practical aspects of administering mineral interests …€¦ · practical aspects of administering...

PRACTICAL ASPECTS OF ADMINISTERING

MINERAL INTERESTS IN PROBATE Locating, Valuing and Transferring Inherited Mineral Interests

Written and Presented by: VIRGINIA A. MOORE

Law Office of Virginia A. Moore Flower Mound, TX

ESTATE PLANNING COUNCIL OF NORTH Texas February 19, 2020

Gleneagles Country Club

5401 West Park Blvd. Plano, TX

VIRGINIA A. MOORE Law Offices of Virginia A. Moore

(972) 355-0800 [email protected]

6021 Morriss Rd., Ste 112 Flower Mound, TX 75028

Virginia A. Moore has had a varied career bookended with oil and gas representation. She is an honors’ graduate of the University of Houston Bates College of Law where she tailored her studies around oil and gas and environmental law, clerking for Keith Blinn, then General Counsel of Conoco Oil Company and Adjunct Professor of Oil and Gas Law. Virginia grew up in the O&G Industry where her father retired after 45 years as a landman for Humble Oil, (later becoming Exxon). Virginia’s first summer jobs as a teenager were with Humble working as a summer secretary in the geology and geophysics departments. After joining Conoco’s Legal Department out of law school, she represented the company on behalf of Andrew McColpin, then General Counsel, on various subcommittees of the American Petroleum Institute on a variety of oil and gas and environmental matters. Ms. Moore later joined the Dallas firm of Geary, Stahl & Spencer where she practiced in the field of Commercial Real Estate. She has had her own firm for many years and since the advent of the Barnett Shale, her practice has been dominated by oil and gas law, representing hundreds of mineral and Royalty owners, individually and in groups, in lease negotiations and other matters. For the last ten years, Ms. Moore’s practice has taken on a primary focus in assisting clients in locating, valuing and transferring mineral estates as part of probate and trust matters, representing executors, heirs and beneficiaries from all over the United States as they deal with Texas Mineral Interests.

EDUCATION University of Houston – Bates College of Law

Juris Doctor, Cum Laude 1978 University of Houston, B.S. Education 1971

CERTIFICATIONS

Board Certified Texas Board of Legal Specialization, 2009: Oil, Gas & Energy Law MEMBERSHIPS

• Dallas Bar Association: Energy Section • Denton County Bar Association: Real Estate, Probate & Trust Section • Denton County Bar Association: Chair, Real Estate, Probate & Trust Section • Denton County Bar Association: Member, Board of Directors • Flower Mound Oil and Gas Advisory Committee – Place One

Town of Flower Mound, TX • Denton County: Chair, Oil, Gas & Energy Law Study Group • State Bar of Texas: Oil, Gas, and Energy Resources Law Section • State Bar of Texas: Real Estate, Probate, and Trust Law Section • Fellow, Texas Bar College • Leadership Flower Mound • Phi Delta Phi Honorary Legal Society • Order of the Barons Honorary Legal Society • The Advocates – University of Houston Law Center • Zeta Tau Alpha

mailto:[email protected]

Practical Aspects of Administering Mineral Interests in Probate NTCEP 2020-02-19

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Table of Contents

I. Overview – Mineral Interests in Probate ............................................................................ 1 II. The Mineral Interest and Ownership in Texas .................................................................... 1

A. Mineral Interests as Real Property ...................................................................................... 1 B. Concurrent Ownership ........................................................................................................ 1 C. Severance of the Mineral Estate from the Surface Estate ................................................... 3 D. Definitions and Descriptions ............................................................................................... 3

III. Issues to Identify Early ....................................................................................................... 3 A. Surface Liabilities ............................................................................................................... 4 B. Adverse Possession ............................................................................................................. 5

1. Unsevered Minerals .......................................................................................................... 5 2. Severed Minerals .............................................................................................................. 5

C. Ad Valorem Taxes – Tax Sales .......................................................................................... 5 IV. Historical Records: Evaluation, Organization, Maintenance and Supplementation .......... 8

A. Decedent’s Existing Books and Records. ........................................................................... 8 B. Available Electronic Databases for Retrieval of Missing Information – Sources and

Options ................................................................................................................................ 9 1. Genealogy Databases ....................................................................................................... 9 2. Recorded Document Databases ........................................................................................ 9 3. Ad Valorem Tax Records ............................................................................................... 10 4. Unclaimed Property Records ......................................................................................... 10

V. Locating and Identifying Status of Development ............................................................. 10 A. Finding a “Legal Description” and Locating the Property ............................................... 10 B. Determining Status of Leasing and Production ................................................................ 11

VI. Valuation of Mineral Interests .......................................................................................... 12 A. Valuation for 706 Tax Return ........................................................................................... 12 B. Ad Valorem Tax Valuations ............................................................................................. 12 C. Multiples of Annual Cash Flow ........................................................................................ 12 D. Nonproducing Mineral Interests ....................................................................................... 13 E. Fractionated Surface Rights .............................................................................................. 13

VII. Transferring Title to Heirs and Beneficiaries ................................................................... 13 A. The “Gold Standard”: Filing Certified Probate and Last Will & Testament in Every

County in which Real Property is situated ........................................................................ 13 B. Direct Distribution and/or Conveyancing Options and the Doctrine of After Acquired

Title ................................................................................................................................... 14 1. General Warranty and Special Warranty Deeds ............................................................ 14 2. Quit Claim Deed ............................................................................................................. 15 3. After Acquired Title ....................................................................................................... 15 4. Deed without Warranty .................................................................................................. 15 5. Affidavit of Heirship ...................................................................................................... 16 6. Assignment (Working Interest and Overriding Royalty Interest) .................................. 17 7. After the Distribution. .................................................................................................... 18

VIII. Working with Heirs & Beneficiaries – Minerals Management ........................................ 18


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PRACTICAL ASPECTS OF ADMINISTERING MINERAL INTERESTS IN PROBATE

Locating, Valuing and Transferring Inherited Mineral Interests

I. Overview – Mineral Interests in Probate

Many estates include Mineral Interests as assets. Excellent presentations are presented regularly on how to plan for succession for large producing mineral estates, proper methods of accounting for the various types of income generated, and how and when to use Mineral Interests in gifting (and whether, when and how to accept such gifts as the donee).1 This presentation will address a much more common situation where ownership of one or more Mineral Interests are determined to be part of an estate. These often have passed via intestacy or bequests through multiple generations. Many have not been the subject of good advance planning and the most recent decedent may not have known of the asset – the existence of which is often discovered as a surprise when unsolicited offer letters start to arrive after probate or sooner, when an Executor discovers old cardboard boxes filled with tissue paper deeds and Oil & Gas Leases dating from the early- to mid-part of the 20th century. Even in estates where there is a general knowledge that there are Mineral Interests to be addressed, the documentation able to be located routinely presents “What do we do now?” questions, the answers to which are not generally in the wheelhouse for many Estate and Probate lawyers. It has long been the consensus of those familiar with oil and gas that, no matter how small the interest, Mineral Interests have intrinsic value

1 See, inter alia, Willey, Dustin G. et al, “What Every Estate Planner Needs to Know About Mineral Interests,” State Bar of Texas Intermediate Estate Planning & Probate, June 6, 2017.pdf 2 The best recent evidence of this occurred with the frenzy of leasing in the Barnett Shale where,

and should never be assigned to a category of miscellaneous assets of little value.2 The goal of this presentation, therefore, is to provide guidance on how to respond to your clients when an estate is found to own Mineral Interests and how to administer them through the probate process generally. II. The Mineral Interest and Ownership

in Texas Texas attorneys get a basic introduction to mineral ownership in law school as the “bundle of sticks” doctrine. This offers a good beginning point to evaluate estates in which assets include Mineral Interests. Each “stick” in the bundle constitutes a real property interest and each individually can be owned, transferred during life or as a testamentary transfer, reserved from a conveyance of one or more of the other sticks, or otherwise dealt with as a separate or individual interest.

A. Mineral Interests as Real Property Minerals in the ground are real property. There are five recognized ownership rights associated with ownership of minerals3: The right to develop (the right of ingress and egress) The right to lease (the executive right) The right to receive Bonus payments The right to receive Delay Rentals The right to receive Royalty payments

B. Concurrent Ownership In the case of inherited Mineral Interests, ownership has often become more and more fractionated with each successive generation.

during 2006-2008, Bonus payments escalated as high as $35,000 per net mineral acre. Owners in subdivisions of quarter-acre lots were banding together to negotiate and sign oil and gas leases for these extraordinarily high figures. 3 Altman v. Blake, 712 S.W.2d 117, 118 (Tex.1986).


