Property and Oil and Gas Don't Mix: The Mangling
of Common Law Property Concepts
Bruce M. Kramer*
I. Indroduction.............................................................
II. The Problem with Estates
A. Some Basic Definitional and Conceptual Difficulties
B. Defining the Leasehold Estate-Why Adopt a Rule of Automatic
Termination?
III. The Rule Against Perpetuities
A. The Defeasible Term Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Top Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Conclusion...........................................................
IV. The Mysterious One-Eighth.. . . . . . . . . . . . . . . .. . . . .. . . . . . . . . .. . .. .. . . . . . . . . . .
V. Real Covenants-Herein of Assignments and Subleases. . . . . . . . . . . . . . . . . . . . . . .
VI. The Differences Between a Canon of Construction and a Rule of Law. . . . . . . . . .
VII. Some Closing Thoughts
I.
540
541
541
543
550
551
557
558
559
562
564
568
INTRODUGrION
One of the reasons I chose to teach Oil and Gas Law a number of
years ago was that I perceived it to be an advanced property course.!
While that perception is changing,2 I still believe that the heart, if not
the brains, behind any basic course in oil and gas law will still lie in
thousand-year-old common law property principles, which must be
mastered by the student if she is to understand how modern oil and
gas law and transactions are structured.
The fact that property principles, and to a great extent, real property principles, underlie oil and gas law has created many positive externalities for the industry. Some of the benefits were noted by the
Texas Supreme Court which, when interpreting an instrument to create an overriding royalty interest, rather than a mere contractual obligation to pay a sum certain, stated: "[overriding royalties] are
interests in land; and hence not subject to parol sale, but have the
protection of the statute of frauds, the statutes regulating conveyances
and mortgages of real estate, and the statutes requiring the record of
instruments affecting title to or liens on land."3
* Maddox Professor. Texas Tech.; A.B., 1968; J.D., 1972, V.C.L.A.; LL.M.• 1975. Illinois.
1. I must confess that one of my dumbest decisions in law school was not taking the Oil
and Gas Law course taught by Richard Maxwell. What I did not learn in his course, I have tried
to pick up over the years through a careful reading of his many thought-provoking articles. In
addition, Dick has shown an amazing patience in responding to a continuous series of questions
about oil and gas that I have bombarded him with. I nonetheless was able to figure out that Oil
and Gas Law was largely taught by property scholars, leading me to believe that my interest in
property law would be rewarded by teaching the course.
2. You can compare the earlier editions of HOWARD WILLIAMS, ET AL., OIL AND GAS
LAW (1st through 3rd edit.) and WILLIAM HUIE, ET AL., CASES AND MATERIALS ON OIL AND
GAS LAW (1960) with their current versions to see a de-emphasis on traditional property law
concepts. See also EUGENE KUNTZ, ET AL., CASES AND MATERIALS ON OIL AND GAS LAW (2d
ed. 1992) for a more "modern" view of oil and gas law.
3. Tennant v. Dunn, 110 S.W.2d 53, 57 (Tex. Comm'n App. 1937). See also A.W. Walker,
Property Interests Created by Lease, 7 TEX. L. REV. 1,32-49 (1927).
540
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The Mangling of Common Law Property Concepts
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It is property law which provides the skeletal structure to oil and
gas jurisprudence. There is an increasing amount of flesh and bones
that are being added to the skeleton, but without the core skeleton, oil
and gas law as we know it today and as we will continue to know it in
the next century would n'ot exist. While I suggest that some courts
have mangled common law property principles, one should not infer
that the mangling is due to a judicial indifference to common law
property concepts. In fact, the strained exercise of several courts to
justify their decisions in the face of several hundred years of property
jurisprudence lends credence to the belief that courts will not easily
shed the "baggage" which has attached itself to oil and gas law, merely
because the nature of the business has changed. Flexibility is the hallmark of the common law and, given the opportunity for the states to
experiment, it is not surprising that substantial variations from traditional property law principles arise on occasion. Nonetheless, courts
do not feel comfortable about "divorcing" oil and gas law from property law. Whether straining to avoid the application of the Rule
Against Perpetuities to a transaction that Lord Mansfield or Professor
Dukeminier would find outside the furthest extension of the Rule or
struggling to "pigeon-hole" the oil and gas lease as one of only two
possible common law estates, the courts give great deference to centuries-old property tenets. It is my hope that future courts and future
law students will have that same respect for the property skeleton
which gives oil and gas jurisprudence its intellectual and practical
vibrancy.
II.
A.
THE PROBLEM WITH ESTATES
Some Basic Definitional and Conceptual Difficulties
The Restatement of Property defines an estate as "an interest in
land which (a) is or may become possessory and (b) is ownership measured in terms of duration."4 This rather basic definition clearly restricts the estate concept to corporeal or possessory interests, leaving
out the incorporeal or non-possessory interests such as easements or
profits a prendre. 5 In the United States there are two or three different classification schemes that have been adopted regarding the severed oil and gas estate. 6 A large number of states, including
Arkansas, Colorado, Kansas, New Mexico, North Dakota and Texas,
4,
5.
RESTATEMENT OF PROPERTY
OLIN BROWDER, ET AT"
BROWDER, ET AL.).
9 (1936).
BASIC PROPERTY LAW
6. See generally 1 HOWARD WILLIAMS &
(1993) (hereinafter WILLIAMS & MEYERS).
203-04 (5th ed. 1989) (hereinafter
CHARLES MEYERS, OIL AND GAS LAW
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treat the severed estate as a possessory or corporeal interest.? Obviously, in these states an owner of a severed oil and gas estate may
create any of the recognized estates that may be carved out of the fee
simple absolute.
Another group of states, including California, Indiana, Louisiana,
New York, Oklahoma'and Wyoming,S treat the severed mineral estate
as creating only a non-possessory interest, akin to a profit a prendre,
which gives the owner the right to explore for, search and then capture the oil or gas by bringing it to the surface. In these non-ownership states, therefore, the common law estate system should not be
applicable since the severed oil and gas estates can never become possessory. Notwithstanding the contradiction, courts in non-ownership
jurisdictions continue to employ the common law estates classification
scheme to describe various mineral and leasehold interests that may
be carved out of the oil and gas estate. 9
It is axiomatic in classical property jurisprudence that a person
can only transfer an interest equal to or smaller than the interest
owned. That axiom is reflected in the famous maxim, "nemo plus juris
transferre potest quam ipse habet" - No one can transfer a better
title than he himself has. to This concept applies to the size, nature and
duration of the property interest. Therefore, the owner of an incorporeal interest cannot assign or transfer a corporeal interest.l l Likewise
in non-ownership jurisdictions, or in jurisdictions such as Kansas
which treat the leasehold estate as an incorporeal interest,12 the royalty interest that is carved out of the lease should be classified as a
chattel real or a chose in action. 13 Yet royalty interests are universally
treated as incorporeal interests even in states which treat the lease as
7. See cases cited in 1 WILLIAMS AND MEYERS, supra note 6, at 44-50. The Texas Supreme
Court in Stephens County v. Mid-Kansas Oil & Gas Co., 254 S.W. 290 (Tex. 1923) concluded:
We do not regard it as an open question in this state that gas and oil in place are
minerals and realty, subject to ownership, severance, and sale, ... in like manner and to
the same extent as is coal. .... But it is earnestly insisted that the instruments conveyed only incorporeal hereditaments ... and that the terms of the instruments precluded the vesting of title to the gas and oil save as personalty after being brought to
the surface.
Ownership of the gas and oil in place meant having the exclusive right to possess,
use and dispose of the gas and oil.
[d. at 292.
8. See cases cited at 1 WILLIAMS & MEYERS, supra note 6, at 34-44.
9. For example in Gerhard v. Stephens, 442 P.2d 692 (Cal. 1968), the court found that an
oil and gas lease created a defeasible fee estate even though only an incorporeal hereditament
was created. See also, Callahan v. Martin, 43 P.2d 788 (Cal. 1935); Stewart v. Amerada Hess
Corp., 604 P.2d 854 (Okla. 1979).
10. BROWDER, ET AL., supra note 5, at 756.
11. RICHARD HEMINGWAY, THE LAW OF OIL AND GAS 60 (3d ed. 1992) [hereinafter
HEMINGWAY].
12. Lathrop v. Eyestone, 227 F.2d 136 (Kan. 1951).
13. JON BRUCE & JAMES ELY, JR., THE LAW OF EASEMENTS AND LICENSES 3-7 (1988);
HEMINGWAY, supra note 11, at 60.
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an incorporeal hereditament.14 Likewise states which treat the oil and
gas estate as an incorporeal interest should treat the leasehold estate
as a chattel real or chose in action, but again those courts universally
recognize leasehold estates as incorporeal hereditaments. 15
One of the reasons why courts refused to apply the chose in action label to royalty interests was that choses in action were not assignable at common law. 16 In addition, choses in action would not be
treated as incidents to the landowner's possibility of reverter in the
mineral estate and thus would not automatically transfer with a conveyance of the possibility of reverterP It is clear that treating leasehold and/or royalty interests as something less than an incorporeal
hereditament would hinder the alienability of mineral estates by raising questions as to their assignability and by taking them outside of
many of the state recording statutes. That would defeat the purpose
of having a title system which creates a stable environment where financial interests can infuse capital into the industry with some certainty of having sufficient security to justify the investments.
B.
Defining the Leasehold Estate-Why Adopt a Rule of Automatic
Termination?
On more than one occasion, several prominent attorneys representing oil companies have raised with me the issue of why attorneys
have accepted without question the notion that under a typical "unless" lease with a standard habendum clause, the lease would automatically terminate if the delay rentals are not paid either accurately
or timely or if production ceases in the secondary term. The history of
the development of the automatic termination doctrine suggests that
lawyers have been too deferential to that doctrine and probably could
have drafted clauses that would have avoided its harsh ramifications.
From an early date, the English common law recognized two different types of defeasible fee simple estates; the fee simple determina14. See, e.g., Callahan v. Martin, 43 P.2d 788 (Cal. 1935); Lathrop v. Eyestone, 227 P.2d 136
(Kan. 1951); White v. McVey, 31 P.2d 850 (Okla. 1934).
