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Texas Supreme Court Changes the Rule Against Perpetuities in the Oil and Gas Context

In the case of ConocoPhillips Co. v. Koopmann the Texas Supreme Court held that the Rule Against Perpetuities (“the Rule”) did not void a 15-year non-participating royalty interest that was reserved in a deed. In doing so, the Court changed the way the Rule applies to oil and gas deeds.

The Rule is a complicated legal subject and this case makes significant changes in how the Rule applies in Texas. Note that the Supreme Court explicitly limited the holding of this case to “future interests in the oil and gas context.” The case is significant for these reasons:

  • The Supreme Court rejected the long-held distinction of a future interest created via reservation versus one created via grant in the oil and gas context.
  • The case rejected the famous “two-grant theory” developed in Bagby v. Bredthauer, 627 S.W.2d 190 (Tex. Civ. App.-Austin 1981, no writ).
  • The Supreme Court changed the application of the Rule. In the future: (1) the Rule is to be applied less stringently – or differently — to oil, gas and mineral instruments; and (2) the Rule will not void an oil, gas and mineral deed if, regardless of grant or reservation, the holder of the future remaindered interest is at all times ascertainable and the preceding estate was/is certain to terminate.

What is the Rule Against Perpetuities?

The Rule Against Perpetuities is based on the Texas Constitution Article I § 26 that states: “Perpetuities . . . are contrary to the genius of free government, and shall never be allowed.” “Perpetuities” are interests in property — land or mineral interests — that do not vest within 21 years after the death of some life or lives in being at the time of the conveyance. Normally, the Rule is applied in the context of wills and trusts. But the Rule has been applied to oil, gas, and mineral leases, too. If some future interest in a mineral deed is granted, it must vest within 21 years of the lifetimes of those then living. If it is possible for the vesting to happen beyond that 21 years, then the Rule voids the contingent future interest. The purpose of the Rule is to prevent land from being “locked up” and unsaleable for decades into the future.

Facts of ConocoPhillips

On December 27, 1986, Lois Strieber conveyed, by warranty deed, fee simple title to a 120-acre tract of land in Dewitt County to Lorene Koopmann and her husband. However, Strieber’s deed reserved to her a 15-year, one-half non-participating royalty interest (“NPRI”), which could be extended “as long thereafter as there is production in paying or commercial quantities” under an oil and gas lease. In the event there was no production after the 15-year term, then on December 27, 2011, the NPRI would transfer to the Koopmanns. There was a savings clause allowing for an extension of the 15-year period.

By August 2011, there had been no production from the Koopmanns’ land. At that time, Strieber conveyed  a 60% interest in her NPRI to Burlington Resources Oil & Gas Co., LP.

On December 27, 2011, there was no well actually producing on the land. Burlington and ConocoPhillips disagreed about whether there was a well capable of producing in paying or commercial quantities as of that date and about factual issues related the savings clause that might extent the 15-year reservation period under the Strieber deed. In December 2011, Burlington ceased making payments to anyone. The Koopmanns filed suit seeking to construe the deed, claiming that they were the sole owners of the NPRI as of December 27, 2011. In response, Burlington argued that the reservation of the NPRI was void as a violation of the Rule Against Perpetuities.

The trial court granted summary judgment in favor of the Koopmanns and held them to be the sole owners of the NPRI. The Court of Appeals affirmed with respect to the Rule, but remanded since the Court of Appeals found there to be factual questions regarding the savings clause and whether the 15-year reservation was or should be extended. The Texas Supreme Court affirmed, but for different reasons.

Legal Principles Established by ConocoPhillips: Abolishing the Distinction Between a Grant and a Reservation

Under old law, an important distinction was made between whether a future interest was created by reservation or by a grant. The 1986 Strieber deed, for example, created a future NPRI interest for the Koopmanns based on a reservation. The Rule became a legal issue for the Strieber deed because of the reservation language. The 1986 Strieber deed would not have been a problem if the deed had conveyed everything to the Koopmanns but then re-conveyed the NPRI back to Strieber. Under that type of deed, everything would have vested in 1986; the Koopmanns would have been vested with the entirety of the property and the mineral rights and Streiber would have been vested (or re-vested) with the NPRI. The NPRI would then have reverted back to the Koopmanns sometime in the future.

Clearly this is form over substance. Whether reserved or granted, the effect is the same. In the ConocoPhillips case, the Texas Supreme Court agreed and rejected the long-held distinction between  a future interest created by a grant and a future interest created by a reservation in the oil and gas context when it can be clearly ascertained at all times who the holder of the future interest is — in this case the Koopmanns — and when the previous estate — the NPRI held by Strieber — is certain to end at some point. The Court stated: “We see no persuasive reason to treat the Koopmanns’ future interest in the NPRI as uncertain and thus subject to invalidation by the Rule simply because it was created through a reservation rather than a grant, when the event upon which their interest will vest was certain to occur.”

The Rule Against Perpetuities Applies Differently in the Oil and Gas Context

The Court stated that the Rule applied differently in the oil and gas context, because of the purpose of the Rule. Specifically, the Court stated: “We have recognized the purpose of the Rule as preventing landowners from using remote contingencies to preclude alienability [saleability] of land for generations…. But restraint on alienability and promoting the productivity of land is not at issue in the oil and gas context…. Considering the purpose of the Rule, if the Koopmanns’ future interest in the NPRI could be considered “vested” at the time it was created for purposes of transferability and inheritability, then it would be appropriate for this Court to refrain from applying the Rule to invalidate their interest…. This would be consistent with the purpose of the Rule as we have stated it because alienability and productivity of reserved mineral interests would be facilitated, not hindered.”

In future cases, the questions to be asked in oil and gas situations involving the Rule will be:

  • Is the future contingent interest transferable and/or inheritable?
  • Is the holder the of the future interest known and knowable at all times?
  • Is the previous estate — e.g., Strieber NRPI — certain to end at some point?

If the answer is “yes” to these questions, the Rule will not apply.

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