Flatland Falls Flat When Attempting to Shift an NPRI Burden

AUTHOR(s)

txjack

 

In Brooke-Willbanks v. Flatland Min. Fund, LP,[1] the Eastland Court of Appeals reviewed whether a nonparticipating royalty interest (“NPRI”) will burden a conveyed mineral interest when the deed does not expressly address burden allocation.  In 2014, Kay Brooke-Willbanks (“Kay”) executed a deed (the “2014 Deed”) in favor of Flatland Mineral Fund, LP (“Flatland”). The 2014 Deed conveyed “an undivided 72 Net Mineral Acres…subject to any valid and subsisting oil, gas and other mineral lease or leases on said land…” A valid oil and gas lease covered the subject minerals when the 2014 Deed was executed and remained in place when Flatland later went to sell a portion of its mineral interest in the subject land.[2]

In 2018, Flatland entered into negotiations for the sale of a portion of its minerals to a third party. At this time, Flatland became aware of two preexisting NPRIs burdening the subject land. When Kay refused to execute a correction to the 2014 Deed, Flatland brought suit.[3] The primary issue on appeal is whether Kay bears the entire burden of the preexisting NPRIs (and Flatland acquired its interest-free and clear), or whether Flatland is burdened by its proportionate share of the outstanding NPRIs.

Finding the 2014 Deed unambiguous, the court considered several important rules. First, deeds are construed to confer upon the grantee the greatest estate that the terms of the instrument will allow.[4] Thus, a deed will pass whatever interest the grantor possesses in the land unless the deed contains language expressing a clear intent to grant a lesser estate.[5] For example, a warranty deed will pass a Grantor’s entire estate unless said deed contains express reservations or exceptions.[6] However, as a general rule, “the conveyance of an interest in the minerals in place carries with it by operation of law the right to a corresponding interest in the royalty.”[7] Under this principle, “a severed fraction of the royalty interest—like [an] NPRI—generally would burden the entire mineral estate because it necessarily limits the royalty interests attached to the underlying mineral interests.”[8]

Based on the above, the “default” rule in Texas is that parties will share an NPRI burden in proportion to their ownership of the minerals.  However, they are “free to contract for whatever division of the interests suits them.”[9] If the parties to a deed desire for their agreement to operate differently from this basic principle of mineral conveyance, they should “plainly and in a formal way express that intention.”[10]  Here, the court found no such intent expressed in the 2014 Deed. In fact, the Deed’s language clearly expressed an intent to follow the general rule.

In support of its conclusion, the court noted that the 2014 Deed was made “subject to” the existing oil and gas lease. So long as the lease remains in full force and effect, Flatland and its successors own only the associated royalty interest and the future reversionary interest.[11] Since the right to receive royalty payments, in addition to a future reversionary interest, was the only interest conveyed, the court invoked Wenske v. Ealy[12] in explaining again that (1) a conveyance of minerals carries with it the corresponding royalty and (2) an NPRI burdens the entire mineral estate as it’s attached to said corresponding royalty interest.

As an interesting aside, the 2014 Deed conveyed an undivided 72 Net Mineral Acres and the parties disagreed as to the meaning of the term “net mineral acres.” The court noted that although this term is infrequently discussed in oil and gas jurisprudence, it is commonly used to define a mineral interest that is conveyed by a deed or a lease.[13] In the context of a deed, one net mineral acre is typically considered to equal the fee-simple mineral estate in one gross acre of land. [14] Further, the term “net mineral acre” is often used in mineral deeds when uncertainty exists concerning the total mineral acres that the grantor is able to convey.[15] Here, the court holds that the term “net mineral acre” as used in the deed’s granting clause means an undivided fee simple mineral interest in the 72 acres that Kay conveyed to Flatland, including the right to receive royalty payments therefrom (subject, of course, to its proportionate share of the NPRI burden).[16]

Ultimately, the court held that the 2014 Deed conveyed a proportionate NPRI burden to Flatland. This outcome may have been avoided if Flatland had performed a more thorough title examination before acquiring Kay’s minerals. Had Flatland done so, it could have included “plain and formal”[17] language shifting the entire NPRI burden to Kay in the 2014 Deed.  As a parting note, the court declined to apply Duhig-style estoppel in this case, stating merely that the Duhig holding is “narrow in scope and confined to the specific facts of that case.”[18]  We also note that a prior Texas case, the venerable case of Selman v. Bristow,[19] still stands for the proposition that if there is no “subject to” language at all, then the grantee may take free and clear of the prior outstanding NPRI. Courts, as always, will look to the four corners of the instrument to determine intent.

*Updated on October 31, 2023

 

[1] Tex. App. LEXIS 216; 660 S.W.3d 559 (Tex. App.—Eastland 2023, no writ).

[2] Id. at 4.

[3] Id.

[4] Lott v. Lott, 370 S.W.2d 463, 465 (Tex. 1963)

[5] Rahlek, Ltd., 587 S.W.3d at 64.

[6] 2023 Tex. App. Lexis 216 at 8.

[7] Id. at 11.

[8] Id.

[9] Id.

[10] Id.

[11] Id. at 12.

[12] 521 S.W.3d at 797.

[13] 2023 Tex. App. Lexis 216 at 9.

[14] See Clifton A. Squibb, III. Title Defect Provisions and Issues, State Bar of Tex., TXCLE Oil, Gas and Min. Title Examination Course 13-III, 2020 WL 3978553 (2020).

[15] Ethan M. Wood, III. Some Scenarios Where On-The-Ground Surveys Matter, State Bar of Tex., TXCLE Oil, Gas and Min. Title Examination Course 6-III, 2022 WL 3162027 (2022) (“many conveyances convey a fixed number of ‘net mineral acres’ such that the numerator of the fractional interest will stay constant while the denominator changes upon resurvey”).

[16] 2023 Tex. App. Lexis 216 at 9.

[17] Benge v. Scharbauer, 152 Tex. 447, 259 S.W.2d (1953)

[18] 2023 Tex. App. Lexis 216 at 14 (citing to Duhig v. Peavy-Moore Lumber Co., 144 S.W.2d 878 (Tex.Civ.App. 1966).

[19] 402 S.W.2d 520 (Tex.Civ.App—Tyler 1966).  See also Acoma Oil Corp. v. Wilson, 471 N.W.2d 476 (N.D. 1991), which cites to Selma and Duhig applies a similar rule in North Dakota.  The Acoma court also cites heavily to the New Mexico case of Atl. Ref. Co. v. Beach, 436 P.2d 107 (N.M. 1968).  Note that in both Acoma and Atl. Ref. Co., the deeds contained warranty language but no “subject to” clauses.

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.

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