, can’t change mind and seek a profits share as an unleased co-T

Partition: Co-T has absolute right to partition property in a judicial proceeding. Courts favor partition in kind (dividing the property) over partition by sale unless dividing the property is inequitable

Question 27

Successive Ownership: Life Ts and Remaindermen

Answer 27

Leasing: Neither the life T nor remaindermen can grant a valid ONG lease without joinder of the other

Accounting: (i) Life T gets current inc and int, incl 100% of delay rentals plus interest on bonus and royalty; (ii) remaindermen gets principal of bonus and royalty (no possession until life T dies)

Open Mine Doctrine: Where a lease was in place prior to the creation of the life estate, the life T gets all benefits under the existing lease.

Question 28

Mortgagor/Mortgagee (Recording; Marshalling)

Answer 28

“First in time, first in right” applies—ONG lease is an interest in real property and gets this. Unaffected by foreclosure of an interest later in time

If mortgagee records before lease executed—lease survives a mortgage foreclosure but the surface rights still terminate

Mortgagee records after lease executed—lease cannot be foreclosed against because the mortgage did not include the minerals as an asset belonging to the mortgagor and the mortgagee was on notice of the lease

“Marshalling” the assets—at foreclosure, mortgagee must sell surface assets first to try and satisfy loan before selling mineral

Question 29

4 Types of Trespass Against ONG Interests

Answer 29

Ordinary: When lease expires but lessee stays on tract. Remedy: injunction and damages (incl punitives)

Slant Well Drilling: Bottoming a well underneath someone else’s tract. Remedy: injunction and damages (incl possible punitives)

Drilling Dry Well: Damage to speculative lease value. If a wrongful lessee enters and drills a dry hole, lessor loses the lease value that he could have received before land found out well was dry. Remedy: lost bonus

Geophysical or seismic trespass: When someone on adjacent land explores lessor’s land using seismic vibrations, and gains info lessor’s mineral potential. Remedy: sue in assumpsit—the MV of a K for the right to do seismic exploration
• Note: secondary recovery ops not trespass

Question 30

Trespass Damages: Good/Bad Faith

Answer 30

Good Faith: Honest and reasonable belief in superiority of title, will get a credit for the costs incurred in production if the costs benefit rightful owner

Bad Faith: will be liable for gross value of production from well

Question 31

Slander of Title

Answer 31

(1) publication of false claim; (2) with malice; (3) and loss of a specific sale or leasing opportunity

Damages: measured by the difference b/w MV of lease at time of slander and value at trial with cloud removed.

Question 32

AP of Real Property and/or ONG

Answer 32

Key issue is whether and when the mineral estate was severed from surface.

—AP prior to severance: AP gets title to both surface and mineral estate

—AP after severance: AP gets title to the surface estate only. For minderal, must establish separate action of possession.

Question 33

ONG Lease: The Granting Clause

Answer 33

sets forth (i) rights given by lessor/lessee and (ii) a description of the property

Mother Hubbard Clause: Contains a clause to pick up small strips of land not specifically included in the granting clause because mistakes in surveys or descriptions.

Question 34

Habendum Clause—Production in Paying Quantities (PPQ)

Answer 34

Sets forth the duration of Lessee’s interests in the premises. Typically there is a (i) primary term fixed period during which Lessee has no obligation to conduct drilling ops, and (ii) a secondary term indefinite but normally linked to production.

Construed against the Lessee

PPQ = Revs – Lessor’s Royalty – Operating Costs

Question 35

Temporary Cessation Doctrine

Answer 35

Once PPQ established, temp cessation will not terminate lease if: (i) temporary, short shutdown; (2) which Lessee acts diligently to fix; and (iii) due to mechanical breakdown or the like

Question 36

Marginal Well Doctrine

Answer 36

Some wells only produce PPQ during some months of the year. Test: whether a reasonably prudent operator would continue to op well to make a profit, not merely for speculation

Question 37

Doctrine of Repudiation

Answer 37

An equitable rule that can extend the lease if Lessor obstructs Lessee from developing the lease

Question 38

Delay Rental Clause (unless vs. or; late delay rentals; notice of assignment)

Answer 38

Authorize Lessee to delay drilling or commencing production during the primary term by periodically paying a stipulated amount to lessor

“Unless” rental clauses: clause creates a condition of the lease (FSD). Remedy: lease terminate automatically

“or” rental clauses: clause only creates a covenant b/w lessor and lessee and lease does not terminate automatically. Remedy: Lessor must sue for breach of K; damages would be = to unpaid amount of rentals

Late Delay Rentals: If Lessor accepts a late delay rental payment, the lease comes alive again. Usually reqs: (1) act by Lessor (2) upon which Lessee has detrimentally relied

Notice of Assignment Clause: Some leases may contain a clause that allows one or both parties to assign their rights under the lease, but that no change in ownership is binding on the other party until a certain time after notice of the assignment.