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Each of the multiple owners inherits an undivided fraction of the whole and becomes an owner in common with the others, sharing the ownership concurrently. The three forms of concurrent ownership of real property recognized in TX are community property, joint tenants with rights of survivorship, and tenants in common. In each classification, two or more parties are granted the right to use, occupy and possess each part of the property, but not exclusively. 4 For purposes of this discussion, we will review the rights of the parties sharing undivided interests in the surface and/or mineral estates as tenants in common. Owners of undivided Mineral Interests also are considered tenants in common as to the mineral estate.5 Any co-tenant may exercise the right to develop the mineral estate (the first stick in the Mineral Interests bundle) without the consent of the other co-tenant(s).6 The right to develop may be exercised directly by the co-tenant but it is more often conveyed via an Oil & Gas Lease7 to a third party lessee via execution of an Oil & Gas Lease. Upon execution of the Oil & Gas Lease, the third-party lessee steps into the shoes of the lessor as co-tenant with the other undivided interest holders.8 The nature of co-tenancy is that no co-tenant is granted the authority to bind the interest of another and they are not fiduciaries to each other. They are responsible, however, not to commit waste on the property and they are responsible for

4 Willson v. Superior Oil Co., 274 S.W.2d 947, 950 (Tex.Civ.App-Texarkana 1954, writ ref’d n.r.e.). 5 Burnham v. Hardy Oil Co., 147 S.W. 330 (Tex.Civ.App.-1912, affirmed 195 S.W. 1139). 6 Powell v. Johnson, 170 S.W.2d 273 (Tex.App-1943, aff’d); Pickens v. Hope, 764 S.W. 2d 256, 263-64 (Tex. App.—San Antonio 1988, writ denied) (recognizing the right of the mineral owner to self-development of its own minerals). 7 Technically, while styled as a “lease,” the lessee receives a fee simple determinable in the mineral estate. The lessor retains a possibility of reverter, activated automatically by operation of law at the termination of the lease according to its terms. Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188, 192 (Tex. 2003).

paying their share of common debts against the property such as ad valorem taxes.9 A co-tenant cannot claim title to the common property under limitations title (adverse possession) without giving notice or taking an action that clearly communicates to the other co-tenants that he is claiming the property as his own.10 Any co-tenant may improve the property without consent of the other co-tenants but unless the improvement was necessary and beneficial the other co-tenants are not responsible to share in the cost (although if property is subsequently partitioned, the party investing in the improvement is entitled to recover the enhancement to the value of the land caused by the improvement). Co-tenancy rights as to the surface estate raise slightly different issues. As one example, Texas law does not allow one co-tenant to grant an easement, such as for a pipeline, to a third party without joinder of all co-tenants. 11 An easement is a conveyance of an exclusive possessory interest in real property and a co-tenant has no authority to convey the property interests of other co-tenants to a third party. An Oil & Gas Lease in contrast does not grant an exclusive possessory interest in the mineral estate, although it is considered a conveyance of real property, granting fee simple determinable to the lessee while reserving a right of reverter in the

8 Burnham v. Hardy Oil Co., 147 S.W. 330 (Tex.Civ.App.-1912, affirmed 195 S.W. 1139). 9 Hamman v. Ritchie, 547 S.W.2d 698, 707 (Tex.Civ.App.-Fort Worth 1977). 10 Tex. Civ. Prac. & Rem. Code §16.021 Adverse possession is defined as “an actual and visible appropriation of real property, commenced and continued under a claim of right that is inconsistent with and hostile to the claims of another person.” Paying taxes and/or managing the property alone will not support a claim under adverse possession against the other co-tenants. See discussion following. 11 Lee, et al. v. Phillips Petroleum Co., et al, 329 F.Supp. 579, 582 (U.S. Dist. Ct., S.D. TX,1971).

https://statutes.capitol.texas.gov/Docs/CP/htm/CP.16.htm#16.021


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lessor.12 A co-tenant may, therefore, lease (or convey) the entirety of co-owned property to a third party but must generally share the profits with the other co-tenants and provide an accounting upon request. If, however, he leases only his undivided share of the property, as is the case with mineral co-tenants, there is no requirement that he share in the Bonus or Royalty granted in the Oil & Gas Lease with other co-tenants, each of which has the opportunity to sign a separate lease of their undivided interest. The lessee now stands in the shoes of the original co-tenant lessor, and may enter the property and produce the minerals even without leases from the other co-tenants. If the other co-tenants are unleased mineral owners, the lessee as co-tenant must account to the other co-tenants for their share of any production achieved (unless their interests can also be leased).13 So long as the lessee has a lease from a single co-tenant, the lessor is not a trespasser to the property and is allowed to recoup the costs of achieving and maintaining production before payout to the unleased co-tenants.14 Since co-tenants have no responsibility to reimburse or share in costs for uses that are not beneficiary or necessary, if the well drilled is a dry hole, the unleased co-tenants have no responsibility to share in the costs incurred.15

C. Severance of the Mineral Estate from the Surface Estate

The mineral estate is freely alienable as a separate and distinct interest in real property.16 The mineral estate may be severed from the surface estate in one of two ways: (i) the surface may be conveyed to another party with a reservation of all or some portion of the mineral estate to the Grantor; or (ii) the mineral estate may be

12 Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188, 192 (Tex. 2003). 13 Cox v. Davidson, 397 S.W.2d 200, 201 (Tex. 1965) (“Where one co-tenant decides to develop a common property, the law raises no obligation binding a nonjoining co-tenant to pay a part of the costs of development. However, when mineral property is developed by one co-tenant and as a result thereof he acquires minerals which at one time underlay the common property, the problem of accounting to the nonconsenting co-tenant arises.”).

conveyed to another party exclusive of the surface, typically through a Mineral Deed. The interests reserved or conveyed can be in whole or in part. Once severed from the surface estate, the surface estate becomes subservient to the mineral estate and is burdened by an implied easement that as much of the surface estate as is “reasonably necessary” may be used for the development of the mineral estate.17 As a practical matter, for reasons of efficiency and time, Operators in recent years have generally dispensed with disputing with surface owners over their rights of surface use and agreement with the surface owner is often reached as a matter of contract with reasonable compensation paid for surface damages. The implied threat that the surface may be used without compensation is often sufficient to encourage reasonableness on both sides: the Operator knowing it is avoiding being tied up in court over the meaning of “reasonably necessary” and the Surface Owner knowing that he will at least gain some negotiation power over such things as insurance, indemnities, and surface protections; and he will be paid some compensation.

D. Definitions and Descriptions Various terms relating to Mineral Interests will be used in this paper and are capitalized for purposes of identification, see APPENDIX A: GLOSSARY OF TERMS. III. Issues to Identify Early To assist an Executor in identifying, valuing and transferring one or more Mineral Interests to the beneficiaries, a determination has to be made as to whether Mineral Interests have been severed

14 Hamman v. Ritchie, 547 S.W.2d 698, 707 (Tex.Civ.App.-Fort Worth 1977), citing Cox v. Davidson, 397 S.W.2d 200 (Tex. 1965). 15 Id. 16 Bagby v. Bredthauer, 627 S.W.2d 190, 194 (Tex. App.—Austin, no writ). 17 Acker v. Guinn, 464 S.W.2d 348, 352 (Tex. 1971); Plainsman Trading Co. v. Crews, 898 S.W.2d 786, 788 (Tex. 1995).


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from the surface and if so, whether the decedent’s interest included only a Mineral Interest or whether there is also a retained ownership in the surface estate. The status of whether the Mineral Interest has been leased, and if so, whether the interest is producing, is another area of initial inquiry necessary to determine how to handle the mineral estate. If a producing interest is in a state of suspense, failure to cure the reasons for the suspense raises the issue that the interest may end up transferred to the State Comptroller as a “lost or abandoned” interest. It is also not uncommon for a decedent to own Working Interests, not necessarily because of any involvement of the family in the actual business of oil and gas development, but because of overzealous marketing of such interests during oil and gas up cycles as “investments” (often through phone bank cold call solicitations and likely in violation of state and federal security laws). Finding statements of amounts owed (Joint Interest Billings, or JIB’s) and documentation relating 100-300% penalties and withholding or offsets against Royalties otherwise payable, will raise questions in the mind of any Executor. Some decedents or their ancestors, however, may have themselves been active in the oil and gas business. Hands-on oil and gas activities, often via corporations or other entities, are commonly associated with grants of Overriding Royalty Interests on the various leases and wells developed. Such interests can be extensive and extend to dozens of Wells across many counties. Each situation presents different issues. Discussion on why and how the details of ownership should be researched will follow but there are three important reasons to do so as early in the probate process as feasible.

A. Surface Liabilities Many inherited interests passing down through multiple generations have their inception in the earliest days of settlement of a homesteading family, often acquiring substantial acreage via patent or land grant. A common practice among such early Texas families was to plan for succession among their descendants by subdividing the family farm among the number of surviving children, each

receiving an allotment of the surface estate on which to live and farm and raise their families, but severing the minerals from all the individual portions and re-conveying them in undivided interests among all the heirs equally. In other instances, the minerals were left intact and each child was allotted a share of the surface estate with no severance of the minerals. It the decedent has succeeded to an interest which includes any part of the surface estate, the question is with whom is that ownership shared and how is the surface being managed for potential liabilities. Much of Texas consists of dry land ranching, suitable only for grazing livestock, often only supporting a few per acre. These lands, to the extent they were ever fenced, are often neglected among successive generations and now sit vacant, unfenced and ungrazed. Such lands may have been fenced in common with neighboring properties for livestock purposes (with or without permission and with or without evidence that whether such possession is intended to be adverse to the owners, see following). Renewed oil and gas activity has given this kind of land much greater value than it has held in the past fifty years of sitting idle. Development of minerals creates the need to use the surface estate. Well sites have to be constructed with all-weather roads and utilities have to be brought in. Pipelines have to be constructed and processing facilities set up. Housing and facilities for hundreds or thousands of workers have to be constructed. The consideration paid for these surface uses can be very lucrative to the owners, but only if they can be found. This can be a challenge for many two- or three-times removed generations but there are legends of landmen charged with the task. When pipeline or other surface use agreements are presented offering substantial consideration, seemingly out of the blue to someone who had no knowledge of any ownership interest, many sign without benefit of legal assistance and end up burdening the surface with potentially dangerous activities. Basic protections such as insurance or indemnity clauses are never in the forms proposed.


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All of this adds up to the question of who will be sued when a permitted use (or unpermitted use, think four-wheeler impromptu off-roading tracts featuring teen-agers from a nearby community) results in a death or damage claim. Perhaps of higher threat, what are the respective liabilities of the heirs and beneficiaries as tenants in common for an environmental spill or well blowout and is there any liability for an abandoned or orphaned well for which the operator cannot be located to plug and abandon an oil or gas well at the end of its life in accordance with state requirements. In many families, it is still common for there to be one or two of the older generation who have maintained the responsibility to pay the taxes when due (see discussion following with regard to delinquent tax payments), but there is often no one who has been on or near the property for years to monitor its use and ensure the property is posted against trespassers. If the mineral estate has never been severed from the surface, and each heir and beneficiary owns an undivided interest in both the surface and the minerals, the stage is set to lose the minerals to a surface damage claimant. Although the scope of joint and several liability, and its application, is highly fact dependent and beyond the scope of this article18, there is also the issue of possibility personal liability for surface claims. Before transferring surface or mixed surface and Mineral Interests from the probate estate, the question of surface ownership needs to be determined. If surface ownership is involved, consideration is warranted to setting up a severance of the minerals from the surface to isolate the surface liabilities into a liability limited entity and away from the mineral estate.

