TX Real Property + Oil & Gas

Question 1

Periodic Tenancy in TX

Answer 1

By statute, the required notice to end any periodic tenancy is 30 days and the notice does not have to be given so that it will end on a periodic ending date. The statute allows for proration of rent.

Question 2

Forcible Entry and Forcible Entry Detainer Statutes

Answer 2

TX statutes that provide both residential and commercial landlords a quick, inexpensive judicial process to evict tenants wrongfully in possession.

Jurisdiction is in the justice courts.

Eviction cannot proceed until the landlord provides at least 3 days notice to vacate, unless the lease agreement calls for a longer or shorter period of time

Question 3

Covenant of Quiet Enjoyment

Answer 3

The CoQE does not apply to physical repair issues, as the statutory warranty supersedes the common law.

However, the CoQE can still be used for non-physical repair issues like noisy neighbors and criminal activity by other tenants.

Question 4

Statutory Warranty

Answer 4

Supersedes the common law implied warranty and physical repair issues in the CoQE for ONLY residential leaseholds.

TPC requires the landlord to make repairs to conditions that materially affect the health and safety of an ordinary tenant.

Question 5

Statutory Warranty: Waiver

Answer 5

Can only be waived if 1) a landlord owns only one rental dwelling, 2) the property is not in need of repair at the beginning of the leasehold, 3) the landlord does not know or have reason to know of any problems that would occur during the lease or an extension or renewal, and 4) the lease is in writing, with a provision in bold or underlined that is clearly, voluntarily, and knowingly made for consideration

With a valid waiver, the tenant will be required to make and pay for all repairs

Question 6

Statutory Warranty: Notice

Answer 6

Tenant must send a written notice to the landlord by certified mail return receipt requrested, by registered mail, or by other mail service that allows tracking of delivery.

Notice must be given to the person or place where rent is normally paid, and tenant must be current on rent. After receiving notice, the landlord must be given a reasonable time to repair/respond.

Question 7

Statutory Warranty: Remedies

Answer 7

1) Terminate lease and obtain judicial remedies
2) Stay and sue for judicial remedies, including damages and an order for landlord to make repairs
3) Choose the repair and deduct remedy, which allows tenant to make repairs and deduct the cost from the next month’s rent.

Question 8

Assignments/Sublets

Answer 8

No right to assign or sublet in TX unless permission given by landlord

Question 9

Security Deposits

Answer 9

No limit on amount of security deposit and landlords are not required to pay interest on deposits that are held.

Question 10

Implied Easement by Prior Use

Answer 10

Use must be strictly necessary for the continued enjoyment of the now dominant estate.

If the implied easement by prior use is impliedly granted, then only reasonable necessity is required.

IEbPU not available for landlocked property. Use implied easement by necessity instead.

Question 11

Easements in Gross

Answer 11

May not be transferred unless the language of the easement says so.

Except conservation easements.

Question 12

TX Adverse Possession Period Statutes

Answer 12

Title or Color of Title: 3 years if possessor is there under a color of title and has only narrow specified defects

Duly Registered Deed and Payment of Taxes: 5 years if possessor is there under a recorded deed that is otherwise defective and pays all taxes.

Bare Possession: 10 years, limited to 160 acres or larger area if fenced in, but with a “deed” whatever land is described in the deed.

True Owner under Disability: 25 years

Question 13

Intent to Appropriate

Answer 13

Required in TX that adverse possessor was trying to take something that wasn’t his

Question 14

Statute of Frauds: Doctrine of Part Performance

Answer 14

All three requirements (possession, payment of all or part of purchase price, and improvements) required to satisfy part performance and thereby get around the SoF in TX

Question 15

Risk of Loss

Answer 15

Lies on person in possession at the time of the loss under the Uniform Vendor & Purchaser Act

Question 16

Seller’s Duty to Disclose

Answer 16

Under Sec. 5.008 of the TPC, a statutory seller’s disclosure form must be completed honestly by the seller and provided to the buyer before entering into the sales contract for a residential property.

Exceptions: Foreclosure sales, property resold after foreclosure by the bank, and sales between co-owners

Question 17

Transfer on Death Deed

Answer 17

Allows property owner to designate a transferee to receive title to the property on the owner’s death without the necessity of probate.

Must be recorded to be valid, but no delivery required.

Owner retains power to transfer or encumber the property or revoke the deed.

Question 18

Covenants by Deed

Answer 18

Under the TPC, if a deed uses the words “grants” or “conveys” there are two present covenants impliedly included: the covenant against encumberances and covenant of no prior conveyances

Question 19

Texas Recording Act

Answer 19

Notice Recording

Bona fide purchasers, including mortgagees, and good faith creditors may use the statute to win over the first in time, first in right.

Deed must be signed and signature must be either notarized or signed by two witnesses to be properly recorded in TX.

