Ten “Knotty” title issues nadoa 43rd annual institute september 8-9, 2016 Lamont C. Larsen Davis Graham & Stubbs LLP lamont.larsen@dgslaw.com 303-892-7473

introduction Summary of difficult, yet common title issues General multistate applicability Provide general guidelines Spot issues

1. Mineral interest vs. royalty interest Elements of Mineral Interest Right to explore (seismic) Right of ingress and egress (dominant estate) Right to lease (executive right) Right to lease bonus, delay rentals and royalties Right to extract minerals

1. Mineral interest vs. royalty interest Elements of Royalty Interest Right to receive royalty when oil and gas is produced “Bare” royalty interest Non-participating royalty interest Does not participate in bonus or delay rentals

1. Mineral interest vs. royalty interest Granting/reservation language controls Ignore the title of the instrument “1/16 of the oil, gas and minerals in and under” “1/16 royalty interest” “1/16 of the oil, gas and minerals produced and saved”

1. Mineral interest vs. royalty interest Complications Grant of mineral interest with reservation of bonus, rentals and executive rights Non-executive mineral interest Grant of mineral interest with reservation of executive rights

Title Issues caused by Fractions

2. Royalty fractions Fractional Royalty Fractions of Royalty 1/16 royalty interest 1/16 of 1/8 = 1/128 royalty interest Fixed Fractions of Royalty 1/16 of the royalty “of” means to multiply by current lease royalty Varies

Difference in language is subtle, but result is substantial 2. Royalty fractions Difference in language is subtle, but result is substantial 1/16 royalty interest = 6.25% NRI 1/16 of the royalty (1/8) = 0.78125% NRI Difference is 8X Courts have upheld large fixed royalty interests, even if they exceed the landowner’s royalty

Complications 2. Royalty fractions 1/16 of 1/8 = fixed 1/128 royalty interest 1/16 of the royalty = 1/16 of whatever the current lease royalty is Statements of intent regarding existing leases or future leases “Two Grant” or “Three Grant” deeds

3. Fractional mineral interests Mineral fraction based on tract acreage Undivided 80/640 mineral interest (i.e. 1/8th) Ambiguity if tract does not actually contain the number of acres in the denominator Generally, specific fraction will control 1/8 mineral interest in the tract, whether actual tract acreage more or less

3. Fractional mineral interests Complications – Net Mineral Acres Undivided 80/640 mineral interest Statement of intent to convey 80 “net mineral acres” If give effect to statement of intent, mineral interest is fixed at 80 NMA, even if actual tract acreage is more or less Also, if tract covers lands outside the scope of title examination, cannot confirm whether grantor owned sufficient mineral interest

Duhig v. Peavy-Moore Lumber Co. 4. Duhig rule Duhig v. Peavy-Moore Lumber Co. If grant purports to convey more than what grantor owns, the grant takes precedence over reservation A conveys Tract 1 to B, reserving 50% of minerals If A only owned 50% of the minerals, under Duhig rule, B acquired 50% of the minerals in Tract 1 Grantee is made whole first

4. Duhig rule Exceptions to Duhig Only applies to mineral deeds, not assignments of leasehold or ORRI Quitclaim deeds – no warranty Deed “excepts” or is made “subject to” prior mineral conveyances or reservations Contrary expression of intent (some states)

4. Duhig rule When to watch for Duhig Mineral deed containing a warranty Grantor owns less than 100% of the minerals Deed includes a reservation Prior mineral conveyances or reservations are not excepted

5. Ownership under railroads/roads Roads/Highways Typically created either by deed or by condemnation Condemnation Statute governs the scope and nature of the estate Typically can only condemn only what is necessary for highway purposes (i.e. only the surface estate, not mineral estate) Either a fee surface interest or an easement across the surface

5. Ownership under railroads/roads Highways Created By Deed Must carefully analyze the granting language Fee interest in the surface and mineral estates? Only an easement/ROW across the surface? Key language – very state specific Deed versus Right of Way Strip of land versus on, over and across Land versus ground

5. Ownership under railroads/roads Right-of-way typically acquired from federal government But also could be acquired from landowner if lands already patented Federal Government Typically no deed; statutory grant Determine which statute (1862, 1864 or 1875 Acts)

