Property and Oil and Gas Don't Mix: The Mangling of Common Law Property Concepts

Bruce M. Kramer*

I. Indroduction...... 540 II. The Problem with Estates 541 A. Some Basic Definitional and Conceptual Difficulties 541 B. Defining the Leasehold Estate-Why Adopt a Rule of Automatic Termination? 543 III. The Rule Against Perpetuities 550 A. The Defeasible Term Interest...... 551 B. Top Leases...... 557 C. Conclusion...... 558 IV. The Mysterious One-Eighth...... 559 V. Real Covenants-Herein of Assignments and Subleases...... 562 VI. The Differences Between a Canon of Construction and a Rule of Law...... 564 VII. Some Closing Thoughts 568

I. INTRODUGrION One of the reasons I chose to teach Oil and Gas Law a number of years ago was that I perceived it to be an advanced property course.! While that perception is changing,2 I still believe that the heart, if not the brains, behind any basic course in oil and gas law will still lie in thousand-year-old common law property principles, which must be mastered by the student if she is to understand how modern oil and gas law and transactions are structured. The fact that property principles, and to a great extent, real prop­ erty principles, underlie oil and gas law has created many positive ex­ ternalities for the industry. Some of the benefits were noted by the Texas Supreme Court which, when interpreting an instrument to cre­ ate an overriding royalty interest, rather than a mere contractual obli­ gation to pay a sum certain, stated: "[overriding royalties] are interests in land; and hence not subject to parol sale, but have the protection of the statute of frauds, the statutes regulating conveyances and mortgages of real estate, and the statutes requiring the record of instruments affecting title to or liens on land."3

* Maddox Professor. Texas Tech.; A.B., 1968; J.D., 1972, V.C.L.A.; LL.M.• 1975. Illinois. 1. I must confess that one of my dumbest decisions in law school was not taking the Oil and Gas Law course taught by Richard Maxwell. What I did not learn in his course, I have tried to pick up over the years through a careful reading of his many thought-provoking articles. In addition, Dick has shown an amazing patience in responding to a continuous series of questions about oil and gas that I have bombarded him with. I nonetheless was able to figure out that Oil and Gas Law was largely taught by property scholars, leading me to believe that my interest in property law would be rewarded by teaching the course. 2. You can compare the earlier editions of HOWARD WILLIAMS, ET AL., OIL AND GAS LAW (1st through 3rd edit.) and WILLIAM HUIE, ET AL., CASES AND MATERIALS ON OIL AND GAS LAW (1960) with their current versions to see a de-emphasis on traditional property law concepts. See also EUGENE KUNTZ, ET AL., CASES AND MATERIALS ON OIL AND GAS LAW (2d ed. 1992) for a more "modern" view of oil and gas law. 3. Tennant v. Dunn, 110 S.W.2d 53, 57 (Tex. Comm'n App. 1937). See also A.W. Walker, Property Interests Created by Lease, 7 TEX. L. REV. 1,32-49 (1927).

540

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It is property law which provides the skeletal structure to oil and gas jurisprudence. There is an increasing amount of flesh and bones that are being added to the skeleton, but without the core skeleton, oil and gas law as we know it today and as we will continue to know it in the next century would n'ot exist. While I suggest that some courts have mangled common law property principles, one should not infer that the mangling is due to a judicial indifference to common law property concepts. In fact, the strained exercise of several courts to justify their decisions in the face of several hundred years of property jurisprudence lends credence to the belief that courts will not easily shed the "baggage" which has attached itself to oil and gas law, merely because the nature of the business has changed. Flexibility is the hall­ mark of the common law and, given the opportunity for the states to experiment, it is not surprising that substantial variations from tradi­ tional property law principles arise on occasion. Nonetheless, courts do not feel comfortable about "divorcing" oil and gas law from prop­ erty law. Whether straining to avoid the application of the Rule Against Perpetuities to a transaction that Lord Mansfield or Professor Dukeminier would find outside the furthest extension of the Rule or struggling to "pigeon-hole" the oil and gas lease as one of only two possible common law estates, the courts give great deference to centu­ ries-old property tenets. It is my hope that future courts and future law students will have that same respect for the property skeleton which gives oil and gas jurisprudence its intellectual and practical vibrancy.

II. THE PROBLEM WITH ESTATES

A. Some Basic Definitional and Conceptual Difficulties

The Restatement of Property defines an estate as "an interest in land which (a) is or may become possessory and (b) is ownership mea­ sured in terms of duration."4 This rather basic definition clearly re­ stricts the estate concept to corporeal or possessory interests, leaving out the incorporeal or non-possessory interests such as easements or profits a prendre.5 In the United States there are two or three differ­ ent classification schemes that have been adopted regarding the sev­ ered oil and gas estate.6 A large number of states, including Arkansas, Colorado, Kansas, New Mexico, North Dakota and Texas,

4, RESTATEMENT OF PROPERTY 9 (1936). 5. OLIN BROWDER, ET AT" BASIC PROPERTY LAW 203-04 (5th ed. 1989) (hereinafter BROWDER, ET AL.). 6. See generally 1 HOWARD WILLIAMS & CHARLES MEYERS, OIL AND GAS LAW 203 (1993) (hereinafter WILLIAMS & MEYERS).

HeinOnline -- 33 Washburn L.J. 541 (1993-1994) 542 Washburn Law Journal [Vol. 33 treat the severed estate as a possessory or corporeal interest.? Obvi­ ously, in these states an owner of a severed oil and gas estate may create any of the recognized estates that may be carved out of the fee simple absolute. Another group of states, including California, Indiana, Louisiana, New York, Oklahoma'and Wyoming,S treat the severed mineral estate as creating only a non-possessory interest, akin to a profit a prendre, which gives the owner the right to explore for, search and then cap­ ture the oil or gas by bringing it to the surface. In these non-owner­ ship states, therefore, the common law estate system should not be applicable since the severed oil and gas estates can never become pos­ sessory. Notwithstanding the contradiction, courts in non-ownership jurisdictions continue to employ the common law estates classification scheme to describe various mineral and leasehold interests that may be carved out of the oil and gas estate.9 It is axiomatic in classical property jurisprudence that a person can only transfer an interest equal to or smaller than the interest owned. That axiom is reflected in the famous maxim, "nemo plus juris transferre potest quam ipse habet" - No one can transfer a better title than he himself has.to This concept applies to the size, nature and duration of the property interest. Therefore, the owner of an incorpo­ real interest cannot assign or transfer a corporeal interest.ll Likewise in non-ownership jurisdictions, or in jurisdictions such as Kansas which treat the leasehold estate as an incorporeal interest,12 the roy­ alty interest that is carved out of the lease should be classified as a chattel real or a chose in action.13 Yet royalty interests are universally treated as incorporeal interests even in states which treat the lease as

7. See cases cited in 1 WILLIAMS AND MEYERS, supra note 6, at 44-50. The Texas Supreme Court in Stephens County v. Mid-Kansas Oil & Gas Co., 254 S.W. 290 (Tex. 1923) concluded: We do not regard it as an open question in this state that gas and oil in place are minerals and realty, subject to ownership, severance, and sale, ... in like manner and to the same extent as is coal. .... But it is earnestly insisted that the instruments con­ veyed only incorporeal hereditaments ... and that the terms of the instruments pre­ cluded the vesting of title to the gas and oil save as personalty after being brought to the surface. Ownership of the gas and oil in place meant having the exclusive right to possess, use and dispose of the gas and oil. [d. at 292. 8. See cases cited at 1 WILLIAMS & MEYERS, supra note 6, at 34-44. 9. For example in Gerhard v. Stephens, 442 P.2d 692 (Cal. 1968), the court found that an oil and gas lease created a defeasible fee estate even though only an incorporeal hereditament was created. See also, Callahan v. Martin, 43 P.2d 788 (Cal. 1935); Stewart v. Amerada Hess Corp., 604 P.2d 854 (Okla. 1979). 10. BROWDER, ET AL., supra note 5, at 756. 11. RICHARD HEMINGWAY, THE LAW OF OIL AND GAS 60 (3d ed. 1992) [hereinafter HEMINGWAY]. 12. Lathrop v. Eyestone, 227 F.2d 136 (Kan. 1951). 13. JON BRUCE & JAMES ELY, JR., THE LAW OF EASEMENTS AND LICENSES 3-7 (1988); HEMINGWAY, supra note 11, at 60.

HeinOnline -- 33 Washburn L.J. 542 (1993-1994) 1994] The Mangling of Common Law p'roperty Concepts 543 an incorporeal hereditament.14 Likewise states which treat the oil and gas estate as an incorporeal interest should treat the leasehold estate as a chattel real or chose in action, but again those courts universally recognize leasehold estates as incorporeal hereditaments.15 One of the reasons why courts refused to apply the chose in ac­ tion label to royalty interests was that choses in action were not as­ signable at common law.16 In addition, choses in action would not be treated as incidents to the landowner's possibility of reverter in the mineral estate and thus would not automatically transfer with a con­ veyance of the possibility of reverterP It is clear that treating lease­ hold and/or royalty interests as something less than an incorporeal hereditament would hinder the alienability of mineral estates by rais­ ing questions as to their assignability and by taking them outside of many of the state recording statutes. That would defeat the purpose of having a title system which creates a stable environment where fi­ nancial interests can infuse capital into the industry with some cer­ tainty of having sufficient security to justify the investments.