15. See, e.g., Gerhard v. Stephens, 449 P.2d 692 (Cal. 1968); Baker v. Vanderpool, 178
S.W.2d 189 (Ky. 1944) (royalty is an incorporeal hereditament); Back v. Ohio Fuel Gas Co., 113
N.E.2d 865 (Ohio 1953) (leasehold interest is an incorporeal hereditament).
16.. HEMINGWAY, supra note 11, at 60.
17. See, e.g., Lathrop, 227 P.2d 136. An analogous problem arose in Texas where by virtue
of Caruthers v. Leonard, 254 S.W. 779 (Tex. Comm'n App. 1923), overruled, Harris v. Currie,
176 S.W.2d 302 (Tex. 1943), the court found that a transfer of a mineral estate which had been
leased prior to the conveyance would not transfer either the delay rentals or the royalties payable under the existing lease. This spawned the use of the "subject to" clause in form deeds
which, in turn, created a generation of contentious litigation and irreconcilable opinions. See
generally Bruce Kramer, The Sisyphean Task of Interpreting Mineral Deeds and Leases: An Encyclopedia of Canons of Construction, 24 TEX. TECH L. REV. 1, 19-43 (1993) (hereinafter
Kramer, Sisyphean).
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ble and the fee simple subject to a condition subsequent,18 The major
difference between these two types of defeasible fee simple estates
relates to the differen~e between a limitation and a condition. 19 In
order to create a special limitation, durationallanguage, such as "unless," "so long as," or "until" must be used. 20 If the Grantor conveys
Blackacre to the Grantee and uses the following language: "0 to A
and his heirs so long as liquor is not sold on the premises," A has been
granted a fee simple determinable estate and 0 has retained a possibility of reverter.
In order to create a fee simple subject to a condition subsequent,
on the other hand, conditional, not durational, language needs to be
employed. Thus, if the Grantor conveys Blackacre to the Grantee and
uses the following language: "0 to A and his heirs on condition that
liquor is not sold on the premises and if sold 0 shall have the power to
terminate," A has been granted a fee simple subject to a condition
subsequent and 0 has retained a power of termination or right of
reentry.
In the first example, where A has received a fee simple determinable, if A breaches the limitation 0 becomes the owner of the fee
simple absolute estate automatically and A becomes an instantaneous
trespasser on O's present possessory estate. In the second example,
where A has received a fee simple subject to a condition subsequent,
if A breaches the condition A continues to own the possessory estate,
subject to being ousted by O's affirmative exercise of O's power of
termination.
The differences have been expressed as follows by A.W. Walker,
Jr.:
The difference between them as to their operative effect is well
established and ordinarily presents little difficulty. A limitation in
its generic sense is any provision delimiting the duration of an estate. The operative effect of the occurrence of the event named in a
clause of ... special limitation is ...: the estate granted automatically terminates without the necessity of any affirmative action on
the part of the grantor, or lessor, and, in fact, even without this
knowledge or against his express wishes. The happening of the
event named in a clause of condition subsequent, does not ipso
facto terminate the estate granted ... but merely gives the grantor,
or lessor, the option of terminating the estate. . . . . The estate
18. ROGER CUNNINGHAM, ET AL., THE LAW OF PROPERTY 39-45 (2d ed. 1993) (hereinafter
CUNNINGHAM, ET AL.).
19. THOMAS BERGIN & PAUL HASKELL, PREFACE TO ESTATES IN LAND AND FUTURE INTERESTS 50 (2d ed. 1984); CUNNINGHAM, ET AL., supra note 18, at 45-50.
20. CUNNINGHAM, ET AL., supra note 18, at 46; A.W. Walker, Jr., The Nature of the Property Interests Created by an Oil and Gas Lease in Texas, 7 TEX. L. REv. 539, 540-41 (1929). A.W.
Walker, Jr. wrote a series of three articles that were very influential in applying the common law
estate nomenclature to oil and gas transactions. See also A.W. Walker, Jr., 7 TEX. L. REV. 1
(1928), A.W. Walker, Jr., 8 TEX. L. REV. 463 (1930).
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continues after the happening of the event until the grantor, or lessor, takes affirmative steps to bring the estate to an end.21
As it affects the oil and gas lease, there are several important ramifications that flow from this distinction between a limitation and a condition. The owner of the possibility of reverter may not waive his right
to reclaim the possessory interest. The change in ownership occurs at
the moment the limitation occurs. 22 A power of termination, on the
other hand, may be waived by the owner if it is not promptly exercised. 23 More importantly, the exercise of the power of termination
was treated as a forfeiture, while the operation of the possibility of
reverter was considered to be the natural expiration of the vested estate. 24 Thus, equitable defenses, such as estoppel and waiver, would
not be applicable to defend against the termination of a fee simple
determinable estate.
The history of the "unless" clause is unclear. The earliest leases
did not contain provisions for delay rentals as a means of postponing
the drilling of wells. According to one text, annual "rentals" to postpone drilling first appeared in an 1874 lease.25 By the early twentieth
century, however, a delay rental clause in a nearly standard form became widespread, except in California. 26 At an early date this standard "unless" lease form was treated as creating a fee simple
determinable estate which automatically terminated upon failure to
make timely and accurate delay rental payments.27
21. Walker, 8 TEX. L. REV., supra note 20, at 484-85.
22. This creates problems with the reality that most wells do not continuously produce, but
have "downtimes" for scheduled maintenance, mechanical breakdowns or lack of markets. See
generally, Bruce Kramer, The Temporary Cessation Doctrine: A Practical Response to an Ideological Dilemma, 43 BAYLOR L. REv. 519 (1991) (hereinafter Kramer, Temporary Cessation).
23. CUNNINGHAM, ET AL., supra note 18, at 47-48.
24. Walker, 8 TEX. L. REV., supra note 20, at 486.
25. 1 E. BROWN, THE LAW OF OIL AND GAS LEASES 7-1 (1993), citing SAMUEL GLASSMIRE,
THE LAW OF OIL AND GAS LEASES AND ROYALTIES 199 (1935).
26. The following delay rental clause was included in a 1917 lease:
It is agreed that this lease shall remain in force for a term of three years from this
date, and as long thereafter as oil or gas, or either of them, is produced from said land
by lessee. .. .. If no well is completed on said land on or before the 17th day of
January, 1917, [1 year from date of execution of the lease] this lease shall terminate as
to both parties, unless the lessee on or before that date shall payor tender to the lessor,
... the sum of Three Hundred Eighty and no-100 dollars, which shall operate as a
rental and cover the privilege of deferring the completion of a well for twelve months
from said date.
RICHARD MAXWELL, ET AL., CASES AND MATERIALS ON OIL AND GAS LAW 356 (6th ed. 1993).
See also Leslie Moses, The Evolution and Development of the Oil and Gas Lease, 2 INST. ON OIL
AND GAS L. & TAX'N 1 (1951); 3 WILLIAMS & MEYERS, supra note 6, at 601-601.5 (1993).
27. Dean Sullivan notes that some other rationales were used to support the near-universal
finding that the "unless" lease was automatically terminable. ROBERT SULLIVAN, HANDBOOK
OF OIL & GAS LAW 107 (1955). He further concludes that since the "unless" language is a
special limitation substantial compliance is insufficient. Id. See, e.g., Phillips Petroleum Co. v.
Curtis, 182 F.2d 122 (10th Cir. 1950); W.T. Waggoner Estate v. Sigler Oil Co., 19 S.W.2d 27 (Tex.
1929).
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The fee simple determinable classification scheme led to some absurd results. 28 It also led to a host of exceptions to the rule of automatic termination, which clearly suggested that the courts were not
pleased that a lessee's interest might be terminated because of actions
taken by third parties. Thus came into existence the "mail box exception" which prevented termination if the lessee could show that the
check was mailed in sufficient time to reach the lessor or depository
bank, but did not. 29 But the reason why the payment didn't arrive
would be irrelevant under an automatic termination doctrine. The
payment is a limitation, not a condition, and substantial performance,
or incompetence by a third party should not prevent the lease from
terminating. Normally estoppel, waiver or other equitable defenses
would not be available to the owner of a fee simple determinable estate where the limitation has occurred. But by looking at fault some
courts were treating the lessor's action not as one based in trespass,
but one sounding in forfeiture.
One exception to the automatic termination rule that could be
justified was where the lessor herself caused the delay rental payment
to be erroneously tendered. This exception was accepted by the court
in Humble Oil & Refining Co. v. Harrison. 30 There the lessor had
conveyed a fractional interest to a third party after the lease. Unfortunately, the deed language was not clear as to the exact fraction.
Humble, on the advice of counsel, interpreted the deed to convey a
3/8 mineral estate, while the court eventually interpreted the deed to
convey a 1/2 mineral estate. Humble made the delay rental payments
to the respective parties based on its interpretation. The court refused
to allow the underpaid party to terminate the lease, claiming that the
cause of the underpayment was the lessor's own actions which could
not trigger the limitation.
Delay rental clauses are traps for the unwary. They sometimes
raise difficult questions about when the anniversary date falls. 31 They
also created problems since they were often tied to an acreage figure
which might not be readily ascertainable. 32 Further problems were
caused by post-lease conveyances by the lessor. 33 Since delay rentals
were a substitute for the commencement of the drilling of a well, lessees were also uncertain about whether their development activities
28. For example, in Young v. Jones, 222 S.W. 691 (Tex. Civ. App. 1920), the lease was
terminated when the lessee tendered $73.29 instead of $76.25.
29. See, e.g., Ballard v. Miller, 529 P.2d 752 (N.M. 1974); Corley v. Olympic Petroleum
Corp., 403 S.W.2d 537 (Tex. Civ. App. 1966).
30. Humble Oil & Refining Co. v. Harrison, 205 S.W.2d 355 (Tex. 1947).
31. See, e.g., Greer v. Stanolind Oil & Gas Co., 200 F.2d 920 (10th Cir. 1952); Hughes v.
Franklin, 29 So. 2d 79 (Miss. 1947).