Question 39

Commencement of Drilling Clause

Answer 39

If the delay rental clause states that “if ops for drilling not commenced (objective physical acts and subjective good faith) on or before” a date the lease shall terminate unless Lessee pays delay rentals

Question 40

Defensive or “Savings” Clauses (Shut-In Royalty; Dry Hole; Continuous Ops; Cessation of production; Force Majeure)

Answer 40

To hold a lease beyond the primary term, Lessee needs PPQ. If delay rentals are not holding the lease, then Lessee must satisfy a defensive or savings clause

Shut-In Royalty Clause: When a well ceases PPQ due to market conditions, Lessee can hold lease by paying shut-in royalties

Dry Hole Clause: If Lessee drills a dry hole, she can maintain lease by starting to drill another well within stated time

Continuous Operations Clause: Covers situation where at end of the primary term ops have commenced, but there was not yet actual production

Cessation of Production Clause: If a well ceases producing, Lessee can maintain the lease by commencing repairs within stated time

Force Majeure: Excuses performance or extends time for performance due to unforeseeable factors beyond Lessor’s control. (tip: look to see if force majeure clause covers only covenants or conditions)

Question 41

Pooling Clause

Answer 41

Allows Lessee to hold several tracts under lease with PPQ from just 1 well located on one of the tracts. Typically split between various tract owners. Must exercise in good faith.

Executive right holder has no power to pool NPRI even though has power to lease NPRI

Question 42

Pugh Clause

Answer 42

Protects landowners in pooling arrangements. States that if only party of leased acreage is pooled, rest shall be severed unless lessee drills or pays delay rentals on the remainder. Allows lessee to hold several tracts under lease by producing in paying quantities from just 1 well located on one of the tracts.

Disadvantage: In a pooling context is when lessee elects to pool only a (perhaps small) portion of a tract, which keeps lease alive for the entire tract but only obligates lessee to pay royalties in proportion to their share of entire pool

Question 43

Royalty Clause: Division Orders

Answer 43

Tells Lessee how to divide the proceeds from the well among all the various lessors, NPRIs, and working interest owners. Lessee preps; if owners sign D/O as correct Lessee pays owners based on D/O. Not deed or K, have own set of laws

Binding until revoked but D/O can never contradict a lease

Question 44

4 Implied Covenants for ONG Lease

Answer 44

Reasonably prudent operator—not a fiduciary standard, and operators do not have to drill and produce if they would not make a profit

Implied Covenant to Protect Against Drainage—Lessor must prove (1) substantial drainage; (2) Lessee could drill a profitable well to offset drainage; and (3) damages.

Implied Covenant to Market—Implied covenant to market the ONG (i) within a reasonable time and (ii) at the best price realizable

Implied Covenant to Develop

Question 45

Title and Conveyance: Executive Right

Answer 45

Nonparticipating interest owners rely on executive right owner to realize income from their interests. Depends in part on their conduct.

“utmost good faith and fair dealing” and fiduciary standard against self-dealing

Question 46

Surface Owners vs. Mineral Owners

Answer 46

“minerals”—test is whether mineral in its ordinary and natural meaning (ONG = mineral)

2-step process: If a lease is silent or ambiguous re: ownership (1) is substance 1 of 9 that belong to surface as matter of law (building stone; limestone; caliche; surface shale; sand; water; near-surface lignite and iron ore) and (2) if not, is date of ambiguous conveyance after 1983: pre-83 use surface destruction test (if any reasonable method of extraction would destroy the surface it belongs to surface) or post-1983 use “ordinary and natural meaning”

Question 47

Conveyancing: Non-apportionment and the Community Lease

Answer 47

Non-apportionment: when the property is subdivided after an ONG lease has been entered into, the owners of the subdivided interests are not entitled to apportioned royalty payments. Entitled to apportioned delay rental

Community Lease: Where 2+ contiguous property owners enter into single lease covering all their prop—effect of implied pooling

Question 48

Fractional Interests and Duhig Doctrine

Answer 48

Deeds construed against Grantor

“four corners” clause requires courts to try to give effect to all clauses. Read terms of deeds very literally.

Duhig Doctrine: In a 3+ party chain of conveyances in which Grantor seemingly conveys more than 100% of mineral or royalty interest, Grantor bears the loss

Question 49

Conveyance of a Mineral Interest vs. Royalty Interest

Answer 49

Royalty: “produced and saved”

Mineral: “in, on, or under”

Mixed: presume mineral interest was created