Question 20

Quitclaim Deeds

Answer 20

In TX, Quitclaim deeds put the grantee on notice of any defects that exist in the chain of title. The grantee under a quitclaim deed cannot be a BFP

Question 21

Deeds of Trust

Answer 21

The most often used security instrument in TX.

Not an actual trust.

Debtor is referred to as “grantor” and lender as “grantee”

Third party trustee is also named

Question 22

Equity of Redemption

Answer 22

Exists in TX. No statutory right of redemption.

Question 23

Foreclosure Sales

Answer 23

Typically nonjudicial in TX.

For residential property: Debtor must be given notice of default and at least 20 days to cure AND notice of sale (filed w county clerk and posted at courthouse at least 21 days in advance if not cured.

Junior interests are only necessary parties for judicial foreclosure sales

Question 24

Deficiency Judgments

Answer 24

Limited to the difference between the outstanding debt and the fair market value of the property at the time of the foreclosure if proper process is utilized.

Question 25

Statutory Mechanics’ and Materialmen’s Lien

Answer 25

If validly perfected, MML can protect workers and suppliers to workers on real property and it has priority over mortgages or other liens.

Question 26

Installment Land Contracts

Answer 26

1. Sellers must give buyers detailed statutory notice of a prospective forfeiture.
2. If buyers have made 48 monthly payments or paid 40% of the principal, 60 days to cure; if not, 30 days
3. If a contract for deed (ILC) is recorded it is treated as a warranty deed with vendor’s lien

Question 27

Texas Homestead: Establishing

Answer 27

1. Family or single adult
2. Intent to have it as homestead and actual occupation (or adequate preparation)
3. Leasehold or life estate can be ok

Question 28

TX Homestead: How Much?

Answer 28

Rural: 200 acres (family) or 100 acres (single)

Urban: 10 contiguous acres

Question 29

TX Homestead: Debt Protection

Answer 29

The only liens that can be validly attached to a homestead are:

1. Purchase money
2. Taxes
3. MML for improvements
4. Owelty of partition judgments
5. Refinancing of an otherwise permissible lien
6. Home equity loans and lines of credit
7. Reverse Mortgages
8. Refinance of a chattel mortgage with the mortgage of land

Question 30

TX Homestead: Death of Owner

Answer 30

Surviving spouse has right of occupancy.

Guardian of minor children may request right of occupancy, but are trumped by surviving spouses.

If no surviving spouse or minor children, homestead terminates.

Question 31

TX Homestead: Abandonment

Answer 31

Terminates homestead.

Requires clear evidence of non-use AND an intention to cease using the property as a homestead.

Question 32

Rule of Capture

Answer 32

Basic rule for mineral rights in TX

Rule of nonliability for causing O&G to migrate across property lines, resulting in “drainage” from under another’s land

Question 33

Limitations of the Rule of Capture

Answer 33

Limited by correlative rights, which means O&G owners have a right to a fair opportunity to produce from a common reservoir under his property. Therefore, RoC does not apply to:

1) Negligently drilled O&G
2) Illegally drained O&G
3) Stored gas

Question 34

Mineral Interest RIghts

Answer 34

1) Development (explore, produce, develop, etc.)
2) Executive - The right to lease the minerals

3) Economic Benefits, including:
a. Bonus (for signing lease)
b. Royalty
c. Delay Rentals for deferring drilling

Question 35

Dominance of Mineral Estate

Answer 35

When the ME has been severed from the surface estate, the owner of the ME can use the surface as reasonably necessary to develop the minerals

Question 36

Accommodation Doctrine

Answer 36

Requires mineral owner to accommodate surface uses only under the following conditions:

1) Surface owner has a preexisting use of the surface
2) ME owner has a reasonable alternative method for developing minerals that is less destructive of the surface
3) The reasonable alternative is available on the leased tract

Question 37

Interests Created by O&G Leases

Answer 37

An O&G lease conveys a Fee Simple Determinable and creates two sets of interests:

1) The Working Interest - Gives lessee exclusive right to explore, develop, and produce from the property and the obligation to pay all costs of production
2) The Royalty Interest - Gives lessor a share of the production that is free of the costs of production

Question 38

Nonparticipating Royalty Interest (NPRI)

Answer 38

Grants the right to receive royalty payments to someone other than the mineral interest owner.

NPRI owner may not participate in any leasing transaction

Question 39

Concurrent Ownership: Cotenancy

Answer 39

Every tenant can drill and produce or lease his undivided interest without the consent of other contenants, but must account to the others for their rightful share of the profits from production (as opposed to a royalty interest, which the lessor will have)

Cotenants can ratify the lease and take a royalty interest instead of a share of the profits

Cotenants have absolute right to partition property. Courts favor partition in kind over partition by sale, unless PiK would be inequitable (e.g. if the mineral reserves were distributed unevenly)

Question 40

Successive Ownership and Leasing

Answer 40

Neither life tenant nor remainderman can grant a valid O&G lease without joinder of the other

Once a valid lease is entered into, if grant of life tenancy is silent, life tenant gets current income and interest, including 100% of delay rentals plus interest on bonus and royalty. Remainderman gets principal of bonus and royalty once life tenant dies.

