1. Ten “Knotty” title issues nadoa 43rd annual institute september 8-9, 2016
Lamont C. Larsen
Davis Graham & Stubbs LLP

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

3. 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

4. 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

5. 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”

6. 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

7. Title Issues caused by Fractions

8. 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

9. 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) = % NRI
Difference is 8X
Courts have upheld large fixed royalty interests, even if they exceed the landowner’s royalty

10. 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

11. 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

12. 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

13. 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

14. 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)

15. 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

16. 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

17. 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

18. 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)

19. 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

20. 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

21. 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”?

22. 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

23. 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

24. 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

25. 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

26. 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

27. “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?

28. 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?

29. 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

30. 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?

31. 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?

32. 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

33. 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

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