In Crow v. Lookadoo, the San Antonio Court of Appeals recently interpreted the phrase “lease in existence” in a stipulation.
Here are the facts of the case.
• In 1983, Brown conveyed the “Subject Land” to the Zoellers via a warranty deed. The warranty deed did not contain a mineral reservation in favor of Brown.
• Brown then executed a correction deed, intended to replace the warranty deed. The correction deed contained a reservation of a one-half royalty interest which would convert to a one-half nonparticipating royalty interest in favor of Brown’s heirs and assigns upon her death.
• In 1987, by an assumption deed, the Zoellers conveyed the Subject Land to the Crows, reserving a “one-half interest in the oil gas and other minerals” in favor of Brown which interest would convert to an NPRI in favor of Browns’ heirs and assigns upon her death, until there is a lapse in the lease on which the NPRI is paid or until production ends.
• In 1990, an oil and gas company looking to lease the Subject Land asked Brown, the Zoellers and the Crows to execute a stipulation of interest to clarify their respective interests prior to entering into oil and gas leases covering the Subject Land. The stipulation listed the parties’ interests as follows:
Brown: For her lifetime, an interest equal to one-half of the mineral interest owned by her in the Subject Land on June 4, 1983 (the date of the warranty deed), together with an interest in all bonus, delay rentals and royalties payable pursuant to any oil and gas lease in existence affecting the Subject Land, and on her death, such mineral interest shall automatically convert into an NPRI in favor of the Browns equal to one-half of the percentage mineral interest in the Subject Land owned by Brown on June 4, 1983, in and to all of the royalties reserved and payable under any oil and gas lease in existence covering the Subject Land.
The Zoellers: An equal to one-half of their percentage mineral interest in the Subject Land on June 1, 1987, in and to all of the royalties reserved and payable under any oil and gas lease in existence covering the Subject Land.
The Crows: All interests of Brown and the Zoellers in the Subject Land conveyed to and acquired by the Crows, save and except the reserved interests described above.
• In 2010, the Crows leased the land and sued the Browns and the Zoellers, alleging that neither owned an interest. The trial court ruled in favor of the Browns and Zoellers on summary judgment, and the Crows appealed.
The Crows based their argument on the “lease in existence” language in the stipulation. Pointing to several cases, they argued that the Browns’ interest is determined by whether an oil and gas lease was in existence at the time of Brown’s death and that the Zoellers’ interest is restricted to any oil and gas lease in existence on the date the stipulation was executed.
Affirming most of the summary judgment, the appeals court rejected the Crows’ argument. The court distinguished the Crows’ cases from the facts at hand because those cases specifically contained “subject to” language subjecting the conveyance to an existing lease. The court found the absence of similar “subject to” language, as well as the use of the phrase “under any oil and gas lease” in later paragraphs, indicated that the parties to the stipulation did not intend to make the interests at issue “subject to” a then-existing lease at the time of Brown’s death or at the time the stipulation was executed.
This case generally points to the importance of precise drafting in safeguarding one’s interests. More specifically, in the absence of “subject to” language, a royalty interest related to “leases in existence” may be deemed to be a perpetual interest.
Conrad Hester is a partner in Thompson & Knight’s Fort Worth office and focuses his practice on oil and gas litigation. His expertise includes contract disputes, royalty litigation, lease termination and title suits, surface access, and surface damages disputes.
Sam Fubara is an associate in T&K’s Fort Worth office. He focuses his practice on oil and gas matters.