B. Adverse Possession The question of whether the minerals have been severed from the surface can also be critical to

18 Tex. Civ. Prac. & Rem. Code §33.013. 19 It is beyond the scope of this paper to go into the various time frames and the specifics associated with same; see Tex. Civ. Prac. & Rem. Code §16.021 and following. 20 Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188, 192 (Tex. 2003).

potential loss, not only of the surface but also the mineral estate, through adverse possession. Title by Limitation, or adverse possession, is the loss of title to real property as a result of occupation of the property by a party not in title for the requisite number of years19, as defined by statute. The requirement that the occupation be “actual and visible … and under claim of right that is inconsistent with and hostile to the claim” of the holder of actual title has had significant slippage in recent year20.

1. Unsevered Minerals Unsevered minerals remain part of the fee title associated with the surface, so any perfected adverse possession claim to the surface, carries with loss of title to any unsevered minerals.21

2. Severed Minerals If the minerals have been severed prior to commencement of the adverse possession of the surface, loss of title to the surface will not affect ownership of the minerals, but minerals which have been severed from the surface still remain liable to the potential claim of adverse possession on their own.22 Mineral Interests can be adversely possessed, however, only by drilling and operations by an adverse possessor for the statutory period of time.23 The definition of “adverse possession” as to the a severed mineral estate is: “an actual and visible appropriation of real property by drilling and producing oil and gas, commenced and continued under a claim of right that is inconsistent with and hostile to the claim of another person.”24

C. Ad Valorem Taxes – Tax Sales Mineral Interests, both severed and unsevered, are subject to a variety of tax law issues. This presentation will not address Federal income tax issues (or allowances). We will also not discuss severance taxes applied at the state level to all production as that is a subject unlikely to present an issue in the probate context.

21 Grissom v. Anderson, 79 S.W.2d 619, 621 (Tex. 1935). 22 Tex. Civ. Prac. & Rem. Code §16.021. 23 Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188, 192-3, 198 (Tex. 2003). 24 Grissom v. Anderson, supra.

https://statutes.capitol.texas.gov/Docs/CP/htm/CP.33.htm





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Discussion of Ad Valorem Taxation at the county level is worthy of mention, however, because of the potential result of nonpayment resulting in a loss of the interest at a tax delinquency sale. Mineral Interests fractionated among multiple generations, coupled with a highly mobile society, raise the prospect that small interest holders, unaware of the reasons to notify distant Appraisal Districts of current addresses, will be “lost” to Appraisal Districts. Failure to receive tax statements and notices will, sooner or later, result in delinquencies in payment followed by possible tax sales. Article VIII, Section 1 of the Texas Constitution authorizes the taxation of certain real and personal property. The enabling legislation is found in Title 1 of the Texas Tax Code, designated the Texas Property Tax Code. Unless specifically exempted by law, all property is taxable for ad valorem purposes.25 Responsibilities for appraisals, sending notices and handling protests under the Tax Code fall to various parties, including an Appraisal District responsible for appraising property in the District under a Board of Directors and administered by a Chief Appraiser. The County Tax Assessor-Collector is an elected official in each county except in counties with less than 10,000 in habitants when the County Sheriff serves the role.26 For purposes of this discussion, references will generalize the taxing authorities as the “Appraisal District” in each county. The Austin firm of Pritchard & Abbott, Inc. provides tax valuation services to many counties with regard to oil and gas interests. The firm has published a comprehensive “Frequently Asked Questions” summary detailing the process used to identify and appraise producing interests.27

25 Infra, Pritchard & Abbott, Inc., Item 4. 26 Texas Property Tax Code Section 6.21. 27 Pritchard & Abbott, Inc. “Frequently Asked Questions (FAQs) Regarding the Ad Valorem Tax Appraisal of Oil and Gas Mineral Interests” March 24, 2017. http://www.pandai.com/faq/2017_Mineral_FAQ_for_Website_linked.pdf. 28 Texas Property Tax Code Section 25.19.

The statutory procedures by which Appraisals are made and Notices of Valuation rendered is set forth in the Texas Property Tax Code.28 A “Mineral in Place” is one of the six classes of real property defined by the Code as taxable in the State of Texas.29 The identification of taxable individual Mineral Interests in producing property is generally secured from ownership records provided to the Appraisal District by the designated operator of a well of unit. These records, often referred to as a “Pay Deck” represent the verified ownership of each party owning an interest in a producing well, pool or unit, see APPENDIX D: SAMPLE TIMELINE – LEASING TO ROYALTIES. Mineral Interests are always required to be listed by the Appraisal District separately and carried in the name of the owner of the interest,30 except if the interest is valued at less than $500 and an Operator designed by the Texas Railroad Commission with regard to the property requests that it be listed jointly with all undivided interest owners of that property. In such event, the Notice of Appraised Value will be delivered to the Operator and there is no requirement that each undivided interest owner be delivered a separate notice. HOWEVER, an individual undivided interest owner may request a separate notice of appraised value and the separate notice is required to be provided.31 Making this request by sending this notice is highly recommended as part of the process of transferring Mineral Interests of the estate to the heirs and beneficiaries as it ensures that each will receive notices of taxes due individually. [Form 50-171]32 Fortunately, Section 32.02 of the Texas Property Tax Code clearly treats severed Mineral Interests separately and a tax lien against one undivided interest does not attach to the interests of others,

29 See Texas Property Tax Code, Section 1.04(2)(F). 30 Texas Property Tax Code, Section 25.12, Subsection (a). 31 Id., Subsection (c). 32 See: 50-171, Request for Separate Taxation of an Undivided Interest

https://statutes.capitol.texas.gov/Docs/TX/htm/TX.6.htm#6.21

http://www.pandai.com/faq/2017_Mineral_FAQ_for_Website_linked.pdf

http://www.pandai.com/faq/2017_Mineral_FAQ_for_Website_linked.pdf





https://comptroller.texas.gov/forms/50-171.pdf




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nor against the surface (unless and to the extent of common ownership).33 This prevents the owner of one undivided interest from losing his interest as a result of a tax sale resulting from a delinquency in tax payment by another co-tenant in the interest. The section, however, does not offer protection if the mineral owner also owns the surface. Appraisal Districts are generally required to list separately owned interests in the surface estate in the name of the owner of the interest34 but are allowed by code to list interests owned in undivided interests jointly in the name of all owners or may carry it on their rolls under the name of any one or more of the owners.35 The Tax Code allow an individual co-tenant to request that his interest be separately shown and separately taxed. The request must in writing and filed with the Appraisal District on or before May 1 of any given year. The separate interest must also be described in a duly executed and recorded instrument of title. The application form is the same as used for requesting separate notices to co-tenant mineral owners.36 [Form 50-171]37 Failure by an Appraisal District to notify an owner of the valuation and tax due is not a defense to the owner for nonpayment of taxes.38 The key date for determining ownership of any real property for ad valorem taxation purposes is as of January 1 of each year when a tax lien automatically attaches to property “to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property, whether or not the taxes are imposed in the year the lien attaches.”39 It is typical that oil and gas production beginning mid-year will not render a property taxable

33 Texas Property Tax Code Section 32.02. 34 Texas Tax Code Section 25.04. 35 Texas Property Tax Code, Section 25.11, Subsection (a). 36 Id., Subsection (b). 37 See: 50-171, Request for Separate Taxation of an Undivided Interest 38 Infra, Pritchard & Abbott, Inc. 39 Texas Property Tax Code, Section 32.01.

during the year of first production (since it was not producing on January 1). Technically since the taxable property is the interest itself and as real property. There is no statutory exemption.40 The common practice of appraisal districts not to appraise Mineral Interests until the first full year of production is that an interest in the ground with no income being generated through production is simply valued as zero. According to Pritchard & Abbott, this is the result of the “hurdle to prove up any value above zero.”41 The Tax Code also allows an exemption for any Mineral Interest having a value less than $500.00, but all Mineral Interests owned by a single owner in each taxing unit are aggregated to determine value.42 When production is not reported promptly, however, and the Appraisal District discovers the error for properties that have been producing for one or more full years prior to the current year, the Appraisal District can supplement its rolls for such prior years and mail tax statements for prior periods.43 An Appraisal District can retroactively add real property to the appraisal rolls for up to five preceding years.44 Tax Sales of properties are subject to a variety of protections to the owner. Each year, a county collector is required to prepare a current and cumulative delinquent tax roll. Notice is required to be sent to the owner of record, but ONLY if the county collector can, through the use of reasonable available methods, locate the owner and the owner’s current address. If an owner cannot be located, the statutes provide for public notice to be given in the county of the filing of a suit to collect a delinquent tax and the

40 Texas Property Tax Code, Section 23.01(a). 41 Id., Item 5. 42 Texas Property Tax Code, Section 11.146. 43 Texas Property Tax Code, Section 25.21; note, however, that delinquency dates extended in such event will be postponed to February 1 of the first year that will provide a period of at least 180 days after the date the tax bill is mailed. Texas Property Tax Code, Section 31.04(a-1). 44 Texas Property Tax Code, Section 25.21.








http://www.pandai.com/faq/PTC_Section_23.01(a).Appraised_Value_is_Market_Value.pdf







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appointment of an attorney ad litem to locate and represent the interests of the defendant.45 If a tax sale follows a delinquency lawsuit, an owner is accorded a right of redemption46, allowing the property to be redeemed through the payment of back taxes, penalties and interest, along with the cost paid by a purchaser at the sale and a redemption premium.47 Generally, the courts hold that substantial compliance with the redemption requirements will redeem the property, an issue that came up within the last year in the Supreme Court Case of Sorrell v. Estate of Carlton.48 The issue presented with generational transfers via intestacy is that rarely does the necessary documentation get placed of record in the county identifying the heirs and beneficiaries and providing good addresses. New owners are also typically unaware of the need to maintain a good address of record in any county in which they have an inherited Mineral Interest. Nonproducing Mineral Interests are not taxed, so there is not an issue of a potential tax sale on such interests. If delinquencies occur as to surface or producing mineral interests, however, by the time a co-tenant heir or beneficiary may find out about his ownership, it may already be lost through a tax sale and the period of redemption may have expired. IV. Historical Records: Evaluation,