B. Defining the Leasehold Estate-Why Adopt a Rule ofAutomatic Termination?

On more than one occasion, several prominent attorneys repre­ senting oil companies have raised with me the issue of why attorneys have accepted without question the notion that under a typical "un­ less" lease with a standard habendum clause, the lease would auto­ matically terminate if the delay rentals are not paid either accurately or timely or if production ceases in the secondary term. The history of the development of the automatic termination doctrine suggests that lawyers have been too deferential to that doctrine and probably could have drafted clauses that would have avoided its harsh ramifications. From an early date, the English common law recognized two dif­ ferent types of defeasible fee simple estates; the fee simple determina-

14. See, e.g., Callahan v. Martin, 43 P.2d 788 (Cal. 1935); Lathrop v. Eyestone, 227 P.2d 136 (Kan. 1951); White v. McVey, 31 P.2d 850 (Okla. 1934). 15. See, e.g., Gerhard v. Stephens, 449 P.2d 692 (Cal. 1968); Baker v. Vanderpool, 178 S.W.2d 189 (Ky. 1944) (royalty is an incorporeal hereditament); Back v. Ohio Fuel Gas Co., 113 N.E.2d 865 (Ohio 1953) (leasehold interest is an incorporeal hereditament). 16.. HEMINGWAY, supra note 11, at 60. 17. See, e.g., Lathrop, 227 P.2d 136. An analogous problem arose in Texas where by virtue of Caruthers v. Leonard, 254 S.W. 779 (Tex. Comm'n App. 1923), overruled, Harris v. Currie, 176 S.W.2d 302 (Tex. 1943), the court found that a transfer of a mineral estate which had been leased prior to the conveyance would not transfer either the delay rentals or the royalties paya­ ble under the existing lease. This spawned the use of the "subject to" clause in form deeds which, in turn, created a generation of contentious litigation and irreconcilable opinions. See generally Bruce Kramer, The Sisyphean Task ofInterpreting Mineral Deeds and Leases: An En­ cyclopedia of Canons of Construction, 24 TEX. TECH L. REV. 1, 19-43 (1993) (hereinafter Kramer, Sisyphean).

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ble and the fee simple subject to a condition subsequent,18 The major difference between these two types of defeasible fee simple estates relates to the differen~e between a limitation and a condition.19 In order to create a special limitation, durationallanguage, such as "un­ less," "so long as," or "until" must be used.20 If the Grantor conveys Blackacre to the Grantee and uses the following language: "0 to A and his heirs so long as liquor is not sold on the premises," A has been granted a fee simple determinable estate and 0 has retained a possi­ bility of reverter. In order to create a fee simple subject to a condition subsequent, on the other hand, conditional, not durational, language needs to be employed. Thus, if the Grantor conveys Blackacre to the Grantee and uses the following language: "0 to A and his heirs on condition that liquor is not sold on the premises and if sold 0 shall have the power to terminate," A has been granted a fee simple subject to a condition subsequent and 0 has retained a power of termination or right of reentry. In the first example, where A has received a fee simple determi­ nable, if A breaches the limitation 0 becomes the owner of the fee simple absolute estate automatically and A becomes an instantaneous trespasser on O's present possessory estate. In the second example, where A has received a fee simple subject to a condition subsequent, if A breaches the condition A continues to own the possessory estate, subject to being ousted by O's affirmative exercise of O's power of termination. The differences have been expressed as follows by A.W. Walker, Jr.: The difference between them as to their operative effect is well established and ordinarily presents little difficulty. A limitation in its generic sense is any provision delimiting the duration of an es­ tate. The operative effect of the occurrence of the event named in a clause of ... special limitation is ...: the estate granted automati­ cally terminates without the necessity of any affirmative action on the part of the grantor, or lessor, and, in fact, even without this knowledge or against his express wishes. The happening of the event named in a clause of condition subsequent, does not ipso facto terminate the estate granted ... but merely gives the grantor, or lessor, the option of terminating the estate. .... The estate

18. ROGER CUNNINGHAM, ET AL., THE LAW OF PROPERTY 39-45 (2d ed. 1993) (hereinafter CUNNINGHAM, ET AL.). 19. THOMAS BERGIN & PAUL HASKELL, PREFACE TO ESTATES IN LAND AND FUTURE IN­ TERESTS 50 (2d ed. 1984); CUNNINGHAM, ET AL., supra note 18, at 45-50. 20. CUNNINGHAM, ET AL., supra note 18, at 46; A.W. Walker, Jr., The Nature ofthe Prop­ erty Interests Created by an Oil and Gas Lease in Texas, 7 TEX. L. REv. 539, 540-41 (1929). A.W. Walker, Jr. wrote a series of three articles that were very influential in applying the common law estate nomenclature to oil and gas transactions. See also A.W. Walker, Jr., 7 TEX. L. REV. 1 (1928), A.W. Walker, Jr., 8 TEX. L. REV. 463 (1930).

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continues after the happening of the event until the grantor, or les­ sor, takes affirmative steps to bring the estate to an end.21 As it affects the oil and gas lease, there are several important ramifica­ tions that flow from this distinction between a limitation and a condi­ tion. The owner of the possibility of reverter may not waive his right to reclaim the possessory interest. The change in ownership occurs at the moment the limitation occurs.22 A power of termination, on the other hand, may be waived by the owner if it is not promptly exer­ cised. 23 More importantly, the exercise of the power of termination was treated as a forfeiture, while the operation of the possibility of reverter was considered to be the natural expiration of the vested es­ tate.24 Thus, equitable defenses, such as estoppel and waiver, would not be applicable to defend against the termination of a fee simple determinable estate. The history of the "unless" clause is unclear. The earliest leases did not contain provisions for delay rentals as a means of postponing the drilling of wells. According to one text, annual "rentals" to post­ pone drilling first appeared in an 1874 lease.25 By the early twentieth century, however, a delay rental clause in a nearly standard form be­ came widespread, except in California.26 At an early date this stan­ dard "unless" lease form was treated as creating a fee simple determinable estate which automatically terminated upon failure to make timely and accurate delay rental payments.27

21. Walker, 8 TEX. L. REV., supra note 20, at 484-85. 22. This creates problems with the reality that most wells do not continuously produce, but have "downtimes" for scheduled maintenance, mechanical breakdowns or lack of markets. See generally, Bruce Kramer, The Temporary Cessation Doctrine: A Practical Response to an Ideo­ logical Dilemma, 43 BAYLOR L. REv. 519 (1991) (hereinafter Kramer, Temporary Cessation). 23. CUNNINGHAM, ET AL., supra note 18, at 47-48. 24. Walker, 8 TEX. L. REV., supra note 20, at 486. 25. 1 E. BROWN, THE LAW OF OIL AND GAS LEASES 7-1 (1993), citing SAMUEL GLASSMIRE, THE LAW OF OIL AND GAS LEASES AND ROYALTIES 199 (1935). 26. The following delay rental clause was included in a 1917 lease: It is agreed that this lease shall remain in force for a term of three years from this date, and as long thereafter as oil or gas, or either of them, is produced from said land by lessee. .. .. If no well is completed on said land on or before the 17th day of January, 1917, [1 year from date of execution of the lease] this lease shall terminate as to both parties, unless the lessee on or before that date shall payor tender to the lessor, ... the sum of Three Hundred Eighty and no-100 dollars, which shall operate as a rental and cover the privilege of deferring the completion of a well for twelve months from said date. RICHARD MAXWELL, ET AL., CASES AND MATERIALS ON OIL AND GAS LAW 356 (6th ed. 1993). See also Leslie Moses, The Evolution and Development ofthe Oil and Gas Lease, 2 INST. ON OIL AND GAS L. & TAX'N 1 (1951); 3 WILLIAMS & MEYERS, supra note 6, at 601-601.5 (1993). 27. Dean Sullivan notes that some other rationales were used to support the near-universal finding that the "unless" lease was automatically terminable. ROBERT SULLIVAN, HANDBOOK OF OIL & GAS LAW 107 (1955). He further concludes that since the "unless" language is a special limitation substantial compliance is insufficient. Id. See, e.g., Phillips Petroleum Co. v. Curtis, 182 F.2d 122 (10th Cir. 1950); W.T. Waggoner Estate v. Sigler Oil Co., 19 S.W.2d 27 (Tex. 1929).

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The fee simple determinable classification scheme led to some ab­ surd results.28 It also led to a host of exceptions to the rule of auto­ matic termination, which clearly suggested that the courts were not pleased that a lessee's interest might be terminated because of actions taken by third parties. Thus came into existence the "mail box excep­ tion" which prevented termination if the lessee could show that the check was mailed in sufficient time to reach the lessor or depository bank, but did not.29 But the reason why the payment didn't arrive would be irrelevant under an automatic termination doctrine. The payment is a limitation, not a condition, and substantial performance, or incompetence by a third party should not prevent the lease from terminating. Normally estoppel, waiver or other equitable defenses would not be available to the owner of a fee simple determinable es­ tate where the limitation has occurred. But by looking at fault some courts were treating the lessor's action not as one based in trespass, but one sounding in forfeiture. One exception to the automatic termination rule that could be justified was where the lessor herself caused the delay rental payment to be erroneously tendered. This exception was accepted by the court in Humble Oil & Refining Co. v. Harrison. 30 There the lessor had conveyed a fractional interest to a third party after the lease. Unfor­ tunately, the deed language was not clear as to the exact fraction. Humble, on the advice of counsel, interpreted the deed to convey a 3/8 mineral estate, while the court eventually interpreted the deed to convey a 1/2 mineral estate. Humble made the delay rental payments to the respective parties based on its interpretation. The court refused to allow the underpaid party to terminate the lease, claiming that the cause of the underpayment was the lessor's own actions which could not trigger the limitation. Delay rental clauses are traps for the unwary. They sometimes raise difficult questions about when the anniversary date falls. 31 They also created problems since they were often tied to an acreage figure which might not be readily ascertainable.32 Further problems were caused by post-lease conveyances by the lessor.33 Since delay rentals were a substitute for the commencement of the drilling of a well, les­ sees were also uncertain about whether their development activities

28. For example, in Young v. Jones, 222 S.W. 691 (Tex. Civ. App. 1920), the lease was terminated when the lessee tendered $73.29 instead of $76.25. 29. See, e.g., Ballard v. Miller, 529 P.2d 752 (N.M. 1974); Corley v. Olympic Petroleum Corp., 403 S.W.2d 537 (Tex. Civ. App. 1966). 30. Humble Oil & Refining Co. v. Harrison, 205 S.W.2d 355 (Tex. 1947). 31. See, e.g., Greer v. Stanolind Oil & Gas Co., 200 F.2d 920 (10th Cir. 1952); Hughes v. Franklin, 29 So. 2d 79 (Miss. 1947). 32. Compare Schwartzenberger v. Hunt Trust Estate, 244 N.W.2d 711 (N.D. 1976) with Norman Jessen & Assoc., Inc. v. Amoco Production Co., 305 N.W.2d 648 (N.D. 1981). 33. See, e.g., Atlantic Refining Co. v. Shell Oil Co., 46 So. 2d 907 (La. 1950).

