Oil and gas title examinations are tough – and recent Texas Supreme Court and appellate court decisions on the construction of old royalty conveyances and reservations have complicated the examination process. These days it is hard to determine whether that 1950s deed reserved a “fixed royalty” (e.g. a 1/32nd interest in the oil and gas produced) or a royalty that will be adjusted (a “floating royalty”) depending on the mineral estate owner’s negotiated royalty rate in the governing oil and gas lease (e.g. a 1/5th of the royalty; a 1/4th of the royalty; a 1/6th of the royalty).

Well, guess what – it is not going to get any easier. As long as there is money on the table – there will be lawsuits.

However, do not despair – there is help to be found in the Texas Statutes. The Texas Division Order statute, enacted in the 1990s and codified at TEX. NAT. RES. CODE ANN. §91.401 et seq. can provide the diligent title examiner ample ammunition to resolve complicated title issues – and provide adequate protection against assertions of errors in the opinion.

This law provides, in essence, that payments on oil and gas production due to royalty owners can be placed in “suspense” if there is a “requirement in a title opinion” that places in issue the title, identity, or whereabouts of the royalty owner, and who, upon reasonable request, has not addressed, satisfactorily the title issue, identity, or whereabouts (e.g. executed curative documents, most frequently, a stipulation of interest). In the alternative, the statute provides that a royalty owner can be required to execute a “division order” as a pre-requisite to payment. And the statute goes as far as to set forth a “model form division order,” which I like to refer to as the “statutory division order” form.

More often than not the problem arises along something like the following lines. George Washington conveyed a tract of land to Abraham Lincoln, excepting and reserving a royalty interest. The examiner cannot determine, with assurance, whether George Washington’s reserved royalty is fixed (e.g. a 1/32nd) or floating (e.g. adjusted depending on the royalty rate set forth in the now governing oil and gas lease).

And more often than not, title examiners draft a title requirement that requires that the heirs of George Washington and Abraham Lincoln execute a stipulation interest, that clarifies their respective ownership interests. Lawyers tend to prefer stipulations of interest over division orders, believing that a mutual clarification of property rights is by far more desirable, which it may very well be. However, for the client (e.g. the wonderful, wonderful client), the division order may offer the quickest, easiest, and most cost-efficient solution.

So, what to do?

First, require that your title examiner clearly identify the “title issue” that will justify the suspension of royalty payments;

Second, require that your title examiner clearly identify the parties and their interests that may be placed in suspense; and

Three, require your title examiner to set forth a reasonable and prudent solution.

Here is a suggested comment and requirement that you can require:

“COMMENT: By instr. dated ______, 1932 (see DR Vol. __, p. __), George Washington conveyed the Captioned Land to Abraham Lincoln, excepting and reserving unto himself an undivided 1/32nd nonparticipating royalty interest. The examiner concludes that the reservation was a “fixed” 1/32nd NPRI. However, in light of recent court decisions, it is possible that a court could reach a decision that the NPRI would adjust based upon the royalty rate set forth in the governing lease, to the benefit of the heirs and assigns of George Washington and to the detriment of the heirs and assigns of Abraham Lincoln. Accordingly, there is a title issue that needs resolution.

The examiner has determined the affected interests and owners, subject to this comment and subsequent requirement, to be the following:

NAME                                                INTEREST

__________________                            _________________

__________________                             _________________

REQUIREMENT NO.__: All of the affected owners, listed above, should execute a division order (in the form substantially as set forth by TEX. NAT. RES. CODE §91.402) prior to the release of funds to any of the listed owners. If one or more refuse to execute an order, the examiner should be consulted as to the advisability of placing some (or all) of these interests in suspense, requiring a stipulation of ownership (with words of grant) executed by the affected owners, or interpleading these funds (as being in dispute), in the registry of an appropriate court, or some combination of such actions.”

While I agree that it is always advisable to secure a proper stipulation of interest, the costs to the client (and to the landowners) may just be too high. And, if everyone signs a division order – there is no risk to the oil and gas operator – at least until an owner revokes a division order. So, we title examiners should offer our clients the less expensive and intrusive division order execution requirement as an alternative to a stipulation of interest.

As an aside, if you “go with” a stipulation of interest, be sure it contains words of grant and cross-conveyance (in short, consult an attorney).

What’s wrong with this approach? Why require expensive and difficult to obtain Stipulations of Interest? – I welcome opposing views. Let the discussion begin!

Edward Wilhelm and Jack Wilhelm provide assistance to operators of oil and gas properties.

THE WILHELM LAW FIRM, 5524 Bee Caves Road, Suite B5, Austin, Texas 78746; (512) 236 8400 (phone); (512) 236 8404 (fax); www.wilhelmlaw.net

DISCLAIMER: The information on this site is not intended to and does not offer legal advice, legal recommendations or legal representation on any matter. You need to consult an attorney in person for legal advice regarding your individual situation.