32. Compare Schwartzenberger v. Hunt Trust Estate, 244 N.W.2d 711 (N.D. 1976) with
Norman Jessen & Assoc., Inc. v. Amoco Production Co., 305 N.W.2d 648 (N.D. 1981).
33. See, e.g., Atlantic Refining Co. v. Shell Oil Co., 46 So. 2d 907 (La. 1950).
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satisfied the commencement requirement so as to excuse the delay
rental payment. 34
In many situations oil and gas lawyers tinkered with the fringes of
the unless clause to avoid some of the above-mentioned problems.
For example, many leases included notice of assignment clauses, so
that the lessee was not required to change the payee for a delay rental
check until the lessee received a written notice with a copy of the conveying instrument. 35 Likewise payments were to be made to a depository bank rather than to the individual. This created a higher
certainty that the checks would arrive on time and be promptly
credited to the appropriate account. But a frontal assault on the unless clause never materialized.
Perhaps the lack of such an attack was caused by the fact that
property lawyers are aware that they are not free to create new estates
in land. Likewise they are "conservative" in their approach to precedent in the field because courts have stressed the importance of stare
decisis when it comes to decisions affecting property interests. Nonetheless it is somewhat of a surprise that attorneys did not attempt to
draft a way around the harsh results of the unless clause of the standard oil and gas lease. As shown in Kincaid v. Gulf Oil CO.,36 had the
attorneys been more aggressive, they might have better represented
the interests of their lessee/clients. Kincaid was the classic mistake
case where a Gulf Oil employee placed the names of the wrong lessors
on a substantial delay rental check which had to be flown to the depository bank on a Saturday in order to meet the timing deadline for
such a payment. The bank initially accepted the check, but, at the
request of the lessors, it was never cashed. The lease had a specially
negotiated delay rental clause which provided that if the lessee should
make a bona fide attempt to pay the delay rentals properly, but should
nonetheless fall short, the lease would not terminate if the lessee corrected the error within 30 days of being notified by the lessor. 37
The court had no trouble enforcing the terms of the modified delay rental clause, notwithstanding its inconsistency with the labelling
of the leasehold estate as a fee simple determinable. The court also
used a canon of construction that favors an interpretation which prevents a forfeiture. 38 As noted above, however, a failure to make a
delay rental payment does not result in a forfeiture, but the automatic
34. See, e.g., Oelze v. Key Drilling Co., 481 N.E.2d 801 (Ill. App. Ct. 1985); Herl v.
Legleiter, 668 P.2d 200 (Kan. Ct. App. 1983); Breaux v. Apache Oil Co., 240 So. 2d 589 (La. Ct.
App. 1981); Wilds v. Universal Resources Corp., 662 P.2d 303 (Okla. 1983).
35. Gulf Refining Co. v. Shatford, 159 F.2d 231 (5th Cir. 1947).
36. Kincaid v. Gulf Oil Co., 675 S.W.2d 250 (Tex. Civ. App. 1984).
37. [d. at 252-53.
38. [d. at 254.
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termination of the estate. The court itself noted that fact when it
stated:
It is well settled that with the usual "unless" lease, a failure of
the lessee either to begin a well or to pay the delay rentals, ipso
facto terminates the lease on the date set out for the action and the
estate reverts to the lessor without the necessity of reentry, declaration of forfeiture or legal action. 39
The result of Kincaid is in essence the creation of a new kind of estate
that governs the lease during the primary term. It is an estate that will
last until such time as the lessor notifies the lessee that the delay
rental obligations have been breached and the lessee fails to cure
within a 60-day period. 40 While courts should not allow the parties to
create new estates in land, the parties to a lease should be able to
avoid the harsh ramifications of the court's determination that the unless lease clause creates a fee simple determinable estate. Since states
seem unwilling to change their classification scheme for unless leases,
the drafting solution may be the only answer to the problem. 41
Insofar as the habendum clause is concerned, the language of the
standard clause, namely that the lease shall last "so long as oil or gas
are produced in paying quantities," also lent itself to being treated as a
fee simple determinable estate. While there was some differing treatment of the habendum clause in the early days of oil and gas law,42
most states followed the lead of Texas and called the leasehold estate
in the secondary term a fee simple determinable estate. 43 As with the
delay rental clause this led to some harsh results.
For example, if a lessee drilled a well and discovered gas in paying quantities which could not be marketed prior to the end of the
primary term, the lease would terminate. 44 . Likewise any cessation of
production in the secondary term would automatically terminate the
lease. 45 Estoppel, waiver or other equitable defenses would not be
available to the lessee to defeat the action brought by the lessor. 46
39. [d. at 255.
40. A similar result was reached in Woolley v. Standard Oil Co. of Texas, 230 F.2d 97 (5th
Cir. 1956).
41. One state, Oklahoma, has decided to abandon its prior classification scheme for delay
rental clauses and habendum clauses. After Stewart v. Amerada Hess Corp., 604 P.2d 854
(Okla. 1979), Oklahoma treats the lease as a fee simple on a condition subsequent allowing all
equitable defenses to be raised and placing the onus on the lessor to prove a forfeiture in an
action to enforce its power of termination.
42. 1 EUGENE KUNTZ, LAW OF OIL AND GAS § 26.8(a) (1987) (hereinafter KUNTZ). Professor Kuntz identified two other approaches to the classification issue, both of which would not
have treated the lease as automatically terminating in the event production in paying quantities
was either not achieved or ceased.
43. Stephens County v. Mid-Kansas Oil & Gas Co., 254 S.W. 290 (Tex. 1923). See also
Baldwin v. Blue Stem Oil Co., 189 P. 920 (Kan. 1920).
44. See, e.g., Stanolind Oil & Gas Co. v. Barnhill, 107 S.W.2d 746 (Tex. Civ. App. 1937).
45. Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941).
46. For example, in Watson, 155 S.W.2d 783, the lessee shut-in a well because there was no
market for the oil because of the Depression and the poor quality of the oil being produced.
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The drafters of oil and gas leases responded more vigorously to
the automatic termination feature of habendum clauses than to the
same feature as it affected the delay rental obligation. Savings clauses
were added to the lease to deal with the realities of oil and gas production. These included continuous operations clauses which allowed
the lease to continue if the lessee was engaging in operations in the
secondary term even if there was no production,47 dry hole and/or cessation of production clauses,48 and shut-in gas royalty clauses. 49
Additionally, courts came to the rescue of parties stuck with the
automatic termination rule by providing both modifications to the rule
and a rejection of it. For example, the Oklahoma Supreme Court in
Stewart v. Amerada Hess Co. ,50 rejected the interpretation given the
habendum clause which treats the secondary term estate as a fee simple determinable. Instead the court made a clean break from the automatic termination rule, but not a clean break from property
jurisprudence when it announced as follows:
The "thereafter" clause is hence not ever to be regarded as
akin in effect to the common-law conditional limitation or determinable fee estate. The occurrence of the limiting event or condition
does not automatically aff~ct an end to the right. Rather, the clause
is to be regarded as fixing the life of a lease instead of providing of
means of terminating it in advance of the time at which it would
otherwise expire. In short, the lease continues in existence so long
as interruption of production in paying quantities does not extend
for a period longer than reasonable or justifiable ....51
Thus the fee simple determinable estate was in essence transformed
into a fee simple subject to a condition subsequent to deal with the
vagaries of oil or gas production and marketing.
The Stewart decision is an offshoot of an earlier Oklahoma modification to the automatic termination rule. The Oklahoma courts had
previously said that the habendum clause is satisfied by discovering a
reservoir that is capable of producing in paying quantities, rather than
requiring actual production and marketing of the oil or gas in paying
Over a three-year period the lessee expended substantial sums, with the knowledge of the lessor,
to maintain the well. The lessee claimed that the lessor was estopped by his inaction to claim
that the lease automatically terminated. The court found that the lessee should have known that
the lease automatically terminated when production ceased in the secondary term so that the
lessee could not have reasonably relied on the lessor's inaction to the lessee's detriment. [d. at
785.
47. See, e.g., Sword v. Rains, 575 F.2d 810 (10thCir. 1978); Tate v. Stanolind Oil & Gas Co.,
240 P.2d 465 (Kan. 1972); Gulf Oil Corp. v. Reid, 337 S.W.2d 267 (Tex. 1960).
48. See, e.g., Sunac Petroleum Corp. v. Parkes, 416 S.W.2d 798 (Tex. 1967).
49. See, e.g., Gard v. Kaiser, 582 P.2d 1311 (Okla. 1978); Freeman v. Magnolia Petroleum
Co., 171 S.W.2d 339 (Tex. 1943).
50. 604 P.2d 854 (Okla. 1979).
51. [d. at 856. The court further noted that the lessor's action would be one grounded in
forfeiture, which meant that the strong Oklahoma policy against forfeiture would apply and all
equitable defenses to the action would be allowed.
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quantities. 52 By only having to show discovery, the uncertainties relating to actual production and marketing which can lead to stoppages
no longer have the effect of automatically terminating the lessee's
estate.
Another judicial modification to the automatic termination rule is
the temporary cessation of production (TCOP) doctrine. 53 A number
of states which follow the automatic termination rule as to production
in the secondary term, nonetheless identify various excuses which
cause a cessation of production, but which nonetheless do not cause
the lease to automatically terminate. 54 The TCOP doctrine is clearly
antithetical to the notion that the lease automatically terminates when
production ceases. Actions taken by the lessee after a cessation of
production would be irrelevant under classic fee simple determinable
analysis. The limitation having occurred, the lessee becomes an instantaneous trespasser. But the TCOP doctrine delays the termination for a period of time that is deemed reasonable for an operator to
regain production. Thus, post-cessation actions become relevant in
determining the continued viability of the fee simple determinable estate. This is clearly inconsistent with the fee simple determinable estate concept. But the technical realities of oil and gas production and
marketing made it a viable option to avoid the harsh results of the
automatic termination rule. As I stated a few years ago:
While the TCOP doctrine adds some uncertainty to the law, it
does so in order to provide the lessee, and ultimately the lessor,
with some needed protection from the results of applying a thousand-year-old concept to the modern oil and gas industry. . . . .