HeinOnline -- 33 Washburn L.J. 546 (1993-1994) 1994] The Mangling of Common Law Property Concepts 547 satisfied the commencement requirement so as to excuse the delay rental payment.34 In many situations oil and gas lawyers tinkered with the fringes of the unless clause to avoid some of the above-mentioned problems. For example, many leases included notice of assignment clauses, so that the lessee was not required to change the payee for a delay rental check until the lessee received a written notice with a copy of the con­ veying instrument.35 Likewise payments were to be made to a deposi­ tory bank rather than to the individual. This created a higher certainty that the checks would arrive on time and be promptly credited to the appropriate account. But a frontal assault on the un­ less clause never materialized. Perhaps the lack of such an attack was caused by the fact that property lawyers are aware that they are not free to create new estates in land. Likewise they are "conservative" in their approach to prece­ dent in the field because courts have stressed the importance of stare decisis when it comes to decisions affecting property interests. None­ theless it is somewhat of a surprise that attorneys did not attempt to draft a way around the harsh results of the unless clause of the stan­ dard oil and gas lease. As shown in Kincaid v. Gulf Oil CO.,36 had the attorneys been more aggressive, they might have better represented the interests of their lessee/clients. Kincaid was the classic mistake case where a Gulf Oil employee placed the names of the wrong lessors on a substantial delay rental check which had to be flown to the de­ pository bank on a Saturday in order to meet the timing deadline for such a payment. The bank initially accepted the check, but, at the request of the lessors, it was never cashed. The lease had a specially negotiated delay rental clause which provided that if the lessee should make a bona fide attempt to pay the delay rentals properly, but should nonetheless fall short, the lease would not terminate if the lessee cor­ rected the error within 30 days of being notified by the lessor.37 The court had no trouble enforcing the terms of the modified de­ lay rental clause, notwithstanding its inconsistency with the labelling of the leasehold estate as a fee simple determinable. The court also used a canon of construction that favors an interpretation which pre­ vents a forfeiture.38 As noted above, however, a failure to make a delay rental payment does not result in a forfeiture, but the automatic

34. See, e.g., Oelze v. Key Drilling Co., 481 N.E.2d 801 (Ill. App. Ct. 1985); Herl v. Legleiter, 668 P.2d 200 (Kan. Ct. App. 1983); Breaux v. Apache Oil Co., 240 So. 2d 589 (La. Ct. App. 1981); Wilds v. Universal Resources Corp., 662 P.2d 303 (Okla. 1983). 35. Gulf Refining Co. v. Shatford, 159 F.2d 231 (5th Cir. 1947). 36. Kincaid v. Gulf Oil Co., 675 S.W.2d 250 (Tex. Civ. App. 1984). 37. [d. at 252-53. 38. [d. at 254.

HeinOnline -- 33 Washburn L.J. 547 (1993-1994) 548 Washburn Law Journal [Vol. 33 termination of the estate. The court itself noted that fact when it stated: It is well settled that with the usual "unless" lease, a failure of the lessee either to begin a well or to pay the delay rentals, ipso facto terminates the lease on the date set out for the action and the estate reverts to the lessor without the necessity of reentry, declara­ tion of forfeiture or legal action.39 The result of Kincaid is in essence the creation of a new kind of estate that governs the lease during the primary term. It is an estate that will last until such time as the lessor notifies the lessee that the delay rental obligations have been breached and the lessee fails to cure within a 60-day period.40 While courts should not allow the parties to create new estates in land, the parties to a lease should be able to avoid the harsh ramifications of the court's determination that the un­ less lease clause creates a fee simple determinable estate. Since states seem unwilling to change their classification scheme for unless leases, the drafting solution may be the only answer to the problem.41 Insofar as the habendum clause is concerned, the language of the standard clause, namely that the lease shall last "so long as oil or gas are produced in paying quantities," also lent itself to being treated as a fee simple determinable estate. While there was some differing treat­ ment of the habendum clause in the early days of oil and gas law,42 most states followed the lead of Texas and called the leasehold estate in the secondary term a fee simple determinable estate.43 As with the delay rental clause this led to some harsh results. For example, if a lessee drilled a well and discovered gas in pay­ ing quantities which could not be marketed prior to the end of the primary term, the lease would terminate.44 . Likewise any cessation of production in the secondary term would automatically terminate the lease.45 Estoppel, waiver or other equitable defenses would not be available to the lessee to defeat the action brought by the lessor.46

39. [d. at 255. 40. A similar result was reached in Woolley v. Standard Oil Co. of Texas, 230 F.2d 97 (5th Cir. 1956). 41. One state, Oklahoma, has decided to abandon its prior classification scheme for delay rental clauses and habendum clauses. After Stewart v. Amerada Hess Corp., 604 P.2d 854 (Okla. 1979), Oklahoma treats the lease as a fee simple on a condition subsequent allowing all equitable defenses to be raised and placing the onus on the lessor to prove a forfeiture in an action to enforce its power of termination. 42. 1 EUGENE KUNTZ, LAW OF OIL AND GAS § 26.8(a) (1987) (hereinafter KUNTZ). Profes­ sor Kuntz identified two other approaches to the classification issue, both of which would not have treated the lease as automatically terminating in the event production in paying quantities was either not achieved or ceased. 43. Stephens County v. Mid-Kansas Oil & Gas Co., 254 S.W. 290 (Tex. 1923). See also Baldwin v. Blue Stem Oil Co., 189 P. 920 (Kan. 1920). 44. See, e.g., Stanolind Oil & Gas Co. v. Barnhill, 107 S.W.2d 746 (Tex. Civ. App. 1937). 45. Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941). 46. For example, in Watson, 155 S.W.2d 783, the lessee shut-in a well because there was no market for the oil because of the Depression and the poor quality of the oil being produced.

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The drafters of oil and gas leases responded more vigorously to the automatic termination feature of habendum clauses than to the same feature as it affected the delay rental obligation. Savings clauses were added to the lease to deal with the realities of oil and gas pro­ duction. These included continuous operations clauses which allowed the lease to continue if the lessee was engaging in operations in the secondary term even if there was no production,47 dry hole and/or ces­ sation of production clauses,48 and shut-in gas royalty clauses.49 Additionally, courts came to the rescue of parties stuck with the automatic termination rule by providing both modifications to the rule and a rejection of it. For example, the Oklahoma Supreme Court in Stewart v. Amerada Hess Co. ,50 rejected the interpretation given the habendum clause which treats the secondary term estate as a fee sim­ ple determinable. Instead the court made a clean break from the au­ tomatic termination rule, but not a clean break from property jurisprudence when it announced as follows: The "thereafter" clause is hence not ever to be regarded as akin in effect to the common-law conditional limitation or determi­ nable fee estate. The occurrence of the limiting event or condition does not automatically aff~ct an end to the right. Rather, the clause is to be regarded as fixing the life of a lease instead of providing of means of terminating it in advance of the time at which it would otherwise expire. In short, the lease continues in existence so long as interruption of production in paying quantities does not extend for a period longer than reasonable or justifiable ....51 Thus the fee simple determinable estate was in essence transformed into a fee simple subject to a condition subsequent to deal with the vagaries of oil or gas production and marketing. The Stewart decision is an offshoot of an earlier Oklahoma modi­ fication to the automatic termination rule. The Oklahoma courts had previously said that the habendum clause is satisfied by discovering a reservoir that is capable of producing in paying quantities, rather than requiring actual production and marketing of the oil or gas in paying

Over a three-year period the lessee expended substantial sums, with the knowledge of the lessor, to maintain the well. The lessee claimed that the lessor was estopped by his inaction to claim that the lease automatically terminated. The court found that the lessee should have known that the lease automatically terminated when production ceased in the secondary term so that the lessee could not have reasonably relied on the lessor's inaction to the lessee's detriment. [d. at 785. 47. See, e.g., Sword v. Rains, 575 F.2d 810 (10thCir. 1978); Tate v. Stanolind Oil & Gas Co., 240 P.2d 465 (Kan. 1972); Gulf Oil Corp. v. Reid, 337 S.W.2d 267 (Tex. 1960). 48. See, e.g., Sunac Petroleum Corp. v. Parkes, 416 S.W.2d 798 (Tex. 1967). 49. See, e.g., Gard v. Kaiser, 582 P.2d 1311 (Okla. 1978); Freeman v. Magnolia Petroleum Co., 171 S.W.2d 339 (Tex. 1943). 50. 604 P.2d 854 (Okla. 1979). 51. [d. at 856. The court further noted that the lessor's action would be one grounded in forfeiture, which meant that the strong Oklahoma policy against forfeiture would apply and all equitable defenses to the action would be allowed.

HeinOnline -- 33 Washburn L.J. 549 (1993-1994) 550 Washburn Law Journal [Vol. 33 quantities.52 By only having to show discovery, the uncertainties re­ lating to actual production and marketing which can lead to stoppages no longer have the effect of automatically terminating the lessee's estate. Another judicial modification to the automatic termination rule is the temporary cessation of production (TCOP) doctrine.53 A number of states which follow the automatic termination rule as to production in the secondary term, nonetheless identify various excuses which cause a cessation of production, but which nonetheless do not cause the lease to automatically terminate.54 The TCOP doctrine is clearly antithetical to the notion that the lease automatically terminates when production ceases. Actions taken by the lessee after a cessation of production would be irrelevant under classic fee simple determinable analysis. The limitation having occurred, the lessee becomes an in­ stantaneous trespasser. But the TCOP doctrine delays the termina­ tion for a period of time that is deemed reasonable for an operator to regain production. Thus, post-cessation actions become relevant in determining the continued viability of the fee simple determinable es­ tate. This is clearly inconsistent with the fee simple determinable es­ tate concept. But the technical realities of oil and gas production and marketing made it a viable option to avoid the harsh results of the automatic termination rule. As I stated a few years ago: While the TCOP doctrine adds some uncertainty to the law, it does so in order to provide the lessee, and ultimately the lessor, with some needed protection from the results of applying a thou­ sand-year-old concept to the modern oil and gas industry..... [T]he common law is a wonderful machine. It changes as societal needs change; it becomes flexible when flexibility is desired; but it remains true to some basic values so as to provide a stability that is necessary for the acceptance of the law as the rules that govern soci­ etal conduct,55

III. THE RULE AGAINST PERPETUITIES Perhaps the most egregious examples of courts "mangling" our ancient system of property jurisprudence comes in the area of the rule against perpetuities (hereinafter Rule).56 The classic statement of the

52. McVicker v. Horn, Robinson & Nathan, 322 P.2d 410 (Okla. 1958). Besides Oklahoma, Kentucky, Montana and West Virginia appear to have adopted the discovery rule. See Bruce Kramer, Discussion Notes, 85 Oil & Gas Rep. 138 (1985). 53. For a more complete discussion of the temporary cessation of production doctrine, see Kramer, Temporary Cessation, supra note 22. 54. The court in Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941), required the lessee to prove that the cessation of production was caused by a sudden stoppage or mechanical break­ down in order to avoid automatic termination. [d. at 784. 55. Kramer, Temporary Cessation, supra note 22, at 550. 56. Commentators for years have complained about the application of the Rule to certain oil and gas transactions. See, e.g., 2 WILLIAMS & MEYERS, supra note 6, at 332; 1 KUNTZ, supra note 42, at 517-30; Bruce M. Jones, The Rule Against Perpetuities as it Affects California Oil and

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Rule is by Professor John Chipman Gray: "No interest 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."57 The two areas which have created the most difficult Rule problems in oil and gas jurisprudence are the creation of defeasible term interests and the transfer of stand-alone royalty interests.