Open Mines Doctrine - Where lease was in place prior to the creation of the life estate, life tenant gets all benefits under the existing lease

Question 41

Mortgagor/Mortgagee

Answer 41

Traditional rule of first in time, first in right

1. If mortgagee records before lease executed, the lease survives a mortgage foreclosure, but the surface rights still terminate
2. If O&G lease recorded before the mortgage, lease cannot be foreclosed against because the mortgage did not include minerals as an asset belonging to the mortgagor
3. Marshalling the Assets - At foreclosure, the mortgagee must sell surface assets first to satisfy the loan before selling the mineral estate

Question 42

Trespass Against Mineral Rights

Answer 42

Ordinary Trespass - Lease expires, but lessee stays on tract
-Remedy: Injunction and damages

Slant Well Drilling
-Remedy: Injunction and damages

Drilling Dry Well
-Remedy: Lost bonus

Geophysical or Seismic Trespass
-Remedy: Sue in assumpsit for market value of a contract for the right to do seismic exploration

Secondary recovery operations are not a trespass

Question 43

Good Faith/Bad Faith Damages for Trespass

Answer 43

Good Faith - If trespasser had honest and reasonable belief in superiority of his title, he will get credit for costs incurred in production if the costs benefited the rightful owner

Bad Faith - Trespasser will be liable for the gross value of production from the well

Question 44

Slander of Title

Answer 44

P must prove:

1. Publicaiton of a false claim of title to the property
2. With malice; and
3. Loss of specific sale or leasing opportunity because buyer did not want to purchase property with disputed title

Damages measured by difference between market value of lease at the time of the slander and its value at trial with cloud removed

Question 45

Adverse Possession

Answer 45

Applies to O&G interests. Key question is when mineral estate was severed

a. Possession begins prior to severance - Possessor gets title to both
b. Possession begins after severance - Surface estate only, unless APor can show a separate action of possession

Question 46

Granting Clause of O&G Lease*

Answer 46

Purpose: Sets forth rights given by Lessor to Lessee and description of the property

Mother Hubbard Clause: Allows lessee to pick up small strips of land not specifically included in granting clause because of mistakes in surveys or descriptions

Question 47

Habendum Clause–Production in Paying Quantities (PPQ)**

Answer 47

Purpose: Sets duration of Lessee’s interest. Typically w (i) a primary term, during which lessee has no obligation to drill and (ii) a secondary term, which is indefinite but normally linked to production

O&G leases are construed against the lessee

In TX, “production means PPQ. Formula is:
Revenues minus Lessor’s Royalty minus Operating Costs

Question 48

Common Law Exceptions to PPQ

Answer 48

Temporary Cessation Doctrine - Key factors

a. Short, temporary shutdown
b. Which lessee acts diligently to fix
c. Due to a mechanical breakdown or the like

Marginal Well Doctrine - Applies when wells only produce certain months out of the year. Test is whether a reasonably prudent operator would continue to operate the well for profit

Doctrine of Repudiation - Extends lease where Lessor obstructs Lessee from developing

Question 49

Delay Rental Clauses**

Answer 49

Authorize lessee to delay drilling by paying a stipulated amount to the lessor.

“Unless” delay rental clause - Lease terminates automatically if DR not paid

“Or” delay rental clause - Creates a covenant and the lease does not terminate automatically
-Remedy: Lessor must sue for breach of contract–damages in amount of unpaid rentals

Question 50

Late Delay Rentals**

Answer 50

If lessor accepts late DR payment lease comes alive again based on a loose theory of estoppel.

Requires (i) act of lessor (ii) upon which lessee detrimentally relied (e.g. cashing the check)

Question 51

Commencement of Drilling Clause**

Answer 51

If DR clause sets a date by which operations must commence, “commencement depends on two factors:

1. Objective physical acts on leased premises
2. Subjective good faith intent to pursue drilling operation

Question 52

Shut-In Royalty Clause***

Answer 52

Defensive savings clause, which provides that when a well ceases PPQ due to market conditions, Lessee can hold lease by paying shut-in royalties

Question 53

Other Defensive Savings Clauses**

Answer 53

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

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

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

These clauses can be tacked together

Question 54

Force Majeure Clause**

Answer 54

Excuses or extends time for performance for unforeseeable factors beyond lessee’s control

Tip: Check whether FMC covers only covenants or also conditions

Question 55

Pooling Clause**

Answer 55

Allows lessee to hold several tracts under lease with PPQ from just one well located on one of the tracts. Royalty will split between various tract owners.