[T]he common law is a wonderful machine. It changes as societal
needs change; it becomes flexible when flexibility is desired; but it
remains true to some basic values so as to provide a stability that is
necessary for the acceptance of the law as the rules that govern societal conduct,55
III.
THE RULE AGAINST PERPETUITIES
Perhaps the most egregious examples of courts "mangling" our
ancient system of property jurisprudence comes in the area of the rule
against perpetuities (hereinafter Rule ).56 The classic statement of the
52. McVicker v. Horn, Robinson & Nathan, 322 P.2d 410 (Okla. 1958). Besides Oklahoma,
Kentucky, Montana and West Virginia appear to have adopted the discovery rule. See Bruce
Kramer, Discussion Notes, 85 Oil & Gas Rep. 138 (1985).
53. For a more complete discussion of the temporary cessation of production doctrine, see
Kramer, Temporary Cessation, supra note 22.
54. The court in Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941), required the lessee to
prove that the cessation of production was caused by a sudden stoppage or mechanical breakdown in order to avoid automatic termination. [d. at 784.
55. Kramer, Temporary Cessation, supra note 22, at 550.
56. Commentators for years have complained about the application of the Rule to certain
oil and gas transactions. See, e.g., 2 WILLIAMS & MEYERS, supra note 6, at 332; 1 KUNTZ, supra
note 42, at 517-30; Bruce M. Jones, The Rule Against Perpetuities as it Affects California Oil and
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Rule is by Professor John Chipman Gray: "No interest is good unless
it must vest, if at all, not later than twenty-one years after some life in
being at the creation of the interest."57
The two areas which have created the most difficult Rule
problems in oil and gas jurisprudence are the creation of defeasible
term interests and the transfer of stand-alone royalty interests.
A.
The Defeasible Term Interest
The following hypothetical represents the problem with certain
types of transfers of defeasible term interests. Olivia owns a unitary
fee simple absolute estate in Blackacre. She conveys the surface estate and 1/2 of the mineral estate in fee simple absolute to Alexis,
reserving to herself 1/2 of the mineral estate for a period of 20 years
and so long thereafter as oil or gas is produced in paying quantities.58
A first year law student having studied the problem of estates and
future interests in class would conclude as to the 1/2 mineral estate
reserved by Olivia, that Olivia would have a fee simple subject to an
executory limitation and that Alexis would have an executory interest.
Alexis owns an executory interest because it is a future interest created in someone other than the grantor that will become possessory
by the divesting of a prior freehold estate held by another person. 59
Unfortunately the Rule would invalidate Alexis' executory interest
and leave Olivia with a fee simple absolute. This seemingly incongruous result occurs because the Rule acts to defeat the intent of the
grantor. Thus, while Olivia intended to reserve less than a fee simple
absolute in 1/2 of the minerals, the remorseless application of the Rule
would defeat Alexis' executory interest and vest in Olivia a fee simple
absolute. Notwithstanding this textbook analysis, most courts when
confronted with such deeds refuse to apply the Rule. In some instances the result is a setback to every first-year Property professor in
the United States.
Gas Interests. 7 UCLA L. REV. 261 (1960); Eugene Kuntz, The Rule against Perpetuities and
Mineral Interests, 8 OKLA. L. REV. 183 (1955); Joseph Morris, Future Interests in Oil and Gas
Law, 3 ROCKY Mm. MIN. L. INST. 579 (1957).
57. JOHN GRAY. THE RULE AGAINST PERPETUITIES 201 (4th ed. 1952).
58. The defeasible term interest, be it royalty or mineral, is a fascinating estate. Apparently
the defeasible term royalty interest was reserved as a matter of course by Federal Land Banks
when they resold property interests that had been foreclosed during the Great Depression. See,
e.g., Williams v. Watt, 668 P.2d 620, 621-22 (Wyo. 1983). Why the banks chose a defeasible term
interest rather than a perpetual royalty is not clear, except of course in Kansas, where, as it later
turned out, such a reservation would have violated the Rule. DAVID E. PIERCE, KANSAS OIL
AND GAS HANDBOOK 4-21 to 4-23 (1986).
.
59. For a discussion of executory interests and their prior lives as uses see CORNELIUS Moy·
NIHAN, INTRODUCTION TO THE LAW OF REAL PROPERTY 190-92 (2d ed. 1988). Executory interests as legal estates were only recognized after the enactment of the Statute of Uses in 1536. As
with many English property law concepts, the origin of the Statute of Uses has to deal with
money, or the lack of it, caused by landed noblemen converting their ownership of land from
legal estates to equitable uses. Id. at 178-80.
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The principal mangler of property principles is the Wyoming
Supreme Court. In Williams v. Watt,60 the Federal Land Bank deeded
certain lands to Williams, excepting and reserving "an undivided onehalf interest in all oil, gas and mineral rights ... for a period of 20
years from the 10th day of April, 1940, and as long thereafter as oil,
gas, or other minerals continue to be produced therefrom .... "61
Subsequently, Williams conveyed the same interest to Watt, reserving
all of the minerals. There was no production from the conveyed lands
by April 1960. The simple issue was whether Williams had reserved
the 1/2 mineral estate in which he had an executory interest which
later vested when no production occurred. 62 Applying the analysis
given above, Williams' executory interest in the 1/2 minerals reserved
by the Federal Land Bank would be void and not subject to the
reservation. 63
While the court splintered in its analysis, all agreed that the overriding obligation of the court is to give effect to the intention of the
parties. This ignores the fact that the Rule, by definition, is intentdefeating. The real issue is not the intent of the parties but the classification of the interests created by the original deed. If the Rule, with
its modifications, applies to the interest created, the intent of the parties is irrelevant. 64 The majority, however, in seeking to carry out the
intent of the parties, does violence to 1000 years of property law with
ramifications far beyond the oil and gas context. 65
The majority's interpretation is all the more discouraging because
it is not merely making a change to the common law Rule. In Wyoming, the Rule is embodied in both the Constitution and statutes,
although the statutory language does make reference to the common
law Rule. 66 While courts should be free to change common law rules
60. 668 P.2d 620 (Wyo. 1983).
61. [d. at 621.
62. The court could have avoided its doctrinal dilemma had Wyoming adopted the "waitand-see" exception to the Rule. Under this exception the validity of the interest is not determined when it is created, -but instead the court waits to see if the interest will actually vest or fail
to vest within the Rule's time period. See CUNNINGHAM, ET AL., supra note 18, at 143-44. In this
instance, Williams' executory interest would have vested within twenty years from the date of its
creation and thus would not have been invalidated under the Rule.
63. This analysis would also deny ownership of the 1/2 of the minerals to Watt. The true
owner would be the Federal Land Bank which would have effectively reserved a fee simple
absolute in 1/2 of the minerals.
64. The majority admits that if the analysis suggested by Justice Thomas, concurring, is correct, namely that the Williams interest is an executory interest, the interest must be voided under
the Rule. Williams, 668 P.2d at 623.
65. The majority candidly concedes that the concurring judge's analysis is historically correct but nonetheless finds that a remainder can follow a fee simple estate. [d. at 624.
66. WYo. CaNsT. art. 1, § 30; WYo. STAT. ANN. § 34-1-139 (Michie 1990). See also TEX.
CaNsT. art. 1, § 26.
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to adjust to the times,67 they should be more constrained when they
are applying a statutory rule. 68
The court initially identified the Land Bank's excepted 1/2 mineral estate as a fee simple determinable estate. 69 This is not an accurate classification given the fact that a third party has the future
interest. The court concedes that Williams' interest cannot be a possibility of reverter since Williams is not the grantor. 70 It acknowledges
the classical rules when it states:
Under antiquated historical concepts it could be ... argued that
a remainder is likewise an inappropriate designation of Williams'
interest for the reason that a remainder cannot follow a fee. . ...
The justification for this rule is that once the owner of an estate in
fee simple conveys his estate in fee simple, there is nothing left to
constitute a remainder. . .. Once the possibility of reverter and the
remainder have been ruled out ..., it follows from these traditional
principles that Williams should be held-on historical grounds-to
have possessed an executory interest in the mineral estate excepted
by the Land Bank. 71
While admitting that the Williams interest should be an executory interest and thus void under the Rule, the court notes that only a few
other state courts had voided similar conveyances. 72 But driven by
the constitutional and statutory mandate, the majority could neither
ignore the Rule, create a legal fiction to avoid its application, or generally exempt oil and gas transactions from its application. Instead it
chose to mangle the "historical" features of common law estates
which clearly prohibit a remainder interest from following a defeasible
fee simple estate.
The linchpin in the majority's analysis is its conclusion that unlike
the typical executory interest, which may last forever, the Williams
interest is certain to become possessory when the production of minerals terminates. However, the Rule did not invalidate eternal contingent future interests, but those interests which would vest or fail to
vest within a life in being plus 21 years. Minerals may be produced for
67. OLIVER HOLMES, THE COMMON LAW (1881).
68. This position was noted by the Alabama Supreme Court in Earle v. International Paper
Co., 429 So. 2d 989 (Ala. 1983) (discussed infra notes 87-89 and accompanying text).
69. The court noted the historic differences between limitations and conditions. Williams,
668 P.2d at 628. The court also referred to Baker v. Hugoton Production Co., 320 P.2d 772 (Kan.
1958), which correctly identified the interests in a defeasible term deed as a fee simple determinable coupled with a possibility of reverter. In Baker, the grantee received the present possessory estate which was to last for twenty years and so long thereafter as oil or gas were produced
in paying quantities. In Williams, on the other hand, the grantor retained the present possessory
estate.
70. See RESTATEMENT OF PROPERTY, supra note 4, § 154(3); LEWIS SIMES AND ALLAN F.
SMITH, THE LAW OF FUTURE INTERESTS 281 (2d ed. 1956) [hereinafter SIMES & SMITH).