Organization, Maintenance and Supplementation A. Decedent’s Existing Books and

Records. It’s critical in working with executors to recommend that ALL documents relating to Mineral Interests be preserved for review. Uninformed executors may pull out recent

45 Texas Property Tax Code, Section 33.475. 46 Texas Property Tax Code, Section 34.21. 47 Texas Property Tax Code, Section 34.21, Subsection (a). 48 Sorrell v. Estate of Carlton, 504 S.W.3d, 62 Tex.Sup.Ct.J. 888 (Tex. May 3, 2019) (16-0874).

payment stubs and dispose of everything else, hoping to simplify the process. Even the multitudes of unsolicited offer to purchase letters should be maintained. They often contain information specifically identifying owned Mineral Interests by legal description and ownership interest. They can be of great help in preparing an Inventory of Mineral Interests. See APPENDIX E: SAMPLE OFFER LETTER49 detailing Mineral Interests owned by full legal description and fractional decimal interest. Once an Executor is aware of the ownership of Mineral Interests in the estate, it is important that all the available records be organized so missing important records can be identified and obtained if possible. For our clients, we recommend assembling hard copy files by categories: state/county (general and tax), Operators, probate and trust, and solicitations. Acquisition documents (deeds, assignments) and mineral leases are kept in the applicable state/county files as they pertain directly to the land, regardless of what Operator originally secured the applicable Oil and Gas Lease. Division Orders can be kept in the land files or the Operator files, but they are used for verification to prior operators and should be kept where they can be easily located for that purpose. If not available, Lease records may be obtainable from the original lessees if known (often not the same entity as the current Operator) but given the leanness of staff maintained by most Operators, review of online databases is often the only source of recorded documentation absent hiring a landman to do an in-person search of records. If unsigned lease copies are in the decedent’s files, these should be verified through county records for evidence of execution. Division Orders establishing the ownership interest in particular wells should be pulled and

49 The Sample Offer Letters attached are redacted samples only – many offers may be legitimate. Parties may have good reasons in many instances to sell rather than hold Mineral Interests, but except in the case of de minimus interests, auctions or other commercial sale opportunities should be reviewed in conjunction with an unsolicited offer.





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verified against the original leases and online permitting of pools, units or allocation wells. Like other records, Division Orders should be considered permanent land records and maintained accordingly. A single well may pass through multiple Operators over its productive life, so Operator files are usually used only for correspondence, check stubs (detailing the production and payment details of each check) and Division Orders. The ability to verify accuracy of the Decimal Interests within each Division Order is dependent on knowing the Royalty reserved in the applicable Oil & Gas Lease and on whether the property is pooled and if so, the size of the pool. If any of this source information is unavailable, no verification can be made, and the client should be so advised. Division Orders are binding until revoked on thirty-days’ notice.50 Particularly on new wells, clients should be advised of the need to verify the accuracy of the Decimal Interest, if possible, as the first Royalty check will often report multiple months earnings. If the Decimal Interest is later found to be incorrect, the Operator is entitled to rely on the signed Division Order to avoid having to recompute the check and pay the correct amount. The presumed remedy to the Mineral Interest owner is to pursue the person or persons who received an overage directly. As a practical matter, this rarely happens if errors are caught early and promptly corrected.

B. Available Electronic Databases for Retrieval of Missing Information – Sources and Options

1. Genealogy Databases ANCESTRY.COM provides copies of original document sources (Official Birth and Death Records, Census Records, etc.) and is easily used to assemble a Family Tree for a decedent known to have inherited Mineral Interests from prior generations. Locating the full legal names of the names in the family line can prove useful in searches of recorded databases from the counties involved to locate original acquisition deeds and

50 Texas Natural Resources Code 91.402, Subsection (g).

oil and gas leases. Caution should be used to take advantage of program privacy tools to limit public access to information entered. The alternative of incorporating “tips” from other family trees available publicly should be used only with the proviso that information may be incorrect and the original source documents should be reviewed. Such tips, however, can often lead to names and parties that would not otherwise be easily located.

2. Recorded Document Databases Texas counties have been digitizing their deed records for several years. Conveyance documents recorded prior probates (which will often lead to the original Inventories with comprehensive lists of minerals owned), old and current Oil & Gas Leases can generally be located via online databases. Two resources are TEXASFILE.com and COURTHOUSEDIRECT.com. Both offer free searches and copies at a reasonable per page cost. TEXASFILE.com offers a statewide name search option and also has options for researching just by minerals and other classifications. These companies are examples only and other commercial databases may be available, particularly for specific counties. Some county clerks have undertaken the process of creating a searchable database in-house. The effectiveness of any given search will depend on how far back the records have been digitized in each individual county. Many of the larger counties have complete coverage back to inception but small counties may only have a few years. Research should not be limited only to the decedent, but should also research ancestor names from whom Mineral Interests may have been inherited. Searching beneficiaries and heirs ancillary to the primary line, such as cousins, aunts, uncles and other persons who may also have inherited interests in the same properties, will often lead to good legal descriptions as some

https://statutes.capitol.texas.gov/Docs/NR/htm/NR.91.htm#91.402


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family lines are more proactive in managing minerals.

3. Ad Valorem Tax Records Counties maintain searchable property tax rolls. If Mineral Interests are known to be producing, and/or surface interests are also owned, searching the tax rolls can provide the names of the owners, the legal descriptions and other detail that will be helpful in assembling an Inventory of Mineral Interests.

4. Unclaimed Property Records Another source of information to determine whether an estate holds Mineral Interests is to run all the family names through Unclaimed Property Records databases. The Office of the State Comptroller51 of each state administers assets, typically funds, reported to the state after being determined to be “lost or abandoned.” Entries reflecting royalty payments are indicative of Mineral Interests owned by that party and can lead to information allowing identification of the Mineral Interest by following up with the reporting company. Whereas division order analysts are often swamped and unable or unwilling to provide background information, for some reason, larger operators have specifically designated staff handling reporting of lost and abandoned assets. The staff in these departments, often also having the responsibility of trying to find the lost person originally, are often quite willing to provide information and assist with securing release of assets. Mineral Interests are subject to presumption of abandonment after they have remained unclaimed by the owner for more than three years.52 A holder of funds is allowed to transfer assets to the state of last known address for the owner or to the state of the holder’s incorporation so a person who resided in multiple states will be harder to research than long-time Texas residents who will normally be listed on the State Comptroller’s website: https://claimittexas.org/

51 The Texas State Comptroller’s Unclaimed Property website is claimittexas.org. 52 Texas Property Code, Section 75.101 53 To satisfy the Statute of Frauds, a contract "must furnish within itself, or by reference to some other existing writing, the means or data by which

Parties should always access this site through the State Comptroller’s official website to avoid hacking and misdirection through fraud. See comptroller.texas.gov. V. Locating and Identifying Status of

Development A. Finding a “Legal Description” and

Locating the Property All instruments purporting to convey an interest in real property are subject to the Texas Statute of Frauds and must contain a legal description of the property sufficient to allow it to be located with reasonable certainly.53 After all the decedent’s documentation has been located, sorted and reviewed, there may be nothing that has a “legal description” of the property. There may be a lot of material with well names, lease names, lease numbers or other operator identification details. The Texas Railroad Commission maintains a public GIS Viewer that is easily accessible to locate tracts of land if sufficient identifying information is available.54 See sample maps attached as APPENDIX C: SAMPLE OIL AND GAS MAPS reflecting the type of map which can be located and the kinds of details available. Search tools available in the toolbar allow a variety of search options to narrow down incomplete legal descriptions to a specific tract. Once located, the resulting map, read with the legend provided, provides a major amount of information about the property, its status as leased or unleased, production records, and ownership details if a producing well is located within a pool of owners. The maps also reflect how the property is situated with regard to known oil and gas fields and producing areas nearby. This provides detail to allow valuation of nonproducing interests. This paper will not afford the opportunity to provide detail on becoming an expert in

the property to be conveyed may be identified with reasonable certainty." If a contract does not meet this standard, it is void under the Statute of Frauds. Long Trusts v. Griffin, 222 S.W.3d 412 (Tex. 2006). 54 http://gis.rrc.texas.gov/GISViewer/.

https://claimittexas.org/

https://statutes.capitol.texas.gov/Docs/PR/htm/PR.75.htm#75.101

http://gis.rrc.texas.gov/GISViewer/


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navigating this website, but the TRRC provides a number of instructional tools, including guides and videos. Exploring the site can be very helpful. The General Land Office maintains a similar site. 55

B. Determining Status of Leasing and Production

The status of leasing and production is important not only in valuing the assets, but also for ascertaining whether or not the property remains in a viable lease. Wells with substantial periods of nonproduction should be evaluated against the terms of the applicable Oil & Gas Lease to determine whether a case can be made that the lease has terminated for failure to produce in paying quantities. If so, the Mineral Interest becomes available for new leasing efforts (with possible new consideration in the form of Bonus payments, and higher royalties if new production is achieved). Production records for wells can be secured through use of hyperlinks at the TRRC GIS Viewer,56 or via the online query system available at: https://www.rrc.state.tx.us/about-us/resource-center/research/online-research-queries/ Following the maps shown on APPENDIX C: SAMPLE OIL AND GAS MAPS are sample production records, one reflecting a clear case for termination for nonproduction for a number of years (assuming no other production is being achieved from another well in the same unit or pool57) and one where non-production is for a much shorter period and if either Shut-In Royalty payments as specified in the lease are being paid and/or the cessation of production can be shown to be temporary and for good cause based on the standard of a “reasonably prudent operator” is unlikely to be held terminated.

55 https://www.glo.texas.gov/land/land-management/gis/. 56 http://gis.rrc.texas.gov/GISViewer/. 57 Paying production from a single well, or only a few wells, is sufficient under the traditional form of Oil & Gas lease to maintain it in effect in its entirety even if it includes land remote from any well. Mathews v. Sun Oil Co., 425 S.W.2d 330 (Tex.1968).

