In Northern Oil & Gas, Inc. v. EOG Res., Inc.,[1] the Supreme Court of North Dakota reviewed two fundamental aspects of real property conveyancing: the doctrines of “delivery” and “actual notice.” The facts, which read a lot like a law school hypothetical, are as follows.
Ritter, Laber and Associates, Inc. (“Ritter”) was a joint venture that was locating unleased minerals owners and leasing their interests in North Dakota. In 2006, Ritter approached Eugene and Carol Hanson (the “Hanson Parents”) about leasing their mineral interest in Mountrail County. As a result, the Hanson Parents executed an oil and gas lease (the “2006 Lease”) and a separate “Side Letter Agreement.” Per the Side Letter Agreement, the 2006 Lease was to be recorded upon completion of a satisfactory title check. In the event the Hanson Parents’ title failed, the lease was to remain unrecorded and be of no further effect. The essence of these two documents was that Ritter was attempting to create an option to lease that it could exercise once it was assured that the Hanson Parents had good and defensible title to their minerals.[2]
The timeline of events following the 2006 Lease and Side Letter Agreement is important. In April 2007, the Hanson Parents conveyed the subject mineral interest to their son and daughter-in-law, Kelly and Denise Hanson (the “Hanson Kids”). In May 2007, Ritter recorded a “Memorandum of Oil and Gas Lease Option” referencing the 2006 Lease. Around July 2007, Ritter recorded the 2006 Lease and sent the Hanson Parents a bonus payment and a letter stating that it had “elected to exercise its option to lease.” Ritter then assigned the 2006 Lease to EOG Resources, Inc. (“EOG”). Apparently sensing an opportunity, Ritter took a new lease (the “2007 Lease”) from the Hanson Kids in December 2007. The 2007 Lease was duly recorded and assigned to Northern Oil & Gas, Inc. (“Northern”).[3]
In 2016, Northern sued to determine whether the Hanson minerals were leased under EOG’s 2006 Lease from the Hanson Parents or Northern’s 2007 Lease from the Hanson Kids. The district court found that: (i) the first transaction between the Hanson Parents and Ritter created a mere option to lease; (ii) the Hanson Kids did not have notice of said option at the time they acquired the interest; and (iii) the Hanson Kids were bona fide purchasers who took title free and clear of the 2006 Lease and Side Letter Agreement. Thus, the lower court found in favor of Northern’s 2007 Lease, and EOG filed this appeal.[4]
The first issue examined by the Supreme Court was whether the 2006 Lease created an immediately effective lease or a mere option to lease. The concept of deed “delivery” was central to this analysis. In the North Dakota Century Code, a written transfer of real property is referred to as a “grant.”[5] A grant takes effect only upon its delivery; whether delivery has occurred depends on the grantor’s intent.[6] This fact-based inquiry turns on “the circumstances surrounding the transaction.”[7] In addition to these basic rules, the Supreme Court noted that under North Dakota law a grant cannot be delivered to a grantee conditionally (i.e., with the intent that title transfer upon some contingency or condition).[8] Unless some condition or contingency is included in the four corners of the instrument itself, it is “absolutely effective” upon delivery.[9] This prevents the effectiveness of a duly executed deed from being predicated on some unrecorded or otherwise unexpressed requirement.[10] The Court was careful to distinguish that the effectiveness of a real property grant itself may be conditional, but not its delivery.[11]
As noted above, the district court had held that the 2006 Lease, when combined with the Side Letter Agreement, created a mere option to lease. In reversing the district court’s decision, the Supreme Court held that although the Side Letter Agreement promised title would only transfer to Ritter following a successful title examination, the Hanson Parents had actually relinquished their title when they signed and handed over the 2006 Lease, reversing the district court’s decision. When a grantor manually delivers a conveyance “absolute in form,” he makes an absolute delivery and title passes immediately.[12] In fact, any conditions created outside the four corners of the lease are void for purposes of delivery as a matter of law.[13]