71. See generally THOMAS BERGIN & PAUL HASKELL, PREFACE TO ESTATES IN LAND AND
FUTURE INTERESTS 62-66 (2d ed. 1984); SIMES & SMITH, supra note 70, at 103; RESTATEMENT OF
PROPERTY, supra note 4, §§ 15, 154(3), 158.
72. See cases cited in 2 WILLIAMS & MEYERS, supra note 6, at 335.
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a much longer period of time. This argument would support a general
exemption for mineral estates from the application of the Rule since
minerals are finite and will be exhausted at some time.
The court further argues that remainders and executory interests
have similar characteristics. 73 But it ignores the fact that only remainders could be created before the enactment of the Statute of Uses.
The court also ignores the fact that remainders were incapable of following defeasible fee simple estates. In addition, remainders typically
followed the natural expiration of the prior vested estate while executory interests divested the prior vested estate. However, this type of
executory interest is the exception to the Rule because it does not
divest the prior vested estate since the present possessory estate is
described in durational terms. 74 Thus all executory interests which
follow present possessory estates which terminate automatically do
not in theory divest the prior vested estate. The court does not explain whether all executory interests which do not divest, i.e., follow
an automatically terminating estate, will be transformed into
remainders,75
The court suggests that only future interests in mineral estates
that follow defeasible fee simple estates will be remainders. The traditional executory interest following a surface defeasible fee simple interest will not be magically transformed into a remainder. This might
lead to the following conundrum: 0 owns Blackacre, surface and mineral estates, in fee simple absolute. 0 conveys Blackacre to B reserving to himself a 1/2 interest in the surface and the minerals for 20
years and so long thereafter as oil or gas is produced in paying quantities. B's future interest in the surface estate is an executory interest
which is void under the Rule while B's future interest in the mineral
estate would be a remainder. 76
Having slain the executory interest/remainder dragon the court
had more work to do. Contingent remainders, under the modern
view, are indestructible. Therefore they are future interests which are
subject to the remote vesting policy of the Rule. 77 Thus the court had
to find that what was essentially a contingent remainder was a vested
73. See generally SIMES & SMITH, supra note 70, at 103.
74. BROWDER, ET AL., supra note 5, at 240.
75. For example, in the transfer of 0 to A for life so long as demon rum is not sold on the
premises and if sold it shall automatically go to B, B would normally be found to own an executory interest even though B's future interest would not divest the life estate.
76. The court cites as an example a grant of Blackacre from A to B, reserving to A a present fee interest so long as no gambling occurs on the premises. B's interest is classified as an
executory interest which would be void under the Rule. The court erroneously calls A's interest
a fee simple determinable, when it should properly be classified as a fee simple subject to an
executory limitation. Williams v. Watt. 668 P.2d 620, 632 (Wyo. 1983).
77. Under the traditional doctrine ,of destructibility, contingent remainders were certain to
vest or fail to vest at the time the life estate terminated, making the Rule inapplicable. CUNNINGHAM, ET AL., supra note 18, at 104-06.
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remainder. The classic difference between a vested and a contingent
remainder is that contingent remainders are subject to a condition
precedent while vested remainders are not.78 Again the court relies
on the fact that at some point, even if it cannot be ascertained, the
minerals will be exhausted so that there is no condition precedent affecting the vesting of the remainder. Here there is a mere postponement of the enjoyment of possessing the estate to a point which, while
unknown, is certain to occur. This would seemingly run directly contrary to the underlying policy of the Rule about remote vesting, but, as
with possibilities of reverter and powers of termination, the Rule has
not been universally applied to cover all types of remotely vesting future interests,79
Justice Thomas, who concurred in the result,80 disagreed with the
mangling of property jurisprudence. He would treat the Williams' future interest as an executory interest subject to the Rule. 81 He would
then apply an offshoot of the "wait-and-see" doctrine to create a future interest which would not violate the Rule. 82 He states:
[S]ince the executory interest is limited upon alternative contingencies, one of which violates the rule against perpetuities and
the other of which does not, the invalid provision had no impact
upon the validity of the other contingency because the event occurred upon which the efficacy of the valid contingency depended.
There was no mineral production, development, or operation within
the 20-year period, and the rule of perpetuities should not be applied to void Williams' interest. 83
In other words, the court will wait to see if the term-for-years segment
of the grant will be extended into the indefinite-term segment. If not,
the original grant can be construed as retaining a term for years followed by a indefeasibly vested remainder. In this case, the future interest did vest within the period allowed by the Rule and therefore
invalidation was not warranted. While achieving the same result as
the majority, the analysis applies generally accepted property tenets
which do less violence to basic property jurisprudence.84
78. RESTATEMENT OF PROPERTY, supra note 4, § 157 cmt. on cl. d; CUNNINGHAM, ET AL.
supra note 18, at 103. A contingent remainder may be so classified because the takers are unascertained at the time of the transfer. That is sometimes treated as a form of condition precedent.
See generally id.
79. See generally SIMES & SMITH, supra note 70, at 1236, 1239; 2 WILLIAMS & MEYERS,
supra note 6, at 335. The exclusion of the possibility of reverter from the application of the Rule
has been labelled an historical accident with no basis in policy. VI AMERICAN LAW OF PROP.
ERTY § 24.1, at 7 n.3 (1952).
80. Williams v. Watt, 668 P.2d 620, 634 (Wyo. 1983) (Thomas, J., specially concurring).
81. [d. at 633-34. Justice Thomas unfortunately refers to the Land Bank's interest as a fee
simple determinable, rather than a fee simple subject to a condition subsequent. See supra notes
69-70 and accompanying text.
82. CUNNINGHAM, ET AL., supra note 18, at 143-44.
83. Williams, 668 P.2d at 637.
84. A similar approach was adopted by a four-judge concurring opinion in Earle v. International Paper Co., 429 So. 2d 989, 996-97 (Ala. 1983) (Jones, J., concurring specially). In Earle,
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A third approach which employs a legal fiction to avoid application of the Rule has been followed in a number of states. 85 I am not in
favor of creating legal fictions. If the existing common law rule is no
longer appropriate it should be reversed by judicial or legislative action. Creating a legal fiction takes something away from the law by
creating an image of outcome-oriented decisions, rather than a careful
analysis of the issues and rules raised by a particular common law
doctrine.
There is some basis for the legal fiction approach because at one
time there was a significant difference in the way the law treated an
"excepted" versus a "reserved" interest. As noted in Powell on Real
Property: "An 'exception' exists when some part of the ownership of
the grantor is never parted with, while a 'reservation' is the term applicable when the instrument transfers all that the grantor had but
recreates in him some specified interest with respect to the land
transferred."86
The problem with this historical anomaly is that most modern
deed forms use the term "excepting and reserving" which should
make it impossible to determine whether the grantor really intended
to use one or both of these mechanisms.
Where a grantor excepts or reserves a present possessory estate
for a fixed period of time and so long thereafter as oil or gas is produced in paying quantities, if the court finds that a reservation was
intended, it could hold that the entire interest passed to the grantee
who then regranted the mineral estate back to the grantor. With that
fictional regrant the grantee would be retaining the future interest,
which would be a possibility of reverter and, therefore, not subject to
the Rule.
The problem, of course, is determining whether the instrument
was a reservation or exception. The Alabama Supreme Court was
frank and candid about attempting to divine the intent of the parties
to such an instrument when it stated: "Realistically, [the grantor] had
no intent regarding any distinction between withholding an interest
and receiving the same interest from his grantee. He would simply
have intended to convey the property while retaining limited mineral
rights by whatever form of words the lawyers said would be effective."87 The court identified several factors which led it to conclude
the concurring opinion would not technically wait and see. They would validate the retained
interest for the fixed period of time and invalidate it for the indefinite period which followed.
The grantor's retained interest would be severed into valid and invalid segments where there
were two contingencies, one of which would violate the Rule.
85. See e.g., Earle v. International Paper Co., 429 So. 2d 989 (Ala. 1983); Bagby v.
Bredthauer, 627 S.W.2d 190 (Tex. Civ. App. 1981).
86. 6A RICHARD R. POWELL, LAW OF REAL PROPERTY § 887[5] (Rohan rev. 1982).
87. International Paper Co., 429 So. 2d at 993.
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that the deed created a reservation rather than an exception. The first
was the use of words of inheritance, ("heirs and assigns") in the deed.
Again, at common law a reservation technically lasted only for the life
of the reserver while the exception retained the full interest in the
grantor. 88 Thus if the parties intended to create an exception the
words of inheritance would be superfluous. A reality check would undoubtedly uncover the fact that a form deed was used which contains
the words of inheritance not in order to make the reservation perpetual but because words of inheritance have traditionally been included
in deeds for several hundred years. 89
B.
Top Leases
The use of top leases in the oil and gas industry has raised several
questions. One of them entails the appropriate role for attorneys in
the transaction, since one could posit a situation where a lessor is actively trying to disengage herself from an existing lease in order to
receive the benefits of a second lease, when no appropriate grounds
for terminating the first lease exist. But the focus here relates to the
application of the Rule to the typical top-leasing situation.
Depending on the court's characterization, a top lease can be described as a springing executory interest,90 or merely a transfer of a
part of the lessor's possibility of reverter. 91 If the top lease is treated
as a springing executory interest it would run afoul of the Rule. Such
a conclusion was reached by the Texas Supreme Court in Peveto v.
Starkey,92 although the court was interpreting a top deed rather than a
top lease. The analysis, however, would be the same if the language of
the top deed or lease clearly made the conveyance dependent upon
the termination of the prior interest, be it a lease or a defeasible term
interest as in Peveto. If Peveto were generally followed, the practice
of giving top leases would cease. Regardless of the terms of the top
lease or top deed, the practical effect of either instrument is to postpone vesting of the interest in possession until the bottom lease or
deed expires. Since in most cases the bottom lease or deed will expire
88. 6A POWELL, supra note 86, § 887[5]. See also 1 KUNTZ, supra note 42, at 406-08, where
the author notes that "[i]n modern conveyancing, both terms are used in a cumulative fashion in
most instruments, without regard to any distinction." Id. at 407.