Every Oil & Gas Lease has two terms. The first, or Primary Term, is specified within the lease as a period of years in which the lessee must drill and complete a well producing oil or gas in paying quantities. The second, called the Secondary Term, follows expiration of the Primary Term and continues “for so long thereafter as” production in paying quantities continues.58 Many leases in the Permian Basin are 50-75 years old and, because production in paying quantities continues even if only as a stripper well producing less than 10 barrels of oil a month, the underlying lease remain in existence. Absent applicability of a savings clause, or a court created exceptions if a well ceases to produce in paying quantities at any time after the expiration of the Primary Term, the lease automatically terminates. Some of the savings clauses that extend the Primary Term or restrict termination for nonperformance typically included in Oil & Gas Leases include provisions related to continuous operations, force majeure, Shut-In Royalties, notice and cure clauses and others. The otherwise strict rule is now also subject to judicially created savings mechanisms, such as the “Temporary Cessation of Production Doctrine” where lack of production will not terminate a lease “if the lessee can prove the cessation of production was only temporary due to sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith or a like cause.”59 Under these circumstances, the lessee is entitled to a “reasonable time” to repair the well and restore production. Courts also look to intent when a well is shut-in and whether or not a reasonably

58 Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550 (Tex.2002); Watson v. Rochmill, 155 S.W.2d 783 (Tex.1941); Bradley v. Avery, 746 S.W.2d 341 (Tex.Civ.App.― Austin 1988, no writ). 59 Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783 (1941).

https://www.rrc.state.tx.us/about-us/resource-center/research/online-research-queries/



https://www.glo.texas.gov/land/land-management/gis/

https://www.glo.texas.gov/land/land-management/gis/

http://gis.rrc.texas.gov/GISViewer/

https://demo.lawriter.net/states/TX/books/Case_Law/result?number=1

https://demo.lawriter.net/states/TX/books/Case_Law/result?number=1

http://www.casemakerlegal.com/SearchResult.aspx?searchFields%5bstate%5d=&query=155+S.W.2d+783&juriStatesHidden=&searchCriteria=Citation&tabAction=ALLC&dtypeName=&headAdmin=&headCaselaw=&headStatutes=&searchType=overview&jurisdictions.allStates=on&jurisdictions.includeRelatedFederal=on&pinCite=y

http://www.casemakerlegal.com/SearchResult.aspx?searchFields%5bstate%5d=&query=155+S.W.2d+783&juriStatesHidden=&searchCriteria=Citation&tabAction=ALLC&dtypeName=&headAdmin=&headCaselaw=&headStatutes=&searchType=overview&jurisdictions.allStates=on&jurisdictions.includeRelatedFederal=on&pinCite=y


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prudent Operator would hold the well for a period of nonproduction.60 Even with exceptions, however, reviewing production records may reflect grounds for claiming that a lease has terminated. If such periods are discovered and clearly evidence an abandonment of a well, the next step is to contact the last known operator and request that a Termination of Lease Notice be prepared and filed of record in the county where the land is located. VI. Valuation of Mineral Interests Arriving at a valuation of Mineral Interests depends greatly on the reason for the valuation being sought. Valuation for estate tax purposes will require formal appraisal and is discussed only briefly below. Valuation for inventory purposes and/or allocation of interests among beneficiaries can be based on any of the other methods discussed, or averaged among them.

A. Valuation for 706 Tax Return A Mineral Interest in a large estate for which a 706 Federal Tax Return is being prepared will follow Treasury Regulations and Tax Court rulings. An expert Appraiser will be required to work with the tax preparer to value all the assets, including minerals. Appraisals will typically address the estate’s ownership interest, estimates of producing reserves, historical production and sales, costs projections and taxes, and application of a discount for the estimated future net cash flow. Fair Market Value is usually greatly discounted based on the anticipated return of investment required by experienced buyers knowledgeable on the volatility of the markets.61

B. Ad Valorem Tax Valuations

60 Whether a well is producing in “paying quantities” is turns not only on whether there is a profit being made in any given period, but whether a “Reasonably Prudent Operator” would have a reasonable basis to expect that profitable returns from the well will be achievable within a reasonable of time, the test being stated of whether “a Reasonably Prudent Operator would have operated the well for a profit and not merely for speculation, in light of all relevant facts.” Clifton v. Koontz, 325 S.W.2d 684 (Tex.1959). Also see Pickens v. Hope, 764 S.W.2d 256 (Tex.Civ.App.-San Antonio 1988).

The Texas Property Tax Code offers two specific sections related to appraisals of mineral interests. The first, while titled “Mineral Interest Not Being Produced,” relates solely to valuing minerals that are removable, i.e., produced by “surface mining or quarrying from a deposit.”62 Oil and gas interests do not fall within the purview of this section. The second, titled specifically “Oil or Gas Interest” sets forth a specific and detailed formula for use by Appraisal Districts in arriving at a valuation for oil and gas in place based on projected future income.63 The Pritchard & Abbott FAQ’s provide additional detail on how, as a consultant to many Appraisal Districts, they provide appraisals.64 Appraised value provided in Notices from the Appraisal District, generally mailed in March or April of each year, provide a defensible valuation for the Estate. The methodology used is detailed and specific and very hard to defeat by mineral owners interested in the prospect of protesting values. That being said, they do not provide the best indicators of true market value and should not be used to establish sales prices for Mineral Interests to be sold rather than distributed. Factors such as comparable sales and current market conditions are better suited for that purpose.

C. Multiples of Annual Cash Flow A general rule of thumb for valuing Royalties, including Overriding Royalties, is to use a multiple of three to five times the trailing 12-month cash flow of the interest. This appears to be the norm used by CPA’s in preparing gift tax returns and by bank trust departments for

61 A somewhat dated but excellent presentation on the valuation of mineral interests for estate tax purposes is Craig Adams, “Planning for Owners of Oil & Gas Interests”, State Bar of Texas Advanced Estate Planning and Probate Course June 7, 2006, Houston, Pgs. 8-11. 62 Texas Property Tax Code Section 23.17. 63 Texas Property Tax Code Section 23.175. 64Pritchard & Abbott, Inc. “Frequently Asked Questions (FAQs) Regarding the Ad Valorem Tax Appraisal of Oil and Gas Mineral Interests” March 24, 2017, supra Note 28




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valuation of oil and gas properties. The method eliminates the need to incur engineering or appraisal fees and is particularly useful for smaller interests. A smaller multiple would be justifiable for horizonal shale wells in the second year of production given typical and expected declines in production after the first year of operation and could likely be supported by pulling production records of older nearby wells in the same fields.

D. Nonproducing Mineral Interests A wide variance in value can be expected for nonproducing mineral interests. For Ad Valorem Tax purposes, they are valued at zero, regardless of size, location or other factors. To arrive at a fair valuation, particularly for basis purposes in the hands of the beneficiaries of the estate, an analysis can be performed of properties in the same fields and areas to determine whether leases are routinely being signed and the amounts reported for signing bonuses being paid. At a minimum, valuing an interest in a field with new productive wells and active leasing can be valued at a multiple of net mineral acres at an average bonus rate likely to be attained should a lease be accepted. Bonus rates shown in actual lease offers are a good source of information, but likely low to rates capable of being negotiated with a specific oil and gas company. Interests that show no proximity to actual current development or production from wells are generally valued at a de minimus rate of $10-$100 dollars per net mineral acre.

E. Fractionated Surface Rights Much like a discount factor associated with valuing a restricted sale limited partnership interest, a fractionated undivided interest in the surface estate will have a greatly reduced value as related to the whole. The interests, however, are not “valueless” if the property is likely to be subject to surface uses associated with oil and gas development. The terms of any applicable Oil & Gas Lease should be reviewed as payment schedules may have been negotiated for surface uses. This may or may not limit the values which might otherwise be negotiated as a stand-alone matter, but they do provide some information as to the value of ownership of the surface subject to a

particular Oil & Gas Lease. To arrive at a valuation, research would be required as to the “on-the-ground” location and activity in the area, the amount of ownership interest, and any limiting terms in existing agreements. VII. Transferring Title to Heirs and

Beneficiaries A. The “Gold Standard”: Filing

Certified Probate and Last Will & Testament in Every County in which Real Property is situated

Most commentators with an abstracting background make the case that there is only one mechanism to convey title through a probated estate – to secure multiple certified copies of the Probate File (Order Admitting Will to Probate and the Last Will & Testament) and filing one, which can be supplemented with a Distribution or Executor’s Deed, in every county in which the decedent owned a Mineral Interest. This can be a frightfully expensive process for the estate, often faced with filing 30-50 pages of documentation in counties charging $24-26.00 for the first page, and $4.00 for every page thereafter. Multiply that total by sometimes 20-30 counties, add the cost to have an attorney draft the transmittal and fund through a IOLTA account check, assemble a checklist to verify that each package is properly recorded and returned (yes, counties do “lose” filings and you should be checking to be sure the originals are being returned), and the cost can be daunting. The risk, particularly with nonproducing Mineral Interests, is that the Executor will be dissuaded from filing in all counties due to the cost and the perceived low value of a nonproducing interest. See APPENDIX B SAMPLE RECORDING FEE SCHEDULE. A comment added to Standard 11.30, Texas Title Examination Standards, filed as Title 2-Appendix to the Texas Property Code, seems to REQUIRE this method of handling: “If the probate proceedings took place in another county, the examiner should require the filing of certified copies of the order appointment the representative and any will and any codicils in the


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county where the land is located.” Tex. Estates Code §256.20165 [Emphasis Added.] Reviewing the actual text of the quoted section of the Estates Code, however, does not support this position.

SUBCHAPTER E. ADMISSION OF WILL TO, AND PROCEDURES

FOLLOWING, PROBATE Sec. 256.201. ADMISSION OF WILL TO PROBATE. If the court is satisfied on the completion of hearing an application for the probate of a will that the will should be admitted to probate, the court shall enter an order admitting the will to probate. Certified copies of the will and the order admitting the will to probate, or of the record of the will and order, and the record of testimony, may be:

(1) recorded in other counties; and (2) used in evidence, as the originals may be used, on the trial of the same matter in any other court when taken to that court by appeal or otherwise.