A. The Defeasible Term Interest The following hypothetical represents the problem with certain types of transfers of defeasible term interests. Olivia owns a unitary fee simple absolute estate in Blackacre. She conveys the surface es­ tate and 1/2 of the mineral estate in fee simple absolute to Alexis, reserving to herself 1/2 of the mineral estate for a period of 20 years and so long thereafter as oil or gas is produced in paying quantities.58 A first year law student having studied the problem of estates and future interests in class would conclude as to the 1/2 mineral estate reserved by Olivia, that Olivia would have a fee simple subject to an executory limitation and that Alexis would have an executory interest. Alexis owns an executory interest because it is a future interest cre­ ated in someone other than the grantor that will become possessory by the divesting of a prior freehold estate held by another person.59 Unfortunately the Rule would invalidate Alexis' executory interest and leave Olivia with a fee simple absolute. This seemingly incongru­ ous result occurs because the Rule acts to defeat the intent of the grantor. Thus, while Olivia intended to reserve less than a fee simple absolute in 1/2 of the minerals, the remorseless application of the Rule would defeat Alexis' executory interest and vest in Olivia a fee simple absolute. Notwithstanding this textbook analysis, most courts when confronted with such deeds refuse to apply the Rule. In some in­ stances the result is a setback to every first-year Property professor in the United States.

Gas Interests. 7 UCLA L. REV. 261 (1960); Eugene Kuntz, The Rule against Perpetuities and Mineral Interests, 8 OKLA. L. REV. 183 (1955); Joseph Morris, Future Interests in Oil and Gas Law, 3 ROCKY Mm. MIN. L. INST. 579 (1957). 57. JOHN GRAY. THE RULE AGAINST PERPETUITIES 201 (4th ed. 1952). 58. The defeasible term interest, be it royalty or mineral, is a fascinating estate. Apparently the defeasible term royalty interest was reserved as a matter of course by Federal Land Banks when they resold property interests that had been foreclosed during the Great Depression. See, e.g., Williams v. Watt, 668 P.2d 620, 621-22 (Wyo. 1983). Why the banks chose a defeasible term interest rather than a perpetual royalty is not clear, except of course in Kansas, where, as it later turned out, such a reservation would have violated the Rule. DAVID E. PIERCE, KANSAS OIL AND GAS HANDBOOK 4-21 to 4-23 (1986). . 59. For a discussion of executory interests and their prior lives as uses see CORNELIUS Moy· NIHAN, INTRODUCTION TO THE LAW OF REAL PROPERTY 190-92 (2d ed. 1988). Executory inter­ ests as legal estates were only recognized after the enactment of the Statute of Uses in 1536. As with many English property law concepts, the origin of the Statute of Uses has to deal with money, or the lack of it, caused by landed noblemen converting their ownership of land from legal estates to equitable uses. Id. at 178-80.

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The principal mangler of property principles is the Wyoming Supreme Court. In Williams v. Watt,60 the Federal Land Bank deeded certain lands to Williams, excepting and reserving "an undivided one­ half interest in all oil, gas and mineral rights ... for a period of 20 years from the 10th day of April, 1940, and as long thereafter as oil, gas, or other minerals continue to be produced therefrom ...."61 Subsequently, Williams conveyed the same interest to Watt, reserving all of the minerals. There was no production from the conveyed lands by April 1960. The simple issue was whether Williams had reserved the 1/2 mineral estate in which he had an executory interest which later vested when no production occurred.62 Applying the analysis given above, Williams' executory interest in the 1/2 minerals reserved by the Federal Land Bank would be void and not subject to the reservation.63 While the court splintered in its analysis, all agreed that the over­ riding obligation of the court is to give effect to the intention of the parties. This ignores the fact that the Rule, by definition, is intent­ defeating. The real issue is not the intent of the parties but the classi­ fication of the interests created by the original deed. If the Rule, with its modifications, applies to the interest created, the intent of the par­ ties is irrelevant.64 The majority, however, in seeking to carry out the intent of the parties, does violence to 1000 years of property law with ramifications far beyond the oil and gas context.65 The majority's interpretation is all the more discouraging because it is not merely making a change to the common law Rule. In Wyo­ ming, the Rule is embodied in both the Constitution and statutes, although the statutory language does make reference to the common law Rule.66 While courts should be free to change common law rules

60. 668 P.2d 620 (Wyo. 1983). 61. [d. at 621. 62. The court could have avoided its doctrinal dilemma had Wyoming adopted the "wait­ and-see" exception to the Rule. Under this exception the validity of the interest is not deter­ mined when it is created, -but instead the court waits to see if the interest will actually vest or fail to vest within the Rule's time period. See CUNNINGHAM, ET AL., supra note 18, at 143-44. In this instance, Williams' executory interest would have vested within twenty years from the date of its creation and thus would not have been invalidated under the Rule. 63. This analysis would also deny ownership of the 1/2 of the minerals to Watt. The true owner would be the Federal Land Bank which would have effectively reserved a fee simple absolute in 1/2 of the minerals. 64. The majority admits that if the analysis suggested by Justice Thomas, concurring, is cor­ rect, namely that the Williams interest is an executory interest, the interest must be voided under the Rule. Williams, 668 P.2d at 623. 65. The majority candidly concedes that the concurring judge's analysis is historically cor­ rect but nonetheless finds that a remainder can follow a fee simple estate. [d. at 624. 66. WYo. CaNsT. art. 1, § 30; WYo. STAT. ANN. § 34-1-139 (Michie 1990). See also TEX. CaNsT. art. 1, § 26.

HeinOnline -- 33 Washburn L.J. 552 (1993-1994) 1994] The Mangling of Common Law Property Concepts 553 to adjust to the times,67 they should be more constrained when they are applying a statutory rule.68 The court initially identified the Land Bank's excepted 1/2 min­ eral estate as a fee simple determinable estate.69 This is not an accu­ rate classification given the fact that a third party has the future interest. The court concedes that Williams' interest cannot be a possi­ bility of reverter since Williams is not the grantor.70 It acknowledges the classical rules when it states: Under antiquated historical concepts it could be ... argued that a remainder is likewise an inappropriate designation of Williams' interest for the reason that a remainder cannot follow a fee. . ... The justification for this rule is that once the owner of an estate in fee simple conveys his estate in fee simple, there is nothing left to constitute a remainder. . .. Once the possibility of reverter and the remainder have been ruled out ..., it follows from these traditional principles that Williams should be held-on historical grounds-to have possessed an executory interest in the mineral estate excepted by the Land Bank.71 While admitting that the Williams interest should be an executory in­ terest and thus void under the Rule, the court notes that only a few other state courts had voided similar conveyances.72 But driven by the constitutional and statutory mandate, the majority could neither ignore the Rule, create a legal fiction to avoid its application, or gen­ erally exempt oil and gas transactions from its application. Instead it chose to mangle the "historical" features of common law estates which clearly prohibit a remainder interest from following a defeasible fee simple estate. The linchpin in the majority's analysis is its conclusion that unlike the typical executory interest, which may last forever, the Williams interest is certain to become possessory when the production of min­ erals terminates. However, the Rule did not invalidate eternal contin­ gent future interests, but those interests which would vest or fail to vest within a life in being plus 21 years. Minerals may be produced for

67. OLIVER HOLMES, THE COMMON LAW (1881). 68. This position was noted by the Alabama Supreme Court in Earle v. International Paper Co., 429 So. 2d 989 (Ala. 1983) (discussed infra notes 87-89 and accompanying text). 69. The court noted the historic differences between limitations and conditions. Williams, 668 P.2d at 628. The court also referred to Baker v. Hugoton Production Co., 320 P.2d 772 (Kan. 1958), which correctly identified the interests in a defeasible term deed as a fee simple determi­ nable coupled with a possibility of reverter. In Baker, the grantee received the present posses­ sory estate which was to last for twenty years and so long thereafter as oil or gas were produced in paying quantities. In Williams, on the other hand, the grantor retained the present possessory estate. 70. See RESTATEMENT OF PROPERTY, supra note 4, § 154(3); LEWIS SIMES AND ALLAN F. SMITH, THE LAW OF FUTURE INTERESTS 281 (2d ed. 1956) [hereinafter SIMES & SMITH). 71. See generally THOMAS BERGIN & PAUL HASKELL, PREFACE TO ESTATES IN LAND AND FUTURE INTERESTS 62-66 (2d ed. 1984); SIMES & SMITH, supra note 70, at 103; RESTATEMENT OF PROPERTY, supra note 4, §§ 15, 154(3), 158. 72. See cases cited in 2 WILLIAMS & MEYERS, supra note 6, at 335.