5. Ownership under railroads/roads 1862 and 1864 Acts ROW is a “limited fee” Surface, coal and iron conveyed, but no other minerals Other minerals did not pass to subsequent patentee, even odd numbered “railroad” sections or state sections Must obtain oil and gas lease from BLM 1875 Act ROW is an easement only All minerals passed to subsequent patentee

6. Ownership under rivers Navigability Test Was the river navigable at the time of statehood? If so, then State owns lands underlying river Lands owned by the state are fixed, even if river meanders If river is non-navigable, each adjacent landowner owns to the center of the river If non-navigable river meanders, ownership follows course

7. Timing of conveyances/Recording State Recording Statutes Race = first to record Race/Notice = first to record without notice of prior conveyance In 1990, A conveys 50% of minerals to B, recorded in 2000 In 1995, A conveys all RTI to C, recorded in 1995 Was C was a “bona fide purchaser for value”?

7. Timing of conveyances/Recording Simultaneous Conveyances A conveys ½ of A’s interest to B On same day, A conveys ½ of A’s interest to C Construed together, even if recorded on different days If executed on different days, then C receives ¼ Best practice is to convey a % interest in the land, not a % of grantor’s interest or convey all RTI in 2nd deed

7. Timing of conveyances/Recording After-Acquired Title A conveys Tract 1 to B, with a warranty of title A subsequently obtains additional interest in Tract 1 Title to subsequent interest flows to B Exception A conveys 50% interest in Tract 1 to B, with warranty A subsequently obtains an additional 25% interest in Tract 1 Title to subsequent interest remains in A

8. Community lease Single lease covering multiple tracts of differing ownership executed by multiple owners Multiple owners deemed to “pool” their interests across leased premises Royalty apportioned according to pro rata interest in entire leased premises Requires title examination of all leased premises

Exceptions to Community Lease Contrary intent is clear in the lease Leased premises includes non-contiguous tracts Non-uniform lease terms as to each lessor Tracts subdivided after lease is executed

9. Wellbore assignments Is it a Wellbore Assignment? Intended to be wellbore only, or simply inadequate exhibits? No lease exhibit Well exhibit contains only well names No legal descriptions Legal descriptions are of well location only, not units

“Leasehold estate associated with” wells 9. Wellbore assignments “Leasehold estate associated with” wells Interest in the leases insofar as to the wellbore? Interest in the 40 acres state spacing around wellbore? Interest in all leases covering lands on which well is drilled or pooled therewith?

Extent of Wellbore Interest 9. Wellbore assignments Extent of Wellbore Interest No interest in infill wells drilled on leases/unit Right to use surface and produce oil and gas under the terms of the lease(s) Limited to existing depths drilled? Limited to existing producing formation? Right to sidetrack or convert to a horizontal well?

Extension and Renewal Clause 10. Extension of orri Extension and Renewal Clause A assigns Lease 1 to B, and reserves and ORRI Assignment states that the ORRI applies to any extension or renewal of Lease 1 acquired by A or A’s successors Easy case: lease contains an extension clause

Is it an Extension/Renewal or a New Lease? 10. Extension of orri Is it an Extension/Renewal or a New Lease? Acquired by same lessee that held old lease? Covers same lands and formations? Contains similar terms (royalty, term, Pugh clause, etc.)? Consideration paid? Length of time from expiration of old lease? Top lease?

10. Extension of orri Complications ORRI applies to extension or renewal of prior lease, or a new lease covering the same lands acquired within 1 year Lessee of old lease acquires package of leases from a third party including a new lease covering same lands?

Additional Complications 10. Extension of orri Additional Complications ORRI in prior lease = difference between existing burdens of 12.5% and 20% (i.e. 7.5%) Royalty in renewal lease is 18% Is ORRI fixed at 7.5% or is it now 2% (20%-18%) Only reported case held that ORRI was fixed at time of its creation

RECOMMENDATIONS Read the language of the instrument carefully Beware of post-production instruments Consult title attorney to apply specific state law Put interests into suspense Obtain stipulations of interest or correction instruments

Thank you Lamont C. Larsen lamont.larsen@dgslaw.com 303-892-7473 Licensed in Colorado, Wyoming, Texas, Utah and Pennsylvania