Added by Acts 2009, 81st Leg., R.S., Ch. 680 (H.B. 2502), Sec. 1, eff. January 1, 2014. [Emphasis Added.] 66

A much cheaper and more reasonable option proposed is to secure and file a certified copy of the Probate, but only in the Deed Records of the County in which it was originally probated. This filing can then be referenced within whatever form of conveyance is selected to provide notice in each applicable county. This practice

65 Texas Estates Code Section 256.201 66 https://statutes.capitol.texas.gov/Docs/ES/htm/ES.256.htm#256.201. 67 Trial v. Dragon, S.W.3d , 62 Tex.Sup.Ct.J. 1292 (Tex. June 21, 2019) [18-0203]. 68 A "general warranty deed" is a deed which contains an express guaranty or assurance of title. See, e.g., Davis v. Andrews, 361 S.W.2d 419, 421 (Tex. Civ. App.—Dallas 1962, writ ref'd n.r.e.). "A general warranty deed expressly binds the grantor to defend against title defects created by himself and all prior titleholders." Munawar v. Cadle Co., 2 S.W.3d 12, 16 (Tex. App.—Corpus Christi 1999, pet. denied).

identifies both of the county of probate and the precise volume and page where the filed probate can be obtained. Any abstractor can easily pull up a copy of a recently recorded instrument in virtually any county.

B. Direct Distribution and/or Conveyancing Options and the Doctrine of After Acquired Title 1. General Warranty and Special

Warranty Deeds Due to the cobbled together nature of fractionated ownership of Mineral Interests, use of warranty deeds, whether general or special, is not recommended. Among other reasons is that the language used typically extends liability for failure of warranty of title to one’s heirs, successors and assigns.67 General Warranty Deeds are deeds in which title is warranted back to the date of the first patent. 68 Special Warranty Deeds limit the general warranty of title found in a general warranty deed by adding the phrase "by, though, or under the grantor but not otherwise", such that the grantor only warrants to defend title against title defects arising from grantor's acts and third parties claiming under the grantor.69 One feature common to both and critically important in the conveyance of Mineral Interests, is that each will automatically pass through any title acquired by the Grantor in the property described AFTER the date of the Deed via the Doctrine of After Acquired Title.70

69 A "special warranty deed" limits the express guaranty found in a general warranty deed by adding the phrase "by, though, or under the grantor but not otherwise", such that the grantor only warrants to defend title against title defects arising from grantor's acts and third parties claiming under the grantor. See Id. 70 “It is the general rule, supported by many authorities, that a deed purporting to convey a fee simple or a less definite estate in land and containing covenants of general warranty will estop the grantor from asserting an after acquired title or interest in land, or the estate which the deed purports to convey, as against the grantee and those claiming under him.” Duhig v. Peavy-Moore Lumber Co., 135 Tex.Sup.Ct.J. 503, 144 S.W.2d 878, 880 (Tex. 1940). See Petry, Scott

http://www.legis.state.tx.us/tlodocs/81R/billtext/html/HB02502F.HTM

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2. Quit Claim Deed The alternative use of a Quit Claim Deed71 as an alternative to a warranty deed is likely to lead to the need for additional conveyancing in the future. A Quit Claim Deed does not affirmatively convey title, so it does not pass through After Acquired Title; see discussion following. "If, when taken as a whole, the instrument discloses a purpose to convey the property itself, and not merely a transfer of the grantor's interest, it will be given the effect of a deed, even though it may have some characteristics of a quitclaim. Conversely, if the instrument, taken as a whole, indicates the grantor's intent to merely transfer, or quit claim, whatever interest the grantor may own, it will be treated as a quitclaim deed."72

3. After Acquired Title One of the common elements of the transfer of Mineral Interests over time and multiple generations is the not uncommon issue of after-acquired title. “After Acquired Title” is a legal doctrine by which property automatically vests in a grantee when the grantor acquires title to the property at a point in time after the deed has been executed and delivered.73 During the early part of the 20th century, large families were common and it was fairly usual that one or more of the daughters would remain unmarried and at home as the caretaker of the older generation. They

C., et al “Revisiting After Acquired Title Revisited”, https://www.petrysinex.com/News/revisiting-after-%20acquired-title-revisited.pdf noting “Texas courts also appear to agree with other jurisdictions that the after acquired title doctrine could apply even if the deed contained "no warranty whatsoever", if the deed clearly showed the grantor meant to convey a specific estate” citing C. D. Shamburger Lumber Co. v. Bredthauer, 62 S.W.2d 603, 605 (Tex.Civ.App. - Fort Worth 1933, writ dism'd). 71 A "quitclaim deed" is an instrument which only purports to convey the grantor's right, title, and interest in property, if any. See Cook v. Smith, 107 Tex. 119, 174 S.W. 1094, 1095 (Tex. 1915). In using a quitclaim deed, the grantor makes no covenant of seizen or representation regarding title. Jackson v. Wildflower Prod. Co., Inc., 505 S.W.3d 80, 90 (Tex. App.—Amarillo 2016, pet. denied).

were often not left out of title to inherited Mineral Interests and often had active portfolios that provided their source of income. Depending on their date of death, often coupled with lack of heirs and/or intestacy, title to Mineral Interests would pass to their siblings and their siblings’ subsequent heirs and beneficiaries. If one of those heirs had taken title to a Mineral Interest via a quit claim deed, as the subsequent title flowed down the ancillary family lines, the Quit Claim Deed did not pass through the after acquired title. Another conveyance is likely to required in the future to cure an objection raised by an Abstractor reviewing title. As an interesting aside with regard to minerals: The Doctrine of After Acquired Title does not apply to enlarge the estate conveyed in fee simple determinable via an Oil & Gas Lease. Oil & Gas Leases routinely purport to include the entire Mineral Interest in a specified tract of land where all parties are aware that the typical lessor owns only an undivided interest there. In McMahon v. Christmann74 the court refused to apply the Duhig Rule75 to add minerals acquired by the lessor after execution of the lease. The reasoning given was that, were the Rule to be applied, it could prevent the lessor from asserting his rights to the negotiated Royalty specified within the lease.

4. Deed without Warranty

72 Jackson v. Wildflower Prod. Co., Inc., 505 S.W.3d 80, 90 (Tex. App.—Amarillo 2016, pet. denied). 73 “It is a general rule, supported by many authorities, that a deed purporting to convey a fee simple or a lesser definite estate in land and containing covenants of general warranty of title or of ownership will operate to estop the grantor from asserting an after-acquired title or interest in the land, or the estate which the deed purports to convey, as against the grantee and those claiming under him.” Trial v. Dragon, __ S.W.3d __, 62 Tex.Sup.Ct.J. 1292 (Tex. June 21, 2019) (18-0203). 74 McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341 (Tex. 1957). 75 Duhig v. Peavy-Moore Lumber Co., 135 Tex.Sup.Ct.J. 503, 144 S.W.2d 878, 880 (Tex. 1940).

https://www.petrysinex.com/News/revisiting-after-%20acquired-title-revisited.pdf

https://www.petrysinex.com/News/revisiting-after-%20acquired-title-revisited.pdf


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A more effective tool than use of a Quit Claim Deed may be use of a Deed Without Warranty allowing an Executor to avoid any warranty of title to the heirs and beneficiaries of an estate or trust but allowing after acquired title to flow through should any be discovered after the conveyance. Typical language in a Deed without Warranty reads as follows: “Grantor, for the Consideration and subject to the Reservations from Conveyance and the Exceptions to Conveyance, grants, sells, and conveys to Grantee the Property, together with all and singular the rights and appurtenances thereto in any way belonging, to have and to hold it to Grantee and Grantee’s heirs, successors, and assigns forever, without express or implied warranty. All warranties that might arise by common law as well as the warranties in section 5.023 of the Texas Property Code (or its successor) are excluded. This conveyance is intended to include any property interests obtained by after-acquired title.” 76 [Emphasis added.] A deed without warranty appears to have first been recognized in case law in the 1892 case of Lindsay v. Freeman77 when the Supreme Court found that a deed which purported to contain no warranty of title, was still sufficient to estop the Grantor from denying that after acquired title had passed to the grantee. Deeds without Warranty are not common in other states but have become a common tool in Texas, particularly in dealing with Mineral Interests. As

76 Porter, Kristen Quinney “Which Way Do I Go: Title Issues Affecting Deeds of Gift, Enhanced Life Estate deeds and Transfer on Death Deeds”, State Bar pf Texas Advanced Elder Law Course, April 6, 2017 77 Lindsay v. Freeman, 18 S.W. 727 (Tex. 1892). 78 Texas Property Code Section 5.023. 79 There is no reported case dealing with a Deed without Warranty that expressly supports this premise, but a Deed without Warranty was discussed at length in Lance v. Robinson, 543 S.W.3d 723, 61 Tex.Sup.Ct.J. 547 (Tex. 2018) without any discussion that it would not have conveyed title had the Grantor owned title. 80 See Lance v. Robinson, 543 S.W.3d 723, 61 Tex.Sup.Ct.J. 547 (Tex. 2018).

shown in the example, the deed disclaims ALL warranties, including implied warranties codified by Texas Property Code Section 5.023.78 The form does, however, incorporate language of actual conveyance (“grant and convey”) so it does constitute an affirmative conveyance of the grantor’s interest in the property in question.79 This affirmative language of conveyance differs from the typical language in a Quit Claim Deed where the language typically reads: “Grantor quitclaims to Grantee all of Grantor’s right, title, and interest in and to the Property.” Courts have held, though, if the Grantor does not actually own an interest in the property being conveyed, then, like a Quit Claim Deed, nothing is conveyed80 and no breach of the warranty of seizen occurs.81 The disclaimer of warranty found in a Deed without Warranty can be adapted to any type of conveyance, including Assignments of Royalty Interests, Mineral Deeds, Executor Deeds, Distribution Deeds or Trustee Deeds. The primary and important difference, therefore, between the Deed without Warranty and a Quit Claim Deed is that a grantee under a quitclaim deed does not obtain title to any interest in property acquired by the grantor after the delivery of the quitclaim deed, through the applicability of the Doctrine of After Acquired Title.82