89. The Alabama court also emphasized the fact that the term deed and the leasehold habendum clause used similar language. From that the court inferred that the grantor's retained
interest was significantly restricted in favor the of the grantee's interest. Given the fact that the
grantor had retained the full executive power over both the granted and retained interest, I fail
to see the importance of this similarity in terms. International Paper Co., 429 So. 2d at 994.
90. See, e.g., Envirogas, Inc. v. Consolidated Gas Supply Corp., 464 N.Y.S.2d 141 (Sup.Ct.),
affd, 469 N.Y.S.2d 499 (1983); Siniard v. Davis, 678 P.2d 1197 (Okla. Ct. App. 1984); Peveto v.
Starkey, 645 S.W.2d 770 (Tex. 1982).
91. Greenshields v. Superior Oil Co., 233 P.2d 959 (Okla. 1951).
92. 645 S.W.2d 770 (Tex. 1982).
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only because of the lack of, or cessation of, production, the future
interest granted to the top lessee will violate the Rule.
If the top lease is treated as merely a conveyance of part of the
possibility of reverter held by the lessor, then no violation of the Rule
occurs. One who owns a possibility of reverter, which, if it becomes
possessory, will be a fee simple absolute, can presently transfer part of
that interest in the form of a possibility of reverter that will become a
fee simple determinable. The key to this transaction is the present
alienation of an existing future interest, the possibility of reverter. 93
Another way of dealing with top leases is to treat them as commercial transactions falling outside the purview of the Rule. 94 In
Nantt v. Puckett Energy Co. ,95 the top lessor was suing the top lessee
for failing to make certain agreed-to payments after the bottom lease
expired. The top lease provided in part:
This lease is presently subordinate to an existing oil and gas
lease .... Notwithstanding anything to the contrary contained in
this lease, the effective date of this lease shall be the date(s) upon
which the existing lease terminates, for whatever reason, and as to
any or all of the lands contained therein. 96
North Dakota has a statutory Rule, which should have restricted the
court's ability to find exceptions to the Rule's coverage. 97 Even after
admitting that oil and gas leases involve interests in real property, the
court focused in on the commercial nature of leasing and top leasing.
In addition, it applied the canon of construction that favors interpretations which validate rather than invalidate conveyances. The court
does not take the giant step of excising from the Rule's tentacles all
"commercial" options which may affect real property and which have
historically been invalid under the Rule. Instead, it opts for a modified "wait-and-see" approach, noting that in this case the future interest did actually vest within the Rule's period since the bottom lease
expired within 2 years of the execution of the top lease. 98
C.
Conclusion
The Rule has caused a substantial amount of consternation as it
has been applied to oil and gas transactions over the years. From initial attacks against the validity of the oil and gas lease to modern
93. 1 KUNTZ, supra note 42, at 520.
94. 2 WILLIAMS & MEYERS, supra note 6, at 322.
95. 382 N.W.2d 655 (N.D. 1986).
96. [d. at 657.
97. N.D. CENT. CODE § 47-02-27 (repealed 1991).
98. Nantt, 382 N.W.2d at 660-61. For a more explicit adoption of the wait-and-see doctrine
to top leases, without the dicta about commercial transactions, see Siniard v. Davis, 678 P.2d
1197 (Okla. Ct. App. 1984). See also Stoltz, Wagner & Brown v. Duncan, 417 F. Supp. 552
(W.D. Okla. 1976), where the court reformed the instrument to avoid the application of the
Rule.
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problems relating to pooling clauses and top leases, the Rule has
caused many an oil and gas attorney to prematurely age. This does
not have to be the case. Insofar as oil and gas are treated as estates in
land, an oil and gas attorney should be expected to know that certain
future interests would violate the Rule. Parties who create defeasible
term interests, in which the grantor retains the present possessory estate and conveys to the grantee the future interest, should not come
running to the courts for relief from their lack of property law competency.99 Careful drafting and a knowledge of the Rule's application
should avoid most problems.
Drafting can also avoid Rule problems that are caused by the fact
that oil and gas interests are property interests, even though a particular transaction may be more like a commercial deal than a transfer of
a property interest. lOO A wholesale exemption for these types of
transactions from the application of the Rule is unwarranted. Likewise unwarranted is the mangling of the Rule and other property tenets that have been described in the earlier paragraphs. Use of existing
exceptions to the Rule, such as the wait-and-see doctrine may ameliorate some of the harsh impacts of the Rule. But the Rule still serves
important public goals. If it did not, legislatures and courts would
have overturned the Rule long ago. As stated in an early oil and gas
case:
The rule against perpetuities springs from considerations of
public policy. The underlying reason for and purpose of the rule is
to avoid fettering real property with future interests dependent
upon contingencies unduly remote which isolate the property and
exclude it from commerce and development for long periods of
time, thus working an indirect restraint upon alienation, which is
regarded at common law as a public evi1. 101
The Rule still serves those purposes in the oil and gas patch and
should not be abandoned to allow the fettering and encumbering of
property interests with future estates that have the possibility of not
vesting for a lengthy period of time.
IV.
THE MYSTERIOUS ONE-EIGHTH
Oil and gas conveyancing law has been struggling with the problem of describing the nature of the interests owned by the lessor and
the lessee after a lease has been executed. Nowhere has the struggle
99. 2 WILLIAMS & MEYERS, supra note 6, at 16.1.
100. Williams and Meyers note that top leases, successive oil payments, certain provisions in
joint operating agreements which give the operator a power to transform property interests at a
later date, non-consent well provisions, and future acquisition provisions all create Rule difficulties. [d. at 13-14. I would add options to purchase and creation of a pooling or unitization
power to the list. See, e.g., Phillips Petroleum Co. v. Peterson, 218 F.2d 926 (10th Cir. 1954), cert.
denied, 349 U.S. 947 (1955).
101. Weber v. Texas Co., 83 F.2d 807, 808 (5th Cir. 1936).
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been more intense and led to more confusion· than in Texas. 102 This
difficulty arose because a number of early decisions identified the
lessee's estate as only encompassing a 7/8th mineral interesU 03 The
law had to account for the remaining 1/8th mineral interest, so it often
labeled the lessor as the owner, even though the lessor only owned a
1/8th non-possessory royalty interest. In Texas, this 7/8th-1/8th division led to the creation of the so-called "multiple-grant" deed
whereby a grantor who has leased his mineral estate and who wants to
convey his property interests uses a form which describes three different interests. For example, in Alford v. Krum,104 the granting clause
of the deed conveyed "one-half of the one-eighth interest" in the mineral estate, the subject-to clause conveyed "1/16 of all the oil royalty
and gas rental or royalty due" and the future lease clause provided
that the grantee would own "a one-half interest" in the mineral estate. lOS The use of this type of confusing language was caused in part
by the general misunderstanding that the lessor owns a 1/8th interest
after leasing, as well as by a conveyancing rule that did not allow the
present lease benefits to be conveyed in a mere transfer of the mineral
estate. 106
A recent' decision of the Texas Supreme Court brings into focus
the folly of not treating the leasing transaction according to appropriate property law tenets. After a lease has been executed the lessor
has conveyed his entire (100%) possessory estate in the minerals. In a
non-possessory state the lessor has conveyed his entire interest in the
right to search for and capture minerals. The conveyance of a possessory estate, however, is burdened by the lessee's obligation to pay, in
kind or in value, a fractional share of production, if any, that is free of
the costs of production. In addition, the lessee's 100% possessory interest is burdened by any other financial obligations contained in the
lease such as delay rental payments. The lessor retains in most states
100% of the mineral estate as a possibility of reverter. In Oklahoma,
the lessor would retain 100% of the mineral estate as a right of reentry or power of termination. The mineral owner after leasing owns
no part of the present estate, be it possessory or non-possessory.
102. See generally Kramer, Sisyphean, supra note 17, 19-43.
103. See, e.g., W.T. Waggoner Estate v. Wichita County, 273 U.S. 113 (1927); Sheffield v.
Hogg, 77 S.W.2d 1021 (Tex. 1934); Tipps v. Bodine, 101 S.W.2d 1076 (Tex. Civ. App. 1936).
104. 671 S.W.2d 870 (Tex. 1984), overruled, Luckel v. White, 819 S.W.2d 459 (Tex. 1991).
105. Alford, 671 S.W.2d at 871.
106. See generally Kramer, Sisyphean, supra note 17, at 39-40. At the time that many of
these deeds were drafted, Texas followed the rule that a transfer of a mineral interest that had
been leased did not transfer either the delay rentals or the royalties payable under the existing
lease. Caruthers v. Leonard, 254 S.W. 779 (Tex. Comm'n App. 1923). Caruthers was overruled
in Harris v. Currie, 176 S.W.2d 302 (Tex. 1943), but the use of the multiple-grant deed form has
not been abandoned.
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In Jupiter Oil Co. v. Snow,107 the Texas Supreme Court in interpreting a multiple-grant deed revived the notion that the lessor magically retains some part of the mineral estate after a lease has been
executed. The granting clause of a deed conveyed a 1/16 mineral interest. The subject-to clause contained the following language:
"[grantee was to] receive 1/16 part of the oil, gas or other mineral ...
produced by the holder of the lease . . ., that grantors herein now
intend to convey 1/2 of the interest they now have." The future-lease
clause conveyed "an undivided 1/2 of all [the oil]."lo8
There is a conflict between the granting clause and the first part
of the subject-to clause, and the other part of the subject-to clause and
the future lease clause. The former clauses evince an intent to transfer
a 1/16th mineral interest while the latter clauses evince an intent to
transfer a 1/2 mineral interest. The court concluded that the parties
intended to transfer a 1/2 mineral estate. Instead of supporting that
interpretation by giving preemptive weight to the future lease clause,
the court tried to give meaning to all of the provisions of the deed. In
so doing it invoked the 7/8-1/8 false prophet.
The granting clause unequivocally conveyed a 1/16 mineral interest. What did that mean? According to the court, the granting clause
"immediately gave the grantee a 1/16 interest in the mineral estate."109 An immediate transfer of the possessory estate was not possible since the lessee was the owner of the grantor's entire interest.
