New Mexico State Lease Recording Requirements

The New Mexico State Land Office ("SLO") is the government agency responsible for leasing oil, gas and other minerals owned by the State of New Mexico. The Oil, Gas and Mineral Resources Section of the SLO has two separate divisions: the Oil, Gas, and Minerals Division ("OGMD") and the Royalty Management Division ("RMD"). The OGMD administers monthly oil and gas lease sales and issues minerals leases. The RMD collects the royalty checks if production is achieved.

The procedures for leasing state owned minerals are set forth in Chapter 19, Article 10 of the Annotated Statutes of New Mexico ("NMSA"), titled Lease of Oil and Gas Lands. NMSA § 19-10-1 authorizes the commissioner of public lands ("commissioner") to execute oil and gas leases in the name of the State of New Mexico. NMSA §§ 19-10-2, et seq. set forth the numerous technical requirements for leasing, including the classification of states lands, lease provisions, forms and other requirements. NMSA Chapter 70 also regulates oil and gas leasing and production. Article 1 deals with assignments and leases, and Article 2 (the "Oil and Gas Act"), creates and enumerates the powers of the Oil Conservation Division ("OCD") and the regulation of wells.

New Mexico is a notice recording jurisdiction, which means that the recording of instruments affecting real property in the county where the property is located provides constructive notice to all the world of the existence and contents of the instruments so recorded from the time of recording. NMSA §§ 14-9-1 and 2;Camino Real Enters v. Ortega, 758 P.2d 801, 802 (N.M. 1988). Unrecorded instruments are not effective against any good faith purchaser without knowledge of the existence of such unrecorded instruments. NMSA § 14-9-3.

NMSA § 70-1-1 provides that all assignments and other instruments of transfer of royalties in the production of oil, gas or other minerals on any lands located in New Mexico, including lands operated under lease or contract from the United States and from the State of New Mexico, must be recorded in the office of the county clerk of the county where the lands are situated. Under NMSA § 70-1-2, recording such instruments provides constructive notice to all persons of the existence and contents of such assignments and other instruments so recorded from the time of filing, and no assignment or other instrument of transfer affecting the title to such royalties not recorded as herein shall affect the title or right to such royalties of any purchaser or transferee in good faith, without knowledge of the existence of such unrecorded instrument.

Much like federal oil and gas leases, record title of state leases can be severed from operating rights (working interests). Unlike federal oil and gas leases, the SLO has developed a somewhat restrictive approach to record title ownership and assignment. Under the SLO regulatory scheme, operating rights can be assigned freely, but no more than two persons or entities may be the lessee of record (record title owner) of an oil and gas lease. If two persons or entities own record title, they each effectively own an undivided one hundred percent as tenants in common. In other words, the SLO prohibits the creation of "undivided interests" in record title, which it defines as being interests of less than one hundred percent. Prior to December 17, 1924, the SLO allowed record title to be assigned in a certain formation, but for all leases issued after December 17, 1924, such divisions are no longer allowed.

The authority for the SLO's approach to joint ownership of record title is NMSA § 19-10-13, which provides that "all leases issued under the provisions of this act shall be assignable in whole or in part; provided, however, that no assignment of an undivided interest in the lease or any part thereof, or any assignment of less than a legal subdivision shall be recognized or approved by the commissioner." NMAC § 19.2.100.42 expands that rule and provides that assignments shall not be accepted nor approved by the commissioner: (A) for less than the assignor's entire interest in any legal subdivision (except for where transfer is by operation of law); (B) for less than a legal subdivision; (C) in the names of more than two person or legal entities; (D) in the name of a trusteeship unless the trust is expressly set forth and not more than two persons are named as trustee; (E) after lis pendens is filed; (F) for any assignment containing any language other than the approved form; (G) where the assignment covers acreage included in more than one lease; (H) if the lease is not in good standing; and (I) unless the assignor covenants to the assignee and the commissioner that the assigned leasehold estate is valid and subsisting and that all rental and royalties due thereunder have been properly paid. See also Rn, SLO Rule 1, Section 1.034, Section 1.033. Because of the bright line rule that only two parties can own record title interest at any given time, record title is severed often and early in state leases.

Assignments of record title must be filed with the commissioner for approval within one hundred days after having been signed by the assignor as shown upon the face of the instrument. NMAC § 19.2.100.40 - Rn, SLO Rule 1, Section 1.033. If an assignment of record title is filed after that time, then the parties must show to the satisfaction of the commissioner that "extreme hardship will result to one or more of the parties and that no prejudice to the rights of the state will occur." Id. Under NMSA § 19-10-13, assignments of record title must be executed and acknowledged in the same manner as other conveyances of real estate, and three copies must be filed in the office of the commissioner. There is no requirement that assignments of record title be recorded in the county records.

The commissioner has the right to refuse approval of any assignment not executed in proper form or by the proper person or persons, or when the lease is not in good standing as to the assigned tracts, or when litigation is pending affecting the lease or the interest of any person therein. NMSA § 19-10-13 also provides that once the commissioner has approved an assignment of record title, the assignor is relieved from all obligations to the state with respect to the lands embraced in the assignment and the state shall likewise be relieved from all obligations to the assignor as to such tract or tracts.

The SLO defines Miscellaneous Instruments as all documents that create an interest in an oil and gas lease but do not change the lessee of record on the lease (the record title owner). Miscellaneous Instruments include documents that create undivided working interests (i.e. assignments of operating rights), overriding royalty interests, farmout agreements, rights to explore and produce below a particular depth, mergers, name changes, probate materials, mortgages, financing statements and powers of attorney.

Under NMSA § 19-10-13, a record owner of a state oil and gas lease may enter into any contract for the development of the leasehold premises or any portion thereof, or may create overriding royalties or obligations payable out of production, or enter into any other agreements with respect to the development of the leasehold premises or disposition of the production therefrom. These Miscellaneous Instruments do not require approval by the commissioner of public lands. NMAC § 19.2.100.43 - Rn, SLO Rule 1, Section 1.036. Further, there is no restriction on how many parties can own interests under Miscellaneous Instruments, and no restriction on owning a fractional interest. NMSA § 19-10-13 also provides that all Miscellaneous Instruments may be filed either in the office of the commissioner of public lands or recorded in the office of the county clerk of the county where the lands are situated, and the filing or recording thereof shall constitute notice to all the world of the existence and contents of the instruments so filed or recorded.

In summation, assignments of record title must be filed for approval with the SLO, and no more than two parties can own record title at any given time. Miscellaneous Instruments can be filed in the state or county records, but do not have to be filed in both. Therefore, when determining leasehold ownership in a state oil and gas lease, it is necessary to obtain abstracts of title covering the records of the county clerk in the county where the land is located, and the records of the State Land Office. There is no requirement that a state oil and gas lease be recorded in the county records.