5. Affidavit of Heirship The informal preparation and filing of Affidavits of Heirship in counties where evidence is lacking

81 See Lykken v. Kindsvater, No. 02-13-00214-CV (Tex.Civ.App.-Fort Worth November 6, 2014) where the court notes that the Covenant of Seizen (with various spellings over time), in absence of any qualifying expressions, is read into every conveyance of real property, except quit claim deeds, and constitutes "a guaranty against any title existing in a third person [that] might defeat the estate granted," citing Langford v. Newsom, 220 S.W. 544, 545 (Tex. Comm'n App. 1920, holding approved) and Fender v. Farr, 262 S.W.2d 539 (Tex.Civ.App.-Texarkana 1953, no writ).. . 82 Renfrow v. Lineberry, 271 S.W.2d 440 (Tex. Civ. App.—El Paso 1954, writ ref'd n.r.e.).

https://statutes.capitol.texas.gov/Docs/PR/htm/PR.5.htm#5.023


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to establish transfer of minerals interests from earlier generations is a common practice in the oil field where “marketability of title” is not only rarely reviewed but often impossible to establish. Mineral Interests are bought, sold, inherited and leased with little formal indicia of ownership. Non-lawyer landmen seeking leases often prepare and secure execution of in-house forms of Affidavits of Heirship as part of the process of securing leases from heirs. The form and substance rarely follow the form specified in Sections 203.001 and 203.002 of the Texas Estates Code83 and the requirement that the Affidavit be secured from a disinterested party is enforced only where an interest of substantial value is involved. Use of such Affidavits of Heirship can thus be vey helpful and can also provide “links” to the chain of title to clarify known issues.

6. Assignment (Working Interest and Overriding Royalty Interest)

As initially discussed, each “stick” in the “bundle of sticks” comprising a Mineral Interest is considered real property in Texas.84 In instances where a decedent owns a Working Interest or Overriding Royalty Interest, a question can arise as to how such interests are to be conveyed. A Working Interest is synonymous with the Leasehold Interest, or right to develop under the bundle of sticks analogy. It is conveyed to the lessee pursuant to an Oil & Gas Lease as a fee simple determinable (subject to a right of reverter retained by the lessor).85 An Overriding Royalty Interest is an interest in the proceeds from the sale of oil and/or gas. It is a non-operating interest and continues only for so long as the underlying lease continues.86 Other similar nonoperating interests including production payments, net profits interests and carried interests operate the same way. Each is carved out of the Working Interest, free of the

83 Texas Estates Code, Section 203. 84 Altman v. Blake, 712 S.W.2d 117, 118 (Tex.1986). 85 Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188, 192 (Tex. 2003).

costs of production. Because by definition, they are interests in the proceeds from the sale of production (oil and gas already removed from the ground), they are considered personal property in some states (Kansas and Oklahoma). Overriding Royalty Interests are, however, considered real property in Texas. Overriding Royalty interests are often created as part of the consideration for an assignment by the lessee of all or part of the leasehold interest pursuant to an Oil & Gas Lease. If an estate is found to hold a Working Interest, there are significant issues associated with ongoing liabilities that should encourage involvement of an oil and gas expert before the Working Interest is transferred to heirs and beneficiaries.87 That, being said, the holder of a Working Interest will usually have ownership not only in the leasehold (real property) but also in tangible personal property such as equipment, fixtures, logs, files, title opinions, abstracts and other documents, titled personal property and other items associated with the development of the minerals, and intangible property rights, such as pooling agreements, operating agreements, balancing and purchase agreements, etc. The Working Interest is also subject to various obligations and liabilities under the lease, as well as to third parties (including responsibility at the termination of the lease to plug and abandon the well in accordance with requirements of the Texas Railroad Commission). Both Working Interests (insofar as it relates to the leasehold rights) and an Overriding Royalty Interest are considered real property interests in Texas, but they are typically conveyed via Assignments rather than Deeds. The conveyance, to address all the interests owned, will typically be a hybrid instrument often titled in the general form of “Assignment, Bill of

86 Keese v. Continental Pipeline Co., 235 F.2d 386, 388 (5th Cir. 1956), 6 O&GR 364. 87 See Patton, David. “The Bad Moon that Never Rose But Didn’t Go Away-The Continuing Liability of an Assignee After Assignment.” State Bar of Texas Oil and Gas Disputes, Houston January 26,2017.

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Sale and Conveyance.” The format is designed to convey both the real property and assign the personal property interests in one document. Such Assignments, however titled, are recorded in the Deed Records as notice to third parties.

7. After the Distribution. Regardless of which choice is made to distribute assets out of the probate to the beneficiaries, two additional steps are required. Operators of producing wells, after having gone through the leasing process, do not double check land records for the possibility that interests may change hands. Similarly, taxing districts may not pick up all documents conveying interests to new parties and certainly have way to check for changes of addresses or name changes resulting from marriages or divorces. Each current Operator will need to be notified of the change in ownership with a request that they transfer the decedent’s interest on their books and records. Copies of transfer documents, probate orders and other documents evidencing the transfer and the authority of the signing party should be included with the transfer notification. It is helpful to provide a new W-9 showing the full legal name, address and social security number of each transferee. Checks remaining uncashed for long periods, returned mail reflecting a bad address, or notice of an owner’s death will result in automatic suspension of Royalty Payments so the Operator notifications should also request release of any suspensed funds, if any. Requested changes are not made instantaneously. Check cycles generally take 2-3 months to incorporate new information into the system. With small owner-operators, just starting the process may require multiple follow-up requests. Creating and monitoring a checklist of all the requests sent to verify that the interest is transferred in a timely manner is an action that needs to be handled on an ongoing basis until all the transfers have been verified and the interests are checked and “in pay” to all the beneficiaries and/or heirs.

88 Texas Tax Code Section 1.07, Subsection (b).

Simultaneously with notifying current Operators, advising the Appraisal District in each county and enclosing a copy of the transfer document is also recommended (even though conveyances are typically picked up by the time the tax rolls are assembled after each January 1st). If any part of the surface estate is owned, in particular, requests should be made for separate rendition by owned interest, see earlier discussion. An Appraisal District is required to send correspondence, including the annual Notice of Appraised Value (typically sent about May 1st of each year) to the last known address they have on record.88 The Notice is deemed “delivered” when it is placed in the mail89 so failure to receive the notice because of transfer or move is not considered a valid reason for missing a protest deadline or failing to pay taxes due. VIII. Working with Heirs &

Beneficiaries – Minerals Management The information provided will hopefully provide both the probate practitioner and the parties serving as executors and administrators with an overview of the kinds of information available and steps recommended if Mineral Interests are owned within the estate. What is typically not on the radar of either one is the result when the estate has completed the job identifying and transferring Mineral Interests into the names of beneficiaries. The parties’ names and contact information, as public records, immediately becomes searchable from virtually any computer in the world. Hundreds of individuals, working through a multitude of short-lived Limited Liability Companies, flood the mailboxes with unsolicited offers to purchase Mineral Interests targeting the information from these distributions. Heirs and beneficiaries with little to no background on managing Mineral Interests, find themselves to be prime targets for scammers. Appendix E contains two samples of real solicitation letters. The first came, surprisingly in light of the figure offered, from a reputable company. The second is identical to hundreds reviewed where a sight draft is provided with small type options for the offeror to disclaim,

89 Texas Tax Code Section 1.07, Subsection (c).




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while the required “acceptance” is the full execution and return of a fully effective deed. The author receives two-three calls a year from now former mineral owners who accepted offers and waited patiently for sight drafts to mature and be paid, only to realize after the passage of several months that payments would not be made. Inherited Mineral Interests were often painstakingly assembled by members of prior generations, knowing they would go through ups and downs in value, but that they would continue to provide benefits well into subsequent generations. The advice always given to family members was “Never sell your minerals.” In this day and age,

the advice is still given by every oil and gas attorney, but it’s followed with a suggestion that an Administrator or Executor, especially if he or she is also a beneficiary, secure an education in managing what will be a valuable asset and urge the other beneficiaries to do the same. If family dynamics allow, organizing and working together is very valuable. Two excellent resources that can be provided without reservation to new Mineral Owners are the Mineral Rights Forum and the National and State Association of Royalty Owners (Texas Chapter).


1

APPENDICES

APPENDIX A: GLOSSARY OF TERMS 1

APPENDIX A GLOSSARY OF TERMS

Selections Taken from Schlumberger Oilfield Glossary (Free and Accessible to the Public)

https://www.glossary.oilfield.slb.com/ Bonus: A monetary incentive given by the lessee (either an individual

or company) to the lessor (mineral owner) for executing or ratifying an oil, gas and mineral lease.

Delay Rental: Consideration paid to the lessor by a lessee to extend the terms of an oil and gas lease in the absence of operations and/or production that is contractually required to hold the lease. This consideration is usually required to be paid on or before the anniversary date of the oil and gas lease during its primary term, and typically extends the lease for an additional year. Nonpayment of the delay rental in the absence of production or commencement of operations will result in abandonment of the lease after its primary term has expired.

Mineral Interest: Ownership of the right to exploit, mine or produce all minerals lying beneath the surface of a property. In this case, minerals include all hydrocarbons. Mineral interests include: 1. the right to use as much of the surface as is reasonably necessary to access the minerals, 2. the right to execute any conveyances of Mineral Interests, 3. the right to receive bonus consideration, 4. the right to receive delay rentals and 5. the right to receive royalty. Any or all of the above five rights of mineral ownership may be conveyed by the mineral owner.

Oil & Gas Lease: A contract between mineral owner, otherwise known as the lessor and a company or working interest owner, otherwise known as the lessee in which the lessor grants the lessee the right to explore, drill and produce oil, gas and other minerals for a specified primary term and as long thereafter as oil, gas or other minerals are being produced in paying quantities. This lease gives the lessee a working interest. The oil and gas lease is granted in exchange for royalty payments to the lessor.