What could the lessor/grantor convey? All or a part of his possibility
of reverter. If the court is saying that the deed presently transfers a
1/16th interest in the possibility of reverter how did the court ultimately conclude that a full 1/2 mineral estate was conveyed? It did so
by stating that the future lease clause transferred 1/2 of 7/8 of the possibility of reverter. This conclusion is implicitly based on the erroneous presumption that the grantor retained a 1/16 present possessory
estate after the lease. If not, then the grantor/lessor had a 15/16 interest, the granting clause having transferred a 1/16th interest, which
would attribute to the future lease clause a 1/2 of 15/16 or a 15/32
transfer. If you add the 1/16 transferred by virtue of the granting
clause and the 15/32 transferred by virtue of the future lease clause,
the grantee received a 17/32 mineral estate and not a 1/2 mineral estate. The judicial conundrum was caused in part by the court's desire
to avoid giving preemptive weight to either the granting or future
lease clauses when they are in conflict. But where a multiple-grant
deed form is used and the granting and future lease clauses use incon107. 819 S.W.2d 466 (Tex. 1991).
108. [d. at 467. The subject-to clause was reproduced in the court of appeals decision. Snow
v. Jupiter Oil Co., 802 S.W.2d 354, 356 (Tex. Civ. App. 1990), rev'd, 819 S.W.2d 466 (Tex. 1991).
109. Jupiter Oil, 819 S.W.2d at 468-69.
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sistent fractions, they cannot be reconciled since both clauses describe
the lessor's interest in the possibility of reverter. By attempting to
give meaning to both clauses, the court hopelessly confused the issue
and wreaked havoc with basic property law concepts.
V.
REAL COVENANTS-HEREIN OF ASSIGNMENTS AND SUBLEASES
In order for a covenant or promise between two parties to be
enforced or enforceable against successive owners of the respective
estates, the parties must intend the covenant to be binding on successive owers, the promise must touch and concern the estate in land,
there must be horizontal privity between the covenantor and covenantee and there must be vertical privity between the successive
owner and either the original covenantor or covenantee. 110 Because
of the importance of implied covenants to oil and gas law,lll the ability of the lessor to enforce those covenants against successors in interest to the original lessee was critical. The only requirement that
creates some problems for concluding that leasehold implied covenants are real covenants whic~ run with the land is the vertical privity
requirement.
The same problem also arises in the traditional landlord/tenant
relationship, where a key distinction is between an assignment and a
sub-lease. In simple terms, where the tenant assigns his complete interest to his grantee, vertical privity is found so that the original landlord may sue the assignee or vice-versa, should either party breach a
covenant contained in the lease. llZ But where the original tenant retains a reversion, or in some states merely a power of termination, the
conveyance is considered a sub-lease and the vertical privity requirement may not be met. 113 In most jurisdictions the courts will find an
assignment as long as no reversion has been retained by the original
tenant. 114 But in a number of jurisdictions, including the oil-producing states of California and Texas, the reservation of a power of termination will trigger the finding that only a sub-lease has been executed
even where the transferee is otherwise entitled to possess the original
tenant's interest for the full term. ll5
110. CUNNINGHAM, ET AL. supra note 18, at 476-77. See also CHARLES CLARK, REAL COVENANTS AND OTHER INTERESTS WHICH "RUN WITH LAND" (2d ed. 1947).
111. See generally MAURICE MERILL, COVENANTS IMPLIED IN OIL AND GAS LEASES (2d ed.
1940).
112. BROWDER, ET AL., supra note 5, at 623.
113. Amco Thust, Inc. v. Naylor, 317 S.W.2d 47 (1958). See generally CUNNINGHAM, ET AL.
supra note 18, at 387-88.
114. See, e.g., Haynes v. Eagle-Picher Co., 295 F.2d 761 (10th Cir. 1961), cert. denied, 369
U.S. 828 (1962); Berkeley Development Co. v. Great Atlantic & Pacific Tea Co., 518 A.2d 790
(N.J. 1986); Neal v. Craig Brown, Inc., 356 S.E.2d 912 (N.C. Ct. App. 1987).
115. This doctrine is sometimes called the "Massachusetts Rule" since that jurisdiction was
the first to adopt it in 1881. See Dunlap v. Bullard, 131 Mass. 161 (1881). See also Hartman
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These landlord/tenant principles are also applicable in theory to
the oil and gas leasehold relationship. Where less than the entire estate has been conveyed to an assignee of the lessee, no privity of contract or privity of estate exists between the transferee and the original
lessor which would support an action to enforce an express or implied
covenant. 116 This would especially be true in jurisdictions such as
Texas and California since the reservation of an overriding royalty interest would be treated as the functional equivalent of a less-thancomplete transfer.l 17 This would suggest that the original lessor could
not sue the transferee of the original lessee for breach of any express
or implied covenants. This result would have obviously been intolerable from the lessor's viewpoint as well as causing substantial harm to
the public interest in requiring a multiplicity of lawsuits to remedy a
breach of an oil and gas lease.
The California Supreme Court in Hartman Ranch Co. v. Associated Oil CO.118 faced this vertical privity dilemma and, in dictum,
clearly created an exception for oil and gas lease transfers which
would allow the lessor to sue the successor in interest of the lessee for
money damages for the successor's breach of the implied covenant to
prevent drainage. Associated Oil had received a transfer of the leasehold interest from Dabney. In that transaction Dabney had retained
an overriding royalty interest. Since California follows the rule that
even the reservation of a contingent future interest makes the transfer
a sub-lease the court had to deal with the vertical privity issue.
It did so in two ways, one of which did no damage to common law
real covenant jurisprudence, the other of which did. The court initially decided that Associated Oil was liable for the breach of the implied covenant because the transfer to them amounted to a "contract
of assumption" or a third-party creditor beneficiary contract which
would inure to the lessor's benefit even though the lessor was not a
party to that agreement. 119 This ratio decidendi does not invoke real
covenant terminology but nonetheless holds the successor in interest
directly liable.
But the court, in dictum, was afraid that in deciding the case on
the contract-of-assumption rationale, it would leave open the question
of liability in other oil and gas lease transfer cases where the contract
Ranch Co. v. Associated Oil Co., 73 P.2d 1163 (Cal. 1937); Davis v. Vidal, 151 S.W. 290 (Tex.
1912).
116. RICHARD HEMINGWAY, THE LAW OF OIL AND GAS 556-57 (3d ed. 1991).
117. Hartman Ranch, 73 P.2d 1163; Smith v. Sun Oil Co., 116 So. 379 (La. 1928); Sunburst
Oil & Refining Co. v. Callender, 274 P. 834 (Mont. 1929). A number of states, however, hold to
the contrary. See, e.g., Texas Co. v. Mattocks, 204 S.W.2d 176 (Ark. 1947); Connell v. Kanwa
Oil, 170 P.2d 631 (Kan. 1946); Davis v. Lewis, 100 P.2d 994 (Okla. 1940).
118. 73 P.2d 1163 (Cal. 1937).
119. 73 P.2d at 1170.
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between the lessee and its successor was not as clear in providing for
the assumption of the burdens of the various implied or express covenants. While admitting that a lessor cannot ordinarily sue a sublessee
directly for money rental, the court determined that such a rule would
have a deleterious impact on lessors who were claiming that oil or gas
was being drained from their premises. The court stated:
But where rent or royalty under an oil lease is a percentage of
the oil produced, or the proceeds therefrom, it would seem, in line
with certain decisions involving other royalty problems, that the lessor has a definite property right in specific property, in the royalty
percentage ... and that the lessee by executing a sublease rather
than an assignment cannot defeat the lessor's direct right against the
party by whom the oil has been produced. .... It would be but a
step to hold that the lessor, upon breach of a covenant to protect
against drainage, may sue the sublessee to recover his lessor's percentage upon oil not removed through wells on the leased premises,
but drained from said premises by the sublessee through his wells
on adjoining land. 12o
With one fell swoop the law of real covenants has been changed for oil
and gas leases. The court never undertook to analyze the policies that
restrict the enforcement of the burden of real covenants to successors
in interest of the estate being burdened. The court did not expressly
limit its vertical privity exception to the implied covenant to prevent
drainage, which suggests that all of the implied covenants may be enforced against sublessees even though there is an absence of vertical
privity.
VI.
THE DIFFERENCES BETWEEN A CANON OF CONSTRUCTION
AND A RULE OF LAW
In interpreting written instruments affecting real property, many
states have developed canons of construction that assist them in ascertaining the intent of the parties. 121 As a leading treatise on real property has stated:
Canons of construction are merely statements of judicial preference for the resolution of a particular problem. They are based
on common human experience and are designed to achieve what
the court believes to be the "normal" result for the problem under
consideration. Thus, their purpose is not to ascertain the intent of
the parties to the transaction. Rather, it is to resolve a dispute when
it is otherwise impossible to ascertain parties' intent. 122
120. [d. at 1171. This case involved so-called "fraudulent drainage" whereby the drainage
was being caused by wells owned or operated by the same lessee. Whether this exception to the
rule of vertical privity is restricted to such cases is not spelled out in the decision.
121. I have written extensively about the plethora of canons used by the Texas courts which
has oft-times led to inconsistent results and uncertainty in the interpretation of written instruments. See Kramer, Sisphyean, supra note 17.
122. 6A POWELL, supra note 86, § 899(3), at 81A-108.
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Courts mayor may not use canons to assist them in interpreting a
document and they may choose from a host of canons, some of which
may be inconsistent. 123
As opposed to a canon, a rule, such as the rule against perpetuities, must be applied in situations where the conditions for its application are met. When applied, rules lead to a single result and are most
likely to be intent-defeating, rather than intent-effectuating. As discussed above,124 parties which want to create interests that are too
remotely vesting for purposes of the rule against perpetuities have
those interests voided.
Courts have the option in resolving property disputes to use canons or rules. When courts chose rules the results are certain and
people can rely on them. When courts chose canons, the results are
less certain since the courts are reasonably free to apply different canons and reach a different result when they are looking at a different
document.
