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Transfers of Lessor's Interests

A lessor has the right to alienate his/her remaining interests in the oil and gas lease, like the right to receive royalties accruing by virtue of the removal of gas or oil.  Lessor’s rights may include royalty rights, the right to receive delay rentals, the right to share in benefits secured from the lessee such as production payments, the right to develop and produce minerals, and the executive right.

The law implies the right of reverter upon termination of the determinable fee of the lessee.  The right of revertor is the grantor’s right to fee ownership in the real property reverting to him/her if the condition terminating the determinable fee occurs.  The royalty rights that may revert, as part of the total mineral estate that may revert, are therefore part of this possibility of reverter.  Since the royalty rights may be separately alienated, they may be conveyed as part of this possibility of reverter the same as the mineral estate may be[i].  In other words, revertor is a right of the lessor which may be sold or conveyed and may be set forth in the oil and gas lease by necessary legal implication[ii].  In the absence of express restrictions, the transferee of lands subject to a gas and oil lease ordinarily acquires all rights accruing from the ownership of the land, including the transferor’s estate in the reversion.

Where a lessor of oil lands conveys the fee in the leased premises without reserving the royalties, the royalties are payable to the grantee.  However, if the grantor intends to reserve particular gas and oil royalties s/he may do so by inserting an appropriate provision in the agreement.  Generally, the transferee of a lessor’s interest will be protected insofar as the transferee acquired the property in good faith for a valuable consideration and without notice.  If the purchaser takes the property with an existing lease with adequate notice of the existing rights, such purchaser’s rights are subject to the rights of other persons to share in the oil and gas produced from the land under such lease.

In the case of condemnation of a property subject to oil and gas lease, the condemnor has only limited rights.  For instance, where land subject to an oil and gas lease is condemned by a railway company, the company acquires only the exclusive right to use the surface of the land for railway purposes, and does not acquire a right to drill wells for oil and gas.  The right to remove the oil and gas from the land is vested with the lessee and the lessee has to do this without interfering with the railway company’s exclusive right to use the surface for railway purposes.

The lessor has no right to subdivide the single unified obligation as it may impose a subsequent burden on the lessee. Thus, a seller cannot sell the minerals to numerous parties in segregated tracts and parcels, and thus subdivide what was before a single unified obligation affecting the lease as a whole, into countless separate obligations[iii].  Thus, in the absence of a provision in an oil and gas lease to the contrary, the implied covenants are not divisible, and the rights and liabilities of the lessee and the lessee’s assigns are not affected by a sale of a part of the leased premises.  Due to the same reasons, an assignee’s duty to drill wells in addition to those that s/he has drilled is not affected by the lessor’s sale of a part of the premises to which the assignment relates.

However, some courts are of the view regarding royalty division in the case where different persons acquire segregated portions of land subject to a gas and oil lease.  In such a case, if production and gas comes from less than all of the portions, the royalty has to be divided among the several owners, without regard to the particular portion of the leasehold from which the product is extracted, in the ratios that their respective acreages bear to the total acreage.  The grantor’s intention may be the determinant factor in this regard[iv].

In addition, a lessor has a right to convey his/her royalty under a specific lease or leases in whole or in part, or in perpetuity.  Conveyance of future royalty may include or exclude the right to share in any bonuses and delay rentals that may be paid, and the instrument of transfer may specify whether or not the grantee is to have the right to participate in the negotiation of future leases.  It is to be noted that the ordinary conveyance of a true royalty interest does not effect a severance of the gas and oil from the land.

A purchaser of a gas and oil royalty takes the property subject to existing encumbrances of which the person has either actual or constructive notice.  Thus, a person who acquires a royalty interest after the lessor has mortgaged the leased land may lose his/ her rights on a foreclosure, if the mortgagee acts promptly and makes the royalty purchaser a party to the proceedings.

[i] Luckel v. White, 819 S.W.2d 459 (Tex. 1991).

[ii] Kaiser v. Love, 163 Tex. 558, 562 (Tex. 1962).

[iii] Felmont Oil Corp. v. Pan Am. Petroleum Corp., 334 S.W.2d 449 (Tex. Civ. App. El Paso 1960).

[iv] Collins v. Inland Gas Corp., 382 S.W.2d 194 (Ky. 1964).

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