PC and NPRIs - Executive right holder has no power to pool the nonparticipating interests, even though he has the power to lease them

Question 56

Royalty Clause

Answer 56

Cost-Free Nature of Royalties - Royalties are typically free of production costs but not post-production costs (e.g. transportation)

Royalty Clause and Market Value - When leases provide for royalties based on the market value at the well, royalties will be calculated according to the cost of the minerals on the spot market at the time of production

Question 57

Division Orders**

Answer 57

Tells lessee how to divide proceeds from the well among all the various lessors, NPRIs and working interests owners

Lessee creates DO for each owner, owner signs as correct, lessee then pays on the basis of the DO

Under common law, DOs were binding until revoked

Under 1991 DO Act, (not retroactive) DOs are still binding until revoked, but a DO can never contradict a lease, so if it does, it is invalid and RIO is entitled to past underpayments

Question 58

Implied Covenants*

Answer 58

Standard of Performance: Reasonably Prudent Operator
-Lessor has burden to prove lessee could recover O&G at a profit (including costs of drilling, not PPQ standard)

Implied Covenant to Protect Against Drainage: RPO standard with 3 elements;

a. Substantial drainage;
b. Lessee could drill a profitable well to offset drainage
c. Damages

**Implied Covenant to Market: RPO standard requiring lessee to market the O&G within a reasonable time at the best price realizable

Implied Covenant to Develop: Lessor must prove reasonable expectation of profit from additional drilling,regardless of where the proposed well is located

Question 59

Executive Right**

Answer 59

Nonparticipating owners rely on executive right owner to realize income from their interests. Duty depends on conduct.

Utmost Good Faith and Fair Dealing - Usual duty; requires ERH to act with due regard for nonparticipating owners and be willing to execute a lease on the same terms as a reasonably prudent landowner with no nonparticipating interest

Fiduciary Standard - Imposed by courts when ERH engages in egregious self-dealing. Remedies can include cancellation of executive right, cancellation of leases, and damages.

Question 60

Surface Owners vs. Mineral Owners–Meaning of “Minerals”**

Answer 60

Surface Destruction Test - Held that minerals belonged to the surface estate if reasonable methods of extraction would destroy the surface

Ordinary and Natural Meaning Test - 1984 and onwards.

Question 61

The Non-Apportionment Rule*

Answer 61

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.

Question 62

Community Lease

Answer 62

Where two or more contiguous property owners enter into a single lease covering all their property, in TX this is taken as an implied pooling agreement

Question 63

The Duhig Doctrine

Answer 63

In a 3-or-more party chain of conveyances, in which the grantor seemingly conveys more than 100% of the mineral or royalty interest, grantee bears the loss

Question 64

Fractional Interest Problems and the Duhig Doctrine*****

Answer 64

Deeds are construed against grantor

The Four-Corners Rule - Requires that courts try to harmonize all the clauses to give effect to each

Courts read the terms of deeds very literally

Question 65

Conveyance of a Mineral Interest vs. a Royalty Interest*****

Answer 65

1. Royalty Language: “Oil, gas, and other minerals produced and saved.”
2. Mineral Language: “Oil, gas, and other minerals in, on, or under the property.”
3. Mixed Language: In TX is generally construed as creating a mineral interest

Question 66

Texas RRC Policy Objectives

Answer 66

1. Prevent Waste
2. Protect Correlative Rights
3. Protect the Environment

RRC will use drilling permits, spacing rules, prorationing rules, and MIPA and compulsory pooling to achieve these objectives

Question 67

Spacing Rule

Answer 67

A drilling permit is required before a well can be drilled. Applicant must have 40 acres to drill.

Exceptions:

1) Confiscation (i.e., drainage) is proven, and
2) Subdivision (small tract was subdivided by deed before O&G was discovered in area or before land was leased)

Question 68

Prorationing

Answer 68

RRC can regulate the maximum amount of O&G that wells can produce

Question 69

MIPA

Answer 69

RRC can force owners to pool in fields discovered after March 8, 1961

Owners seeking pooling under MIPA must first make a fair and reasonable (from the viewpoint of the party being compelled to pool) offer to pool voluntarily

Preempts Rule of Capture

Question 70

Plugging Wells**

Answer 70

Duty to Plug enforced in the following order:

1. Operator
2. Non-Operator who owns a working interest
3. State of TX

Mineral interest holders, royalty owners, and other interested persons who do not have a working interest in the well have no duty to plug

Question 71

When will a homestead (or land in general) be classified as urban under the TPC?

Answer 71

1. If it is located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; AND
2. Served by police and fire protection (paid or volunteer); AND
3. At least 3 of the following services are provided by a municipality or under contract to a municipality:
   a. Electric
   b. Natural gas
   c. Sewer
   d. Storm sewer
   e. Water