In the conveyancing field, many problems are created by the use
of fractional interests to describe granted or reserved interests. One
particular problem occurs where there is an outstanding recorded
fractional interest. The following hypothetical raises the essential issues: 0 owns a 1/2 mineral estate in Blackacre by virtue of a properly
recorded deed. R owns the remaining 1/2 mineral estate plus 100 percent of the surface. R transfers Blackacre to E reserving an undivided
1/2 mineral interest. 125
How is the mineral estate to be divided between Rand E? Theoretically there are three options: (1) R owns 1/2 and E owns 0; (2) R
owns 0 and E owns 1/2; and (3) R owns 1/4 and E owns 1/4. No court
seems to have accepted the third result, namely that R intended to
retain 1/2 of what he had, which was 1/2. The issue to be resolved,
therefore, is whether R or E was to be the owner of the 1/2 mineral
estate with the other left holding the bag.
In resolving that issue, courts could rely on canons of construction to assist them in ascertaining the intent of the parties. For example, the "greatest estate" canon, which gives to the grantee the largest
estate that the language of the deed will justify, might be applied. 126
Or a court could apply the "construe against the scrivener or the grantor" canon to reach a particular result depending on who was respon123. See, e.g., Gibson v. Watson, 315 S.W.2d 48 (Tex. Civ. App. 1958) (the court, by conservative count, listed twelve different canons of construction in resolving a multiple-fraction
problem).
124. See supra notes 56 to 101 and accompanying text.
125. For a more complete examination of this problem, see 2 WILLIAMS & MEYERS supra
note 6, at 311.
.
126. Kramer, Sisyphean, supra note 17, at 117-23.
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sible for the drafting of the deed. 127 But the leading case which lent
its name to the rule that is applied in these fractional-conveyancing
situations rejected the canon approach and instead opted to adopt a
rule of law that would apply if several conditions were met. Thus, the
court in Duhig v. Peavy-Moore Lumber CO.,128 found that E was the
owner of the 1/2 mineral estate while R had retained nothing. 129 This
was treated as a rule of law, not a canon of construction by many of
the courts which adopted the "Duhig rule."130 Thus, if the deed form
used does not expressly cover the impact of the outstanding fractional
mineral interest, a reservation of a similar fractional interest in the
deed will not inure to the grantor. Instead, the grantee will take the
fractional mineral interest which is determined by subtracting the reserved fraction from 100 percent.
Drafters can easily avoid this problem by either specifically noting the existence of the outstanding fractional interest and stating that
the reservation in the grant is in addition to the outstanding interest or
by merely denoting in the deed what fractional interest, if any, the
grantee is supposed to receive. But since lawyers are creatures of
habit, the deed forms used tend not to allow for such "creative" writing and Duhig-type problems continue to plague the court system.
Once a jurisdiction adopts the Duhig rule, title certainty should
be achieved. If the prior fractional mineral interest is recorded the
grantor who executes a warranty deed will retain nothing under the
hypothetical fractions used above even where the grantee had actual
knowledge of the outstanding mineral interest. l3l But in North Dakota the jurisprudence is, unfortunately, not so clear. North Dakota
initially followed the Duhig rule in the case of a fractional reservation
where there was an outstanding fractional interest not specifically
127. [d. at 103-05, 108-17.
128. 144 S.W.2d 878 (Tex. 1940).
129. There were two different rationales for reaching this result. Commissioner Smedley,
who wrote the opinion for the Texas Commission of Appeals, analyzed the problem as a simple
matter of construction. The language of the deed clearly evinces an intent to convey all of the
surface and 1/2 of the minerals. The reservation merely refers to the outstanding 1/2 mineral
estate owned by the third party. [d. at 879-80. See also WILLIAMS & MEYERS, supra note 6, at
311. The remaining justices agreed with the result but were concerned about the apparent conflict between the expressed intent to grant 1/2 of the minerals and the expressed intent to reserve
to the grantor 1/2 of the minerals. Thus, they argued that it was not merely a constructional issue
but an issue involving a doctrine analogous to estoppel by deed. Having warranted, through a
warranty deed, the title to the surface and 1/2 of the minerals, the grantor was estopped to deny
that the grantee was to receive the 1/2 mineral estate. Duhig, 144 S.W.2d at 880. The fact that
the grantee had actual or constructive knowledge of the outstanding 1/2 mineral estate would
not defeat the estoppel-by-deed rationale.
130. See, e.g., Brown v. Kirk, 257 P.2d 1045 (Colo. 1953); Salmen Brick & Lumber Co. v.
Williams, 50 So. 2d 130 (Miss. 1951); Kadrmas v. Sauvageau, 188 N.W.2d 753 (N.D. 1971); Ewing
v. Trawick, 256 P.2d 182 (Okla. 1953); Body v. McDonald, 334 P.2d 513 (Wyo. 1959).
131. An exception can be made where the grantor can show that the parties intended the
grantor to retain the reserved mineral interest and grounds for reformation of the instrument,
such as mutual mistake, fraud or duress, can also be proven. See 2 WILLIAMS & MEYERS, supra
note 6, § 580.37, at n.ll.
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mentioned in the deed. 132 There was, however, a mid-course change
triggered by the holding in Gilbertson v. Charlson. 133 The facts in Gilbertson present a classic Duhig-type problem. G.S. Thorlackson
owned the surface and ninety-five percent of the minerals when he
died intestate. Three children, Louise, Pauline and Paul, inherited a
1/3 interest in the surface and the minerals. Paul and Louise then conveyed by warranty deed the entire surface estate but reserved and excepted fifty percent of the minerals underlying the estate. 134 The
grantee had actual notice of the outstanding interests held by North
Dakota and herself. Nonetheless, since the parties used a warranty
deed, the Duhig rule would find that the grantors impliedly warranted
a transfer of fifty percent of the mineral estate. Since they owned 631/3 percent of the minerals, they would be left with a total of 13-1/3
percent.
The Gilbertson court did not follow the Duhig rule, but rather
converted Duhig's estoppel-by-deed analysis into an estoppel-in-pais
analysis. It distinguished the earlier North Dakota case which had
adopted the Duhig rule on the basis that the facts did not show that
the grantee had actual or constructive knowledge of the outstanding
mineral interests. Notice, however, is irrelevant to the application of
the Duhig rule. In almost all of the cases applying the Duhig rule,
actual or constructive knowledge is clearly shown. Nonetheless, the
grantee is found to be entitled to the entire difference between the
fraction reserved and 100 percent. If notice is injected as a reason to
deny the application of the Duhig rule, the rule disappears from the
conveyancing scene because almost all deeds are recorded and therefore the grantee will take with constructive notice of the outstanding
fractional interest. By applying traditional equitable-estoppel principles the court was adopting a new rule which would favor the grantor
in fractional-reservation cases. 135
Gilbertson, however, was not the final word in North Dakota.
Only two years later the North Dakota Supreme Court limited Gilbertson to its "unique" facts and reinstituted the Duhig doctrine in
cases where there the grantee has actual or constructive notice of the
outstanding fractional mineral interests. 136 Citing extensively from
the Williams & Meyers treatise, the court found that the proper analysis is to place the risk of loss of title on the party giving the warranty.
The issue is not what the grantor intended to reserve but what the
132. Kadrmas v. Sauvageau, 188 N.W.2d 753 (N.D. 1971).
133. 301 N.W.2d 144 (N.D. 1981).
134. [d. at 145.
135. For a critical analysis of Gilbertson, see Richard Maxwell, Some Comments on North
Dakota Oil and Gas Law, 58 N.D. L. REV. 431 (1982).
136. Sibert v. Kubas, 357 N.W.2d 495 (N.D. 1984).
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grantor purported to transfer. 137 One reason why the court may have
shifted grounds so quickly was identified by several academicians who
commented as follows on the aftermath of Gilbertson:
An explosion of title· research reportedly took place after the
North Dakota Supreme Court's decision in the Gilbertson case.
The court's rejection of a settled rule of property had a domino effect upon the titles of other persons. Landmen made extensive
searches of deed records in an attempt to find Duhig fact situations,
and then acquired leases from grantors who had reserved an interest in minerals at a time when an interest existed in a third party.D8
VII.
SOME CLOSING THOUGHTS
I began this essay by noting the continued de-emphasis on the
property antecedents of oil and gas jurisprudence. The anecdotal exceptions which I have highlighted here, and of which I am sure there
are many more, do not convince me that property tenets are no longer
the skeleton upon which oil and gas jurisprudence is founded. While
there has been a gradual chipping away at the extremities of the skeleton, the basic underlying theme of oil and gas law is still undeniably
rooted in property concepts developed over the past 1000 years. The
fact that neither legislative bodies nor courts have been willing to
drastically re-write the basic property rules, or carve out exceptions
for oil and gas transactions, is further evidence of property law's vitality. The fact that exceptions exist merely reaffirms my view that the
common law is a wonderful device for keeping up with the times and
providing a system of rules that achieves several important societal
objectives, including stability, public confidence that the system is governed by the rule of law, rather than the rule of persons; and producing change where change is needed to meet new and innovative
problems that challenge humankind in dealing with interpersonal relations. Property law was the parent of oil and gas law. As with all
children who age and mature, there has been a parting of the ways,
but the essential relationship is still there and will continue to be there
for the immediate future. Title certainty is more than a hackneyed
phrase. In withdrawing the Duhig rule the court set in motion substantial forces which rippled through the oil and gas industry in North
Dakota. Having once adopted a rule, rather than a canon of construction, courts should be very circumspect about reversing or substantially modifying such rules because of the tremendous impact that
such a decision will have on the settled expectations of those involved
in the conveyancing business.
137. 2 WILLIAMS & MEYERS, supra note 6, § 580.36.
138. EUGENE KUNTZ, ET AL., OIL AND GAS LAW 579 (1st ed. 1986). The Duhig rule has
been followed consistently since Sibert and reinforced as a rule of law that is to be applied
regardless of the knowledge of the parties. Acoma Oil Corp. v. Wilson, 471 N.W.2d 476 (N.D.
1991); Mau v. Schwan, 460 N.W.2d 131 (N.D. 1990).
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