HeinOnline -- 33 Washburn L.J. 553 (1993-1994) 554 Washburn Law Journal [Vol. 33 a much longer period of time. This argument would support a general exemption for mineral estates from the application of the Rule since minerals are finite and will be exhausted at some time. The court further argues that remainders and executory interests have similar characteristics.73 But it ignores the fact that only remain­ ders could be created before the enactment of the Statute of Uses. The court also ignores the fact that remainders were incapable of fol­ lowing defeasible fee simple estates. In addition, remainders typically followed the natural expiration of the prior vested estate while execu­ tory interests divested the prior vested estate. However, this type of executory interest is the exception to the Rule because it does not divest the prior vested estate since the present possessory estate is described in durational terms.74 Thus all executory interests which follow present possessory estates which terminate automatically do not in theory divest the prior vested estate. The court does not ex­ plain whether all executory interests which do not divest, i.e., follow an automatically terminating estate, will be transformed into remainders,75 The court suggests that only future interests in mineral estates that follow defeasible fee simple estates will be remainders. The tradi­ tional executory interest following a surface defeasible fee simple in­ terest will not be magically transformed into a remainder. This might lead to the following conundrum: 0 owns Blackacre, surface and min­ eral estates, in fee simple absolute. 0 conveys Blackacre to B reserv­ ing to himself a 1/2 interest in the surface and the minerals for 20 years and so long thereafter as oil or gas is produced in paying quanti­ ties. B's future interest in the surface estate is an executory interest which is void under the Rule while B's future interest in the mineral estate would be a remainder.76 Having slain the executory interest/remainder dragon the court had more work to do. Contingent remainders, under the modern view, are indestructible. Therefore they are future interests which are subject to the remote vesting policy of the Rule.77 Thus the court had to find that what was essentially a contingent remainder was a vested

73. See generally SIMES & SMITH, supra note 70, at 103. 74. BROWDER, ET AL., supra note 5, at 240. 75. For example, in the transfer of 0 to A for life so long as demon rum is not sold on the premises and if sold it shall automatically go to B, B would normally be found to own an execu­ tory interest even though B's future interest would not divest the life estate. 76. The court cites as an example a grant of Blackacre from A to B, reserving to A a pres­ ent fee interest so long as no gambling occurs on the premises. B's interest is classified as an executory interest which would be void under the Rule. The court erroneously calls A's interest a fee simple determinable, when it should properly be classified as a fee simple subject to an executory limitation. Williams v. Watt. 668 P.2d 620, 632 (Wyo. 1983). 77. Under the traditional doctrine ,of destructibility, contingent remainders were certain to vest or fail to vest at the time the life estate terminated, making the Rule inapplicable. CUNNING­ HAM, ET AL., supra note 18, at 104-06.

HeinOnline -- 33 Washburn L.J. 554 (1993-1994) 1994] The Mangling of Common Law Property Concepts 555 remainder. The classic difference between a vested and a contingent remainder is that contingent remainders are subject to a condition precedent while vested remainders are not.78 Again the court relies on the fact that at some point, even if it cannot be ascertained, the minerals will be exhausted so that there is no condition precedent af­ fecting the vesting of the remainder. Here there is a mere postpone­ ment of the enjoyment of possessing the estate to a point which, while unknown, is certain to occur. This would seemingly run directly con­ trary to the underlying policy of the Rule about remote vesting, but, as with possibilities of reverter and powers of termination, the Rule has not been universally applied to cover all types of remotely vesting fu­ ture interests,79 Justice Thomas, who concurred in the result,80 disagreed with the mangling of property jurisprudence. He would treat the Williams' fu­ ture interest as an executory interest subject to the Rule.81 He would then apply an offshoot of the "wait-and-see" doctrine to create a fu­ ture interest which would not violate the Rule.82 He states: [S]ince the executory interest is limited upon alternative con­ tingencies, one of which violates the rule against perpetuities and the other of which does not, the invalid provision had no impact upon the validity of the other contingency because the event oc­ curred upon which the efficacy of the valid contingency depended. There was no mineral production, development, or operation within the 20-year period, and the rule of perpetuities should not be ap­ plied to void Williams' interest.83 In other words, the court will wait to see if the term-for-years segment of the grant will be extended into the indefinite-term segment. If not, the original grant can be construed as retaining a term for years fol­ lowed by a indefeasibly vested remainder. In this case, the future in­ terest did vest within the period allowed by the Rule and therefore invalidation was not warranted. While achieving the same result as the majority, the analysis applies generally accepted property tenets which do less violence to basic property jurisprudence.84

78. RESTATEMENT OF PROPERTY, supra note 4, § 157 cmt. on cl. d; CUNNINGHAM, ET AL. supra note 18, at 103. A contingent remainder may be so classified because the takers are unas­ certained at the time of the transfer. That is sometimes treated as a form of condition precedent. See generally id. 79. See generally SIMES & SMITH, supra note 70, at 1236, 1239; 2 WILLIAMS & MEYERS, supra note 6, at 335. The exclusion of the possibility of reverter from the application of the Rule has been labelled an historical accident with no basis in policy. VI AMERICAN LAW OF PROP. ERTY § 24.1, at 7 n.3 (1952). 80. Williams v. Watt, 668 P.2d 620, 634 (Wyo. 1983) (Thomas, J., specially concurring). 81. [d. at 633-34. Justice Thomas unfortunately refers to the Land Bank's interest as a fee simple determinable, rather than a fee simple subject to a condition subsequent. See supra notes 69-70 and accompanying text. 82. CUNNINGHAM, ET AL., supra note 18, at 143-44. 83. Williams, 668 P.2d at 637. 84. A similar approach was adopted by a four-judge concurring opinion in Earle v. Interna­ tional Paper Co., 429 So. 2d 989, 996-97 (Ala. 1983) (Jones, J., concurring specially). In Earle,

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A third approach which employs a legal fiction to avoid applica­ tion of the Rule has been followed in a number of states.85 I am not in favor of creating legal fictions. If the existing common law rule is no longer appropriate it should be reversed by judicial or legislative ac­ tion. Creating a legal fiction takes something away from the law by creating an image of outcome-oriented decisions, rather than a careful analysis of the issues and rules raised by a particular common law doctrine. There is some basis for the legal fiction approach because at one time there was a significant difference in the way the law treated an "excepted" versus a "reserved" interest. As noted in Powell on Real Property: "An 'exception' exists when some part of the ownership of the grantor is never parted with, while a 'reservation' is the term ap­ plicable when the instrument transfers all that the grantor had but recreates in him some specified interest with respect to the land transferred."86 The problem with this historical anomaly is that most modern deed forms use the term "excepting and reserving" which should make it impossible to determine whether the grantor really intended to use one or both of these mechanisms. Where a grantor excepts or reserves a present possessory estate for a fixed period of time and so long thereafter as oil or gas is pro­ duced in paying quantities, if the court finds that a reservation was intended, it could hold that the entire interest passed to the grantee who then regranted the mineral estate back to the grantor. With that fictional regrant the grantee would be retaining the future interest, which would be a possibility of reverter and, therefore, not subject to the Rule. The problem, of course, is determining whether the instrument was a reservation or exception. The Alabama Supreme Court was frank and candid about attempting to divine the intent of the parties to such an instrument when it stated: "Realistically, [the grantor] had no intent regarding any distinction between withholding an interest and receiving the same interest from his grantee. He would simply have intended to convey the property while retaining limited mineral rights by whatever form of words the lawyers said would be effec­ tive."87 The court identified several factors which led it to conclude

the concurring opinion would not technically wait and see. They would validate the retained interest for the fixed period of time and invalidate it for the indefinite period which followed. The grantor's retained interest would be severed into valid and invalid segments where there were two contingencies, one of which would violate the Rule. 85. See e.g., Earle v. International Paper Co., 429 So. 2d 989 (Ala. 1983); Bagby v. Bredthauer, 627 S.W.2d 190 (Tex. Civ. App. 1981). 86. 6A RICHARD R. POWELL, LAW OF REAL PROPERTY § 887[5] (Rohan rev. 1982). 87. International Paper Co., 429 So. 2d at 993.

HeinOnline -- 33 Washburn L.J. 556 (1993-1994) 1994] The Mangling of Common Law Property Concepts 557 that the deed created a reservation rather than an exception. The first was the use of words of inheritance, ("heirs and assigns") in the deed. Again, at common law a reservation technically lasted only for the life of the reserver while the exception retained the full interest in the grantor.88 Thus if the parties intended to create an exception the words of inheritance would be superfluous. A reality check would un­ doubtedly uncover the fact that a form deed was used which contains the words of inheritance not in order to make the reservation perpet­ ual but because words of inheritance have traditionally been included in deeds for several hundred years.89

B. Top Leases The use of top leases in the oil and gas industry has raised several questions. One of them entails the appropriate role for attorneys in the transaction, since one could posit a situation where a lessor is ac­ tively trying to disengage herself from an existing lease in order to receive the benefits of a second lease, when no appropriate grounds for terminating the first lease exist. But the focus here relates to the application of the Rule to the typical top-leasing situation. Depending on the court's characterization, a top lease can be de­ scribed as a springing executory interest,90 or merely a transfer of a part of the lessor's possibility of reverter.91 If the top lease is treated as a springing executory interest it would run afoul of the Rule. Such a conclusion was reached by the Texas Supreme Court in Peveto v. Starkey,92 although the court was interpreting a top deed rather than a top lease. The analysis, however, would be the same if the language of the top deed or lease clearly made the conveyance dependent upon the termination of the prior interest, be it a lease or a defeasible term interest as in Peveto. If Peveto were generally followed, the practice of giving top leases would cease. Regardless of the terms of the top lease or top deed, the practical effect of either instrument is to post­ pone vesting of the interest in possession until the bottom lease or deed expires. Since in most cases the bottom lease or deed will expire

88. 6A POWELL, supra note 86, § 887[5]. See also 1 KUNTZ, supra note 42, at 406-08, where the author notes that "[i]n modern conveyancing, both terms are used in a cumulative fashion in most instruments, without regard to any distinction." Id. at 407. 89. The Alabama court also emphasized the fact that the term deed and the leasehold ha­ bendum clause used similar language. From that the court inferred that the grantor's retained interest was significantly restricted in favor the of the grantee's interest. Given the fact that the grantor had retained the full executive power over both the granted and retained interest, I fail to see the importance of this similarity in terms. International Paper Co., 429 So. 2d at 994. 90. See, e.g., Envirogas, Inc. v. Consolidated Gas Supply Corp., 464 N.Y.S.2d 141 (Sup.Ct.), affd, 469 N.Y.S.2d 499 (1983); Siniard v. Davis, 678 P.2d 1197 (Okla. Ct. App. 1984); Peveto v. Starkey, 645 S.W.2d 770 (Tex. 1982). 91. Greenshields v. Superior Oil Co., 233 P.2d 959 (Okla. 1951). 92. 645 S.W.2d 770 (Tex. 1982).