Based on the above, even if the Hanson Parents had intended to create an option, the 2006 Lease could not, as a matter of law, be delivered subject to conditions such as an option. The Supreme Court was equally unconvinced by Northern’s argument that the 2006 Lease and the Side Letter Agreement should be read as part of the same transactions as opposed to “stand-alone documents.” Instead, the Court opted for a four-corners approach, holding that the 2006 Lease did not internally reference the Side Letter Agreement, and the Side Letter Agreement was therefore inadmissible extrinsic evidence.[14]
It is important to note that “delivery by a grantor” and “acceptance” by a grantee are opposite sides of the same coin in real property conveyances, and both must be present for title transfer to take place. In reaching its decision in this case, the Court expressly rejected a line of Texas cases that appear to cut the other way. In Puckett v. Hoover,[15] the Supreme Court of Texas found that no transfer had occurred because the grantee had “no intention of accepting the . . . conveyance unless he [first] approved the title.” Similarly, Sun Exploration & Production Co. v. Benton held that when “the grantee imposes certain conditions precedent to acceptance, title does not pass under the deed until fulfillment of such conditions.”[16] The North Dakota Supreme Court held that this line of reasoning was rejected by the legislature when the Century Code made conditional deliveries “absolute.”[17]
Having determined that the 2006 Lease was effective before the Hanson Parents conveyed their minerals to the Hanson Kids, the Court turned to the implications of the 2006 Lease being recorded after the 2007 mineral transfer. In North Dakota, as in most other states, recording an instrument puts the public on “constructive” notice of its contents.[18] Conversely, an unrecorded instrument is valid only as to the parties to the instrument and those with “actual” or “inquiry” notice of its contents.[19] Thus, unrecorded instruments are void against subsequent good-faith purchasers for value without notice (often called “bona fide” purchasers).[20] Actual notice consists of express information of a fact,[21] while “constructive” notice is imputed by law.[22] “Inquiry” notice is a form of constructive notice that involves awareness of a particular fact without further reasonable investigation.[23]
In determining whether the Hanson Kids took their interest free and clear of the unrecorded 2006 Lease, the Court cited deposition testimony from Kelly Hanson. Kelly made clear that although his knowledge of the 2006 Lease was superficial, he was at least aware of its existence and knew the minerals of his parents were leased. Thus, the Hanson Kids were deemed to have at least inquiry (if not actual) notice of the 2006 Lease and could not be bona fide purchasers. As the 2006 Lease was delivered and the Hanson Kids were on notice of its existence, the 2007 Lease was a mere top lease.[24]
This case deals with the seldom-discussed “delivery” of a conveyance and draws an interesting distinction between a conditional grant and a conditional delivery. At least in North Dakota, a party being in physical possession of a document seems to create a fairly strong presumption of the intent to deliver. Moreover, this case also demonstrates that courts can be unpredictable in their willingness to look at surrounding circumstances or multiple documents as part of the same transaction. Finally, this case illustrates the fact-intensive analysis applied to determine whether a party is charged.
[1] 2022 N.D. LEXIS 180.
[2] Id. at 2-4.
[3] Id.
[4] Id. at 4-5.
[5] N.D.C.C. § 47-09-05.
[6] N.D.C.C. § 47-09-06; Shuck v. Shuck, 44 N.W.2d 767, 772 (N.D. 1950).
[7] Rice v. Neether, 888 N.W.2d 749 (N.D. 2016).
[8] N.D.C.C. § 47-09-07.
[9] Id.
[10] 2022 N.D. LEXIS 180, 8. The court notes here that a grant may be delivered in escrow to a third party subject to conditions without running afoul of N.D.C.C. § 47-09-07.
[11] Id.
[12] Id. at 6-8.
[13] Id. at 11.
[14] Id. at 12-13.
[15] 202 S.W.2d 209 (Tex. 1947).
[16] 728 S.W.2d 35 (Tex. 1987).
[17] N.D.C.C. § 47-09-07.
[18] N.D.C.C. § 47-19-19.
[19] N.D.C.C. § 47-19-46.
[20] N.D.C.C. § 47-19-41; Northern Oil & Gas, Inc. v. Creighton, 830 N.W.2d 556 (N.D. 2013).
[21] N.D.C.C. § 1-01-23.
[22] N.D.C.C. § 1-01-24.
[23] Farmers Union Oil Co. of Garrison v. Smetana, 746 N.W.2d 665 (N.D. 2009).
[24] See 2022 N.D. LEXIS 180, 15-18.
Brad represents clients in connection with upstream energy transactions, complex mineral titles, pooling issues, lease analysis, joint operating agreements, surface use issues, title curative and general oil and gas business matters.