Operator: The owner of the right to drill or produce a well, or the entity contractually charged with drilling of a test well and production of subsequent wells.

Overriding Royalty Interest: A percentage share of production, or the value derived from production, which is free of all costs of drilling and producing, and is created by the lessee or working interest owner and paid by the lessee or working interest owner.

Paid-Up Lease: An oil and gas lease in which delay rentals for the entire primary term are paid in advance with the bonus consideration.

Primary Term: The period of time during which an oil and gas lease will be in effect, in the absence of production, drilling or other operations specified by the lease. The oil and gas lease can be perpetuated past the primary term by production in paying quantities, drilling, operations and/or the payment of shut-in royalties specified by the lease.

APPENDIX A: GLOSSARY OF TERMS 2

Royalty: A percentage share of production, or the value derived from production, paid from a producing well.

Royalty Interest: One of the Bundle of Sticks making up a Mineral Interest that can be owned separately by conveyance or reservation. If uncoupled from the other components, typically referred to as a nonparticipating royalty interest, or NPRI, and conveying only a right to a share of the royalties paid on a lease but not in any bonus, shut-in or delay rental payments.

Secondary Term: The term of an oil and gas lease in which the lease is held in force after expiration of the primary term. Production, operations, continuous drilling and/or shut-in royalty payments are often used to extend an oil and gas lease into its secondary term.

Shut-In Royalty: A shut-in royalty is a payment made as a substitute or contractual method of production to maintain an Oil and Gas Lease in effect for a period when a gas well capable of producing gas in paying quantities is shut in, typically for lack of a market or declines in market rates. Lease terms, to the extent specifically set forth, govern.

Working Interest: A percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and gas from a tract of property. Working interest owners are obligated to pay a corresponding percentage of the cost of leasing, drilling, producing and operating a well or unit. After royalties are paid, the working interest also entitles its owner to share in production revenues with other working interest owners, based on the percentage of working interest owned.

APPENDIX B: SAMPLE RECORDING FEE SCHEDULE 1

APPENDIX B SAMPLE RECORDING FEE SCHEDULE

HARRISON COUNTY, TX

Below is a fairly typical example of a Texas county’s recording fee schedule. Cost per county to file a Probate including the Order Admitting a Will to Probate and Authorizing Letters Testamentary and the Last Will and Testament of a Decedent consisting of a total of 15 pages: First Page $26.00 Pages 2-15 (14 total) $56.00 Cost Per County: $82.00

Versus a Deed without Warranty (3 Pages) Referencing Probate Documents Recorded in County of Probate by Volume and Page

First Page $26.00 Pages 2-15 (14 total) $8.00 Cost Per County: $34.00 Difference in Cost Per County (Approximate): $46.00 This example assumes a relatively simple will of eleven pages. Many wills are substantially longer. In one recent case in which our firm assisted to convey title of the mineral estate to a newly named Trustee, conveyances were filed in 24 Texas counties. Prior to our involvement, a full ancillary probate had been prepared in Harris County for a substantially longer California will with included spousal and minor trusts and filed in all 24 counties. The filing costs were substantial while many of the Mineral Interests were not.

Harrison County’s fee schedule is identical to many mid- to large-size counties. Small counties may be a dollar or two cheaper on the first page.

SOURCE: http://www.co.harrison.tx.us/county%20clerk/home%20page/fee%20schedule.pdf

APPENDIX C: SAMPLE OIL & GAS MAPS 1

APPENDIX C SAMPLE OIL & GAS MAPS

TEXAS RAILROAD COMMISSION -GIS VIEWER

SOURCE OF MAPS: Texas Railroad Commission http://wwwgisp.rrc.texas.gov/GISViewer2/

PARSLEY EILAND

DEVELOPMENT JAGGED PEAK

WHISKEY RIVER DEVELOPMENT

REEVES COUNTY PECOS COUNTY

WARD COUNTY


HOWE GAS UNIT NO. 2 PRODUCTION RECORDS:

-0- FEBRUARY 2012 TO NOVEMBER 2019


PRODUCTION RECORDS -0-

SEVEN MONTHS

APPENDIX D: LEASING TO ROYALTIES 1

APPENDIX D LEASING TO ROYALTIES

It has been the author’s experience that a typical timeline from leasing undeveloped Mineral Interest to production and payment of royalties to a Mineral Interest Owners follows the following general steps: 1. An Operator identifies a target field and land area (“area of interest”) for potential development. 2. Landmen1, often independent of the Operator, are retained and provided parameters for identifying and

leasing the tracts within the area of interest. 3. An initial determination of ownership is made by the Landmen from a variety of records, such as on-

hand or otherwise available previously prepared Abstracts of Title (copies of which can often be inspected for a fee at the offices of independent county abstract companies), and/or review of instruments located from the Grantor/Grantee Indices at the County Courthouse.

4. Based on the determination of ownership made by the Landmen, lease offers are presented and negotiated within the financial and other parameters provided by the Operator. Executed leases are often held for recording to avoid alerting third parties to the attention being turned on the area of interest (hoping to eliminate the possibility that other parties will seek to acquire key leases and hold for additional consideration from the Operator).

5. When leases have been obtained for the “drill-site” tract and other key tracts (but rarely from all mineral owners), permitting and development is pursued by the Operator. Substantial lapses of time may occur from the time leases are negotiated and development is instituted. The Operator has until the end of the Primary Term of the Oil & Gas Lease to achieve production and activity often occurs in a flurry as the expiration nears of the Primary Term.

6. After a well has been completed as a producing well, the Operator has a statutory period of 120 days in which to begin paying royalties to the leased Mineral Interest owners.2 During this period, the Operator will typically secure a full Abstract of Title on the leased properties, theoretically tracing ownership of every owner of a Mineral Interest in the area of interest back to the first patent out of the Crown/Sovereign.3 As a practical effect, however, because of the historical nature of mineral development in TX, and the availability within the community of attorneys who prepare Abstracts of Title, the attorney performing the Abstract will normally start with the last Abstract prepared for the property in question and simply “bring the title forward” from that Abstract. There is no such thing as “clean title” to a tract of land. Various issues relating to possible claims are identified and quantified. Some will require resolution (such as securing evidence of heirship or clarifying names appearing in different forms and not conclusively shown anywhere to be the same person). The Operator is the final decision-maker on whether curative work is required before payment of royalties.

7. Division Orders are then prepared and sent, with requests for curative actions or documents, if any. Division Orders are prepared for every owner of an included Mineral Interest, based on a prorata share

1 The background and qualification of landmen can range from extensive in the case of a landman with a certification from the American Association of Petroleum Landmen (AAPL), to an individual hired by a land company, provided with a 3-5 day education on how to research land records and negotiate leases, and sent out to secure leases. Unless the landman holds themselves out to be “Certified”, there are no minimum educational requirements or training and no forum in which ethical lapses can be heard. Because of this, clients should be always be advised to seek legal review before leases and other documents are executed. More information about certification through the AAPL can be secured at their website: https://www.landman.org/ 2 Texas Natural Resources Code Section 91.402. Note however, that (i) royalties may be withheld pending certain disputes as to title (Subsection (b)); (ii) the requirement of interest to be paid on late royalties is minimal Texas Natural Resources Code Section 91.403; and (iii) most leases have generous notice and periods to cure requirements before a default can be pursued. This combination of factors often leads operators to exceed the statutory time for payment with impunity and many times the process is not completed with Division Orders sent for many months after production commences. 3 Various parts of the State of Texas have been under the sovereignty of six crowns: SPAIN, FRANCE, MEXICO, THE REPUBLIC OF TEXAS, THE UNITED STATES OF AMERICA, and for a brief intervening period, the CONFERATE STATES OF AMERICA.

APPENDIX D: LEASING TO ROYALTIES 2

of the owned interest, expressed as a Decimal Interest4 of eight digits. In TX, signature of a Division Order, once sent, is a requisite to payment unless otherwise waived in the original Oil and Gas Lease.5 A Division Order, by statute, may not modify the terms of an Oil and Gas Lease or operating agreement.6 Commentators point out that this language may not prevent an owner from being “estopped” from raising certain issues if he signs a Division Order that fails to comply with an Oil & Gas Lease.7

8. Unless the required return of a Division Order has been negated in the Oil & Gas Lease, Royalty Payments will commence only once the Division Order has been returned. Royalty Payments if provided in hard check form will be accompanied by a Statement (referred to in industry parlance as simply as a “check stub”) providing statutory required detail as to amount and type of production sold, gross amounts received, and the net amount payable as royalty (determined by multiplying that Royalty Owner’s approved “Decimal Interest” as shown on the Division Order against the gross receipts). Direct deposit payments are not required to have separate detail provided in hard copy but electronic information is often available.

9. The PAY DECK is the spreadsheet showing each owner and their Decimal Interest, all of whom should total 100% (or 1.00) when added to the Working Interest of the Operator(s) and any Overriding Royalty Interest granted out of the Working Interest. The Pay Deck is also provided to the taxing authorities to allow appraisal and taxation of the interest of each individual Mineral Interest owner.

4 A Decimal Interest is a number arrived by multiplying each owner’s undivided interest in a particular tract of land by the share that tract bears to the total acreage in a well (or pool) multiplied by the stated royalty interest payable pursuant to the Oil and Gas Lease executed by that owner. This can be further complicated in the situations where no lease has been signed and the owner is an “unleased mineral owner” but that complexity is left for recommended review by an expert with all the details of a particular situation. 5 Texas Natural Resources Code Section 91.402, Subsection (c)(1). 6 Exxon Corp. v. Middleton, 613 S.W.2d 240 (Tex. 1981). 7 McFarland, John. “Oil and Gas Lease Basics”, State Bar of Texas Real Estate Law 101, San Antonio, TX July 11, 2018, Pg 10.

APPENDIX E: SAMPLE OFFER LETTERS 1

APPENDIX E SAMPLE OFFER LETTERS


NOTE the offered amount is taken from tax values. Investors typically seek a 2-3.5 times return on investment in this kind of asset. This offer speaks to the use of tax values as true fair market value for purposes of selling an interest.