HeinOnline -- 33 Washburn L.J. 557 (1993-1994) 558 Washburn Law Journal [Vol. 33 only because of the lack of, or cessation of, production, the future interest granted to the top lessee will violate the Rule. If the top lease is treated as merely a conveyance of part of the possibility of reverter held by the lessor, then no violation of the Rule occurs. One who owns a possibility of reverter, which, if it becomes possessory, will be a fee simple absolute, can presently transfer part of that interest in the form of a possibility of reverter that will become a fee simple determinable. The key to this transaction is the present alienation of an existing future interest, the possibility of reverter.93 Another way of dealing with top leases is to treat them as com­ mercial transactions falling outside the purview of the Rule.94 In Nantt v. Puckett Energy Co. ,95 the top lessor was suing the top lessee for failing to make certain agreed-to payments after the bottom lease expired. The top lease provided in part: This lease is presently subordinate to an existing oil and gas lease .... Notwithstanding anything to the contrary contained in this lease, the effective date of this lease shall be the date(s) upon which the existing lease terminates, for whatever reason, and as to any or all of the lands contained therein.96 North Dakota has a statutory Rule, which should have restricted the court's ability to find exceptions to the Rule's coverage.97 Even after admitting that oil and gas leases involve interests in real property, the court focused in on the commercial nature of leasing and top leasing. In addition, it applied the canon of construction that favors interpreta­ tions which validate rather than invalidate conveyances. The court does not take the giant step of excising from the Rule's tentacles all "commercial" options which may affect real property and which have historically been invalid under the Rule. Instead, it opts for a modi­ fied "wait-and-see" approach, noting that in this case the future inter­ est did actually vest within the Rule's period since the bottom lease expired within 2 years of the execution of the top lease.98

C. Conclusion The Rule has caused a substantial amount of consternation as it has been applied to oil and gas transactions over the years. From ini­ tial attacks against the validity of the oil and gas lease to modern

93. 1 KUNTZ, supra note 42, at 520. 94. 2 WILLIAMS & MEYERS, supra note 6, at 322. 95. 382 N.W.2d 655 (N.D. 1986). 96. [d. at 657. 97. N.D. CENT. CODE § 47-02-27 (repealed 1991). 98. Nantt, 382 N.W.2d at 660-61. For a more explicit adoption of the wait-and-see doctrine to top leases, without the dicta about commercial transactions, see Siniard v. Davis, 678 P.2d 1197 (Okla. Ct. App. 1984). See also Stoltz, Wagner & Brown v. Duncan, 417 F. Supp. 552 (W.D. Okla. 1976), where the court reformed the instrument to avoid the application of the Rule.

HeinOnline -- 33 Washburn L.J. 558 (1993-1994) 1994] The Mangling of Common Law Property Concepts 559 problems relating to pooling clauses and top leases, the Rule has caused many an oil and gas attorney to prematurely age. This does not have to be the case. Insofar as oil and gas are treated as estates in land, an oil and gas attorney should be expected to know that certain future interests would violate the Rule. Parties who create defeasible term interests, in which the grantor retains the present possessory es­ tate and conveys to the grantee the future interest, should not come running to the courts for relief from their lack of property law compe­ tency.99 Careful drafting and a knowledge of the Rule's application should avoid most problems. Drafting can also avoid Rule problems that are caused by the fact that oil and gas interests are property interests, even though a particu­ lar transaction may be more like a commercial deal than a transfer of a property interest. lOO A wholesale exemption for these types of transactions from the application of the Rule is unwarranted. Like­ wise unwarranted is the mangling of the Rule and other property ten­ ets that have been described in the earlier paragraphs. Use of existing exceptions to the Rule, such as the wait-and-see doctrine may amelio­ rate some of the harsh impacts of the Rule. But the Rule still serves important public goals. If it did not, legislatures and courts would have overturned the Rule long ago. As stated in an early oil and gas case: The rule against perpetuities springs from considerations of public policy. The underlying reason for and purpose of the rule is to avoid fettering real property with future interests dependent upon contingencies unduly remote which isolate the property and exclude it from commerce and development for long periods of time, thus working an indirect restraint upon alienation, which is regarded at common law as a public evi1. 101 The Rule still serves those purposes in the oil and gas patch and should not be abandoned to allow the fettering and encumbering of property interests with future estates that have the possibility of not vesting for a lengthy period of time.

IV. THE MYSTERIOUS ONE-EIGHTH Oil and gas conveyancing law has been struggling with the prob­ lem of describing the nature of the interests owned by the lessor and the lessee after a lease has been executed. Nowhere has the struggle

99. 2 WILLIAMS & MEYERS, supra note 6, at 16.1. 100. Williams and Meyers note that top leases, successive oil payments, certain provisions in joint operating agreements which give the operator a power to transform property interests at a later date, non-consent well provisions, and future acquisition provisions all create Rule difficul­ ties. [d. at 13-14. I would add options to purchase and creation of a pooling or unitization power to the list. See, e.g., Phillips Petroleum Co. v. Peterson, 218 F.2d 926 (10th Cir. 1954), cert. denied, 349 U.S. 947 (1955). 101. Weber v. Texas Co., 83 F.2d 807, 808 (5th Cir. 1936).

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been more intense and led to more confusion· than in Texas. 102 This difficulty arose because a number of early decisions identified the lessee's estate as only encompassing a 7/8th mineral interesU03 The law had to account for the remaining 1/8th mineral interest, so it often labeled the lessor as the owner, even though the lessor only owned a 1/8th non-possessory royalty interest. In Texas, this 7/8th-1/8th divi­ sion led to the creation of the so-called "multiple-grant" deed whereby a grantor who has leased his mineral estate and who wants to convey his property interests uses a form which describes three differ­ ent interests. For example, in Alford v. Krum,104 the granting clause of the deed conveyed "one-half of the one-eighth interest" in the min­ eral estate, the subject-to clause conveyed "1/16 of all the oil royalty and gas rental or royalty due" and the future lease clause provided that the grantee would own "a one-half interest" in the mineral es­ tate. lOS The use of this type of confusing language was caused in part by the general misunderstanding that the lessor owns a 1/8th interest after leasing, as well as by a conveyancing rule that did not allow the present lease benefits to be conveyed in a mere transfer of the mineral estate.106 A recent' decision of the Texas Supreme Court brings into focus the folly of not treating the leasing transaction according to appropri­ ate property law tenets. After a lease has been executed the lessor has conveyed his entire (100%) possessory estate in the minerals. In a non-possessory state the lessor has conveyed his entire interest in the right to search for and capture minerals. The conveyance of a posses­ sory estate, however, is burdened by the lessee's obligation to pay, in kind or in value, a fractional share of production, if any, that is free of the costs of production. In addition, the lessee's 100% possessory in­ terest is burdened by any other financial obligations contained in the lease such as delay rental payments. The lessor retains in most states 100% of the mineral estate as a possibility of reverter. In Oklahoma, the lessor would retain 100% of the mineral estate as a right of re­ entry or power of termination. The mineral owner after leasing owns no part of the present estate, be it possessory or non-possessory.

102. See generally Kramer, Sisyphean, supra note 17, 19-43. 103. See, e.g., W.T. Waggoner Estate v. Wichita County, 273 U.S. 113 (1927); Sheffield v. Hogg, 77 S.W.2d 1021 (Tex. 1934); Tipps v. Bodine, 101 S.W.2d 1076 (Tex. Civ. App. 1936). 104. 671 S.W.2d 870 (Tex. 1984), overruled, Luckel v. White, 819 S.W.2d 459 (Tex. 1991). 105. Alford, 671 S.W.2d at 871. 106. See generally Kramer, Sisyphean, supra note 17, at 39-40. At the time that many of these deeds were drafted, Texas followed the rule that a transfer of a mineral interest that had been leased did not transfer either the delay rentals or the royalties payable under the existing lease. Caruthers v. Leonard, 254 S.W. 779 (Tex. Comm'n App. 1923). Caruthers was overruled in Harris v. Currie, 176 S.W.2d 302 (Tex. 1943), but the use of the multiple-grant deed form has not been abandoned.

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In Jupiter Oil Co. v. Snow,107 the Texas Supreme Court in inter­ preting a multiple-grant deed revived the notion that the lessor magi­ cally retains some part of the mineral estate after a lease has been executed. The granting clause of a deed conveyed a 1/16 mineral in­ terest. The subject-to clause contained the following language: "[grantee was to] receive 1/16 part of the oil, gas or other mineral ... produced by the holder of the lease .. ., that grantors herein now intend to convey 1/2 of the interest they now have." The future-lease clause conveyed "an undivided 1/2 of all [the oil]."lo8 There is a conflict between the granting clause and the first part of the subject-to clause, and the other part of the subject-to clause and the future lease clause. The former clauses evince an intent to transfer a 1/16th mineral interest while the latter clauses evince an intent to transfer a 1/2 mineral interest. The court concluded that the parties intended to transfer a 1/2 mineral estate. Instead of supporting that interpretation by giving preemptive weight to the future lease clause, the court tried to give meaning to all of the provisions of the deed. In so doing it invoked the 7/8-1/8 false prophet. The granting clause unequivocally conveyed a 1/16 mineral inter­ est. What did that mean? According to the court, the granting clause "immediately gave the grantee a 1/16 interest in the mineral es­ tate."109 An immediate transfer of the possessory estate was not pos­ sible since the lessee was the owner of the grantor's entire interest. What could the lessor/grantor convey? All or a part of his possibility of reverter. If the court is saying that the deed presently transfers a 1/16th interest in the possibility of reverter how did the court ulti­ mately conclude that a full 1/2 mineral estate was conveyed? It did so by stating that the future lease clause transferred 1/2 of 7/8 of the pos­ sibility of reverter. This conclusion is implicitly based on the errone­ ous presumption that the grantor retained a 1/16 present possessory estate after the lease. If not, then the grantor/lessor had a 15/16 inter­ est, the granting clause having transferred a 1/16th interest, which would attribute to the future lease clause a 1/2 of 15/16 or a 15/32 transfer. If you add the 1/16 transferred by virtue of the granting clause and the 15/32 transferred by virtue of the future lease clause, the grantee received a 17/32 mineral estate and not a 1/2 mineral es­ tate. The judicial conundrum was caused in part by the court's desire to avoid giving preemptive weight to either the granting or future lease clauses when they are in conflict. But where a multiple-grant deed form is used and the granting and future lease clauses use incon-

107. 819 S.W.2d 466 (Tex. 1991). 108. [d. at 467. The subject-to clause was reproduced in the court of appeals decision. Snow v. Jupiter Oil Co., 802 S.W.2d 354, 356 (Tex. Civ. App. 1990), rev'd, 819 S.W.2d 466 (Tex. 1991). 109. Jupiter Oil, 819 S.W.2d at 468-69.

