SCOTX: Term Royalty Interests Survive the Rule Against Perpetuities
It is one of those arcane principles discussed at length in textbooks that manifests itself in the real world far less frequently: the rule against perpetuities, the notion "that no interest within its scope is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest." Hunt v. Carroll, 157 S.W.2d 429, 436 (Tex. Civ. App.—Beaumont 1941), writ dismissed, 140 Tex. 424, 168 S.W.2d 238 (Comm'n App. 1943). The Supreme Court of Texas recently examined the intersection of the rule and the oil patch in ConocoPhillips Co. v. Koopmann, No. 16-0662.
These are the facts. Lois Strieber conveyed a 120-acre tract of land in Dewitt County to Lorene Koopmann and her late husband. Strieber reserved "a fifteen-year, one-half non-participating royalty interest (the NPRI), which could be extended 'as long thereafter as there is production in paying or commercial quantities' under an oil and gas lease." Koopmann entered into a mineral lease with the precedecessor-in-interest to Burlington Resources Oil & Gas Company, L.P., a ConocoPhillips subsidiary. Four months before the lease would expire by operation of its own terms for lack of production, Strieber conveyed to Burlington a 60% interest in her NPRI—presumably to incentivize the operator to drill before her interest was gone. After the lease subsequently expired when there was still no production, Burlington took the position that the 15-year term reservation was invalid under the rule against perpetuities, such that the NPRI would properly remain with Strieber indefinitely rather than pass to Koopmann. Naturally, this inured to Burlington's benefit since it owned 60% of Strieber's significant NPRI.
Koopmann, of course, sued. She correctly warned the Court that, "if [it] recognize[s] a Rule violation in this case, [it] would call into question every oil and gas lease that uses similar language, which would be disastrous for the oil and gas industry." If Koopmann had lost on appeal, there certainly would have been a race to courthouse clerks' offices across the State to ferret out just these kinds of conveyances, and this would have opened the floodgates to a nightmarish volume of mineral title litigation. Mercifully, the Court sided with Koopmann.
Writing for an undivided Court, Justice Green first explained that Koopmann's "interest in the NPRI could be deemed 'vested' when it was created if that term is taken to mean that the holder of the interest was at all times ascertainable and the preceding estate was certain to terminate." This test was satisfied here because:
Strieber reserved the NPRI for fifteen years and “as long thereafter as there is production in paying or commercial quantities”—a limitation certain to occur at some point. For these reasons, the Koopmanns’ interest was more akin to a vested remainder when it was created because it was capable of becoming possessory upon the natural termination of a prior estate. Once the lessee was no longer able to produce minerals in paying or commercial quantities, the NPRI would transfer to an ascertainable taker—the Koopmanns.
The Court emphasized that its "holding does not run afoul of the constitution’s prohibition of perpetuities because the future oil and gas interest at issue here does not restrain alienability indefinitely"; indeed, it does just the opposite: "giving effect to a future interest that is certain to vest in a known grantee actually promotes alienability."
On balance, Koopmann represents a positive result for the industry, one which will promote certainty in deed construction and therefore encourage robust exploration and development activities.
Tom is a litigation partner in the Houston office of Kane Russell Coleman Logan PC, where he serves as the head of the firm’s energy practice group. Tom is also the host of a weekly podcast on legal news and developments in the oil-and-gas industry, available at www.energylawroundup.com, and a video series on effective legal writing, available at www.theartofthebrief.com.