R.A.P. Battle: The Kansas Supreme Court Clips the Rule Against Perpetuities

In Jason Oil Co., LLC v. Littler, 2019 Kan. LEXIS 204 (Kan. 2019) Kansas joined a growing number of jurisdictions declining to apply the rule against perpetuities to defeasible term oil and gas interests.

On December 30, 1967, Grantor executed two deeds in favor of separate Grantees conveying tracts of land in