HeinOnline -- 33 Washburn L.J. 561 (1993-1994) 562 Washburn Law Journal [Vol. 33 sistent fractions, they cannot be reconciled since both clauses describe the lessor's interest in the possibility of reverter. By attempting to give meaning to both clauses, the court hopelessly confused the issue and wreaked havoc with basic property law concepts.

V. REAL COVENANTS-HEREIN OF ASSIGNMENTS AND SUBLEASES In order for a covenant or promise between two parties to be enforced or enforceable against successive owners of the respective estates, the parties must intend the covenant to be binding on succes­ sive owers, the promise must touch and concern the estate in land, there must be horizontal privity between the covenantor and cove­ nantee and there must be vertical privity between the successive owner and either the original covenantor or covenantee.110 Because of the importance of implied covenants to oil and gas law,lll the abil­ ity of the lessor to enforce those covenants against successors in inter­ est to the original lessee was critical. The only requirement that creates some problems for concluding that leasehold implied cove­ nants are real covenants whic~ run with the land is the vertical privity requirement. The same problem also arises in the traditional landlord/tenant relationship, where a key distinction is between an assignment and a sub-lease. In simple terms, where the tenant assigns his complete in­ terest to his grantee, vertical privity is found so that the original land­ lord may sue the assignee or vice-versa, should either party breach a covenant contained in the lease.llZ But where the original tenant re­ tains a reversion, or in some states merely a power of termination, the conveyance is considered a sub-lease and the vertical privity require­ ment may not be met.113 In most jurisdictions the courts will find an assignment as long as no reversion has been retained by the original tenant.114 But in a number of jurisdictions, including the oil-produc­ ing states of California and Texas, the reservation of a power of termi­ nation will trigger the finding that only a sub-lease has been executed even where the transferee is otherwise entitled to possess the original tenant's interest for the full term.ll5

110. CUNNINGHAM, ET AL. supra note 18, at 476-77. See also CHARLES CLARK, REAL COVE­ NANTS AND OTHER INTERESTS WHICH "RUN WITH LAND" (2d ed. 1947). 111. See generally MAURICE MERILL, COVENANTS IMPLIED IN OIL AND GAS LEASES (2d ed. 1940). 112. BROWDER, ET AL., supra note 5, at 623. 113. Amco Thust, Inc. v. Naylor, 317 S.W.2d 47 (1958). See generally CUNNINGHAM, ET AL. supra note 18, at 387-88. 114. See, e.g., Haynes v. Eagle-Picher Co., 295 F.2d 761 (10th Cir. 1961), cert. denied, 369 U.S. 828 (1962); Berkeley Development Co. v. Great Atlantic & Pacific Tea Co., 518 A.2d 790 (N.J. 1986); Neal v. Craig Brown, Inc., 356 S.E.2d 912 (N.C. Ct. App. 1987). 115. This doctrine is sometimes called the "Massachusetts Rule" since that jurisdiction was the first to adopt it in 1881. See Dunlap v. Bullard, 131 Mass. 161 (1881). See also Hartman

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These landlord/tenant principles are also applicable in theory to the oil and gas leasehold relationship. Where less than the entire es­ tate has been conveyed to an assignee of the lessee, no privity of con­ tract or privity of estate exists between the transferee and the original lessor which would support an action to enforce an express or implied covenant.116 This would especially be true in jurisdictions such as Texas and California since the reservation of an overriding royalty in­ terest would be treated as the functional equivalent of a less-than­ complete transfer.l17 This would suggest that the original lessor could not sue the transferee of the original lessee for breach of any express or implied covenants. This result would have obviously been intolera­ ble from the lessor's viewpoint as well as causing substantial harm to the public interest in requiring a multiplicity of lawsuits to remedy a breach of an oil and gas lease. The California Supreme Court in Hartman Ranch Co. v. Associ­ ated Oil CO.118 faced this vertical privity dilemma and, in dictum, clearly created an exception for oil and gas lease transfers which would allow the lessor to sue the successor in interest of the lessee for money damages for the successor's breach of the implied covenant to prevent drainage. Associated Oil had received a transfer of the lease­ hold interest from Dabney. In that transaction Dabney had retained an overriding royalty interest. Since California follows the rule that even the reservation of a contingent future interest makes the transfer a sub-lease the court had to deal with the vertical privity issue. It did so in two ways, one of which did no damage to common law real covenant jurisprudence, the other of which did. The court ini­ tially decided that Associated Oil was liable for the breach of the im­ plied covenant because the transfer to them amounted to a "contract of assumption" or a third-party creditor beneficiary contract which would inure to the lessor's benefit even though the lessor was not a party to that agreement.119 This ratio decidendi does not invoke real covenant terminology but nonetheless holds the successor in interest directly liable. But the court, in dictum, was afraid that in deciding the case on the contract-of-assumption rationale, it would leave open the question of liability in other oil and gas lease transfer cases where the contract

Ranch Co. v. Associated Oil Co., 73 P.2d 1163 (Cal. 1937); Davis v. Vidal, 151 S.W. 290 (Tex. 1912). 116. RICHARD HEMINGWAY, THE LAW OF OIL AND GAS 556-57 (3d ed. 1991). 117. Hartman Ranch, 73 P.2d 1163; Smith v. Sun Oil Co., 116 So. 379 (La. 1928); Sunburst Oil & Refining Co. v. Callender, 274 P. 834 (Mont. 1929). A number of states, however, hold to the contrary. See, e.g., Texas Co. v. Mattocks, 204 S.W.2d 176 (Ark. 1947); Connell v. Kanwa Oil, 170 P.2d 631 (Kan. 1946); Davis v. Lewis, 100 P.2d 994 (Okla. 1940). 118. 73 P.2d 1163 (Cal. 1937). 119. 73 P.2d at 1170.

HeinOnline -- 33 Washburn L.J. 563 (1993-1994) 564 Washburn Law Journal [Vol. 33 between the lessee and its successor was not as clear in providing for the assumption of the burdens of the various implied or express cove­ nants. While admitting that a lessor cannot ordinarily sue a sublessee directly for money rental, the court determined that such a rule would have a deleterious impact on lessors who were claiming that oil or gas was being drained from their premises. The court stated: But where rent or royalty under an oil lease is a percentage of the oil produced, or the proceeds therefrom, it would seem, in line with certain decisions involving other royalty problems, that the les­ sor has a definite property right in specific property, in the royalty percentage ... and that the lessee by executing a sublease rather than an assignment cannot defeat the lessor's direct right against the party by whom the oil has been produced. .... It would be but a step to hold that the lessor, upon breach of a covenant to protect against drainage, may sue the sublessee to recover his lessor's per­ centage upon oil not removed through wells on the leased premises, but drained from said premises by the sublessee through his wells on adjoining land.12o With one fell swoop the law of real covenants has been changed for oil and gas leases. The court never undertook to analyze the policies that restrict the enforcement of the burden of real covenants to successors in interest of the estate being burdened. The court did not expressly limit its vertical privity exception to the implied covenant to prevent drainage, which suggests that all of the implied covenants may be en­ forced against sublessees even though there is an absence of vertical privity.

VI. THE DIFFERENCES BETWEEN A CANON OF CONSTRUCTION AND A RULE OF LAW In interpreting written instruments affecting real property, many states have developed canons of construction that assist them in ascer­ taining the intent of the parties.121 As a leading treatise on real prop­ erty has stated: Canons of construction are merely statements of judicial pref­ erence for the resolution of a particular problem. They are based on common human experience and are designed to achieve what the court believes to be the "normal" result for the problem under consideration. Thus, their purpose is not to ascertain the intent of the parties to the transaction. Rather, it is to resolve a dispute when it is otherwise impossible to ascertain parties' intent.122

120. [d. at 1171. This case involved so-called "fraudulent drainage" whereby the drainage was being caused by wells owned or operated by the same lessee. Whether this exception to the rule of vertical privity is restricted to such cases is not spelled out in the decision. 121. I have written extensively about the plethora of canons used by the Texas courts which has oft-times led to inconsistent results and uncertainty in the interpretation of written instru­ ments. See Kramer, Sisphyean, supra note 17. 122. 6A POWELL, supra note 86, § 899(3), at 81A-108.

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Courts mayor may not use canons to assist them in interpreting a document and they may choose from a host of canons, some of which may be inconsistent.123 As opposed to a canon, a rule, such as the rule against perpetu­ ities, must be applied in situations where the conditions for its applica­ tion are met. When applied, rules lead to a single result and are most likely to be intent-defeating, rather than intent-effectuating. As dis­ cussed above,124 parties which want to create interests that are too remotely vesting for purposes of the rule against perpetuities have those interests voided. Courts have the option in resolving property disputes to use ca­ nons or rules. When courts chose rules the results are certain and people can rely on them. When courts chose canons, the results are less certain since the courts are reasonably free to apply different ca­ nons and reach a different result when they are looking at a different document. In the conveyancing field, many problems are created by the use of fractional interests to describe granted or reserved interests. One particular problem occurs where there is an outstanding recorded fractional interest. The following hypothetical raises the essential is­ sues: 0 owns a 1/2 mineral estate in Blackacre by virtue of a properly recorded deed. R owns the remaining 1/2 mineral estate plus 100 per­ cent of the surface. R transfers Blackacre to E reserving an undivided 1/2 mineral interest.125 How is the mineral estate to be divided between Rand E? Theo­ retically there are three options: (1) R owns 1/2 and E owns 0; (2) R owns 0 and E owns 1/2; and (3) R owns 1/4 and E owns 1/4. No court seems to have accepted the third result, namely that R intended to retain 1/2 of what he had, which was 1/2. The issue to be resolved, therefore, is whether R or E was to be the owner of the 1/2 mineral estate with the other left holding the bag. In resolving that issue, courts could rely on canons of construc­ tion to assist them in ascertaining the intent of the parties. For exam­ ple, the "greatest estate" canon, which gives to the grantee the largest estate that the language of the deed will justify, might be applied.126 Or a court could apply the "construe against the scrivener or the gran­ tor" canon to reach a particular result depending on who was respon-

123. See, e.g., Gibson v. Watson, 315 S.W.2d 48 (Tex. Civ. App. 1958) (the court, by con­ servative count, listed twelve different canons of construction in resolving a multiple-fraction problem). 124. See supra notes 56 to 101 and accompanying text. 125. For a more complete examination of this problem, see 2 WILLIAMS & MEYERS supra note 6, at 311. . 126. Kramer, Sisyphean, supra note 17, at 117-23.

HeinOnline -- 33 Washburn L.J. 565 (1993-1994) 566 Washburn Law Journal [Vol. 33 sible for the drafting of the deed.127 But the leading case which lent its name to the rule that is applied in these fractional-conveyancing situations rejected the canon approach and instead opted to adopt a rule of law that would apply if several conditions were met. Thus, the court in Duhig v. Peavy-Moore Lumber CO.,128 found that E was the owner of the 1/2 mineral estate while R had retained nothing.129 This was treated as a rule of law, not a canon of construction by many of the courts which adopted the "Duhig rule."130 Thus, if the deed form used does not expressly cover the impact of the outstanding fractional mineral interest, a reservation of a similar fractional interest in the deed will not inure to the grantor. Instead, the grantee will take the fractional mineral interest which is determined by subtracting the re­ served fraction from 100 percent. Drafters can easily avoid this problem by either specifically not­ ing the existence of the outstanding fractional interest and stating that the reservation in the grant is in addition to the outstanding interest or by merely denoting in the deed what fractional interest, if any, the grantee is supposed to receive. But since lawyers are creatures of habit, the deed forms used tend not to allow for such "creative" writ­ ing and Duhig-type problems continue to plague the court system. Once a jurisdiction adopts the Duhig rule, title certainty should be achieved. If the prior fractional mineral interest is recorded the grantor who executes a warranty deed will retain nothing under the hypothetical fractions used above even where the grantee had actual knowledge of the outstanding mineral interest.l3l But in North Da­ kota the jurisprudence is, unfortunately, not so clear. North Dakota initially followed the Duhig rule in the case of a fractional reservation where there was an outstanding fractional interest not specifically

127. [d. at 103-05, 108-17. 128. 144 S.W.2d 878 (Tex. 1940). 129. There were two different rationales for reaching this result. Commissioner Smedley, who wrote the opinion for the Texas Commission of Appeals, analyzed the problem as a simple matter of construction. The language of the deed clearly evinces an intent to convey all of the surface and 1/2 of the minerals. The reservation merely refers to the outstanding 1/2 mineral estate owned by the third party. [d. at 879-80. See also WILLIAMS & MEYERS, supra note 6, at 311. The remaining justices agreed with the result but were concerned about the apparent con­ flict between the expressed intent to grant 1/2 of the minerals and the expressed intent to reserve to the grantor 1/2 of the minerals. Thus, they argued that it was not merely a constructional issue but an issue involving a doctrine analogous to estoppel by deed. Having warranted, through a warranty deed, the title to the surface and 1/2 of the minerals, the grantor was estopped to deny that the grantee was to receive the 1/2 mineral estate. Duhig, 144 S.W.2d at 880. The fact that the grantee had actual or constructive knowledge of the outstanding 1/2 mineral estate would not defeat the estoppel-by-deed rationale. 130. See, e.g., Brown v. Kirk, 257 P.2d 1045 (Colo. 1953); Salmen Brick & Lumber Co. v. Williams, 50 So. 2d 130 (Miss. 1951); Kadrmas v. Sauvageau, 188 N.W.2d 753 (N.D. 1971); Ewing v. Trawick, 256 P.2d 182 (Okla. 1953); Body v. McDonald, 334 P.2d 513 (Wyo. 1959). 131. An exception can be made where the grantor can show that the parties intended the grantor to retain the reserved mineral interest and grounds for reformation of the instrument, such as mutual mistake, fraud or duress, can also be proven. See 2 WILLIAMS & MEYERS, supra note 6, § 580.37, at n.ll.

HeinOnline -- 33 Washburn L.J. 566 (1993-1994) 1994] The Mangling of Common Law Property Concepts 567 mentioned in the deed.132 There was, however, a mid-course change triggered by the holding in Gilbertson v. Charlson.133 The facts in Gil­ bertson present a classic Duhig-type problem. G.S. Thorlackson owned the surface and ninety-five percent of the minerals when he died intestate. Three children, Louise, Pauline and Paul, inherited a 1/3 interest in the surface and the minerals. Paul and Louise then con­ veyed by warranty deed the entire surface estate but reserved and ex­ cepted fifty percent of the minerals underlying the estate.134 The grantee had actual notice of the outstanding interests held by North Dakota and herself. Nonetheless, since the parties used a warranty deed, the Duhig rule would find that the grantors impliedly warranted a transfer of fifty percent of the mineral estate. Since they owned 63­ 1/3 percent of the minerals, they would be left with a total of 13-1/3 percent. The Gilbertson court did not follow the Duhig rule, but rather converted Duhig's estoppel-by-deed analysis into an estoppel-in-pais analysis. It distinguished the earlier North Dakota case which had adopted the Duhig rule on the basis that the facts did not show that the grantee had actual or constructive knowledge of the outstanding mineral interests. Notice, however, is irrelevant to the application of the Duhig rule. In almost all of the cases applying the Duhig rule, actual or constructive knowledge is clearly shown. Nonetheless, the grantee is found to be entitled to the entire difference between the fraction reserved and 100 percent. If notice is injected as a reason to deny the application of the Duhig rule, the rule disappears from the conveyancing scene because almost all deeds are recorded and there­ fore the grantee will take with constructive notice of the outstanding fractional interest. By applying traditional equitable-estoppel princi­ ples the court was adopting a new rule which would favor the grantor in fractional-reservation cases.135 Gilbertson, however, was not the final word in North Dakota. Only two years later the North Dakota Supreme Court limited Gil­ bertson to its "unique" facts and reinstituted the Duhig doctrine in cases where there the grantee has actual or constructive notice of the outstanding fractional mineral interests.136 Citing extensively from the Williams & Meyers treatise, the court found that the proper analy­ sis is to place the risk of loss of title on the party giving the warranty. The issue is not what the grantor intended to reserve but what the

132. Kadrmas v. Sauvageau, 188 N.W.2d 753 (N.D. 1971). 133. 301 N.W.2d 144 (N.D. 1981). 134. [d. at 145. 135. For a critical analysis of Gilbertson, see Richard Maxwell, Some Comments on North Dakota Oil and Gas Law, 58 N.D. L. REV. 431 (1982). 136. Sibert v. Kubas, 357 N.W.2d 495 (N.D. 1984).

HeinOnline -- 33 Washburn L.J. 567 (1993-1994) 568 Washburn Law Journal grantor purported to transfer.137 One reason why the court may have shifted grounds so quickly was identified by several academicians who commented as follows on the aftermath of Gilbertson: An explosion of title· research reportedly took place after the North Dakota Supreme Court's decision in the Gilbertson case. The court's rejection of a settled rule of property had a domino ef­ fect upon the titles of other persons. Landmen made extensive searches of deed records in an attempt to find Duhig fact situations, and then acquired leases from grantors who had reserved an inter­ est in minerals at a time when an interest existed in a third party.D8 VII. SOME CLOSING THOUGHTS I began this essay by noting the continued de-emphasis on the property antecedents of oil and gas jurisprudence. The anecdotal ex­ ceptions which I have highlighted here, and of which I am sure there are many more, do not convince me that property tenets are no longer the skeleton upon which oil and gas jurisprudence is founded. While there has been a gradual chipping away at the extremities of the skele­ ton, the basic underlying theme of oil and gas law is still undeniably rooted in property concepts developed over the past 1000 years. The fact that neither legislative bodies nor courts have been willing to drastically re-write the basic property rules, or carve out exceptions for oil and gas transactions, is further evidence of property law's vital­ ity. The fact that exceptions exist merely reaffirms my view that the common law is a wonderful device for keeping up with the times and providing a system of rules that achieves several important societal objectives, including stability, public confidence that the system is gov­ erned by the rule of law, rather than the rule of persons; and produc­ ing change where change is needed to meet new and innovative problems that challenge humankind in dealing with interpersonal rela­ tions. Property law was the parent of oil and gas law. As with all children who age and mature, there has been a parting of the ways, but the essential relationship is still there and will continue to be there for the immediate future. Title certainty is more than a hackneyed phrase. In withdrawing the Duhig rule the court set in motion sub­ stantial forces which rippled through the oil and gas industry in North Dakota. Having once adopted a rule, rather than a canon of construc­ tion, courts should be very circumspect about reversing or substan­ tially modifying such rules because of the tremendous impact that such a decision will have on the settled expectations of those involved in the conveyancing business.

137. 2 WILLIAMS & MEYERS, supra note 6, § 580.36. 138. EUGENE KUNTZ, ET AL., OIL AND GAS LAW 579 (1st ed. 1986). The Duhig rule has been followed consistently since Sibert and reinforced as a rule of law that is to be applied regardless of the knowledge of the parties. Acoma Oil Corp. v. Wilson, 471 N.W.2d 476 (N.D. 1991); Mau v. Schwan, 460 N.W.2d 131 (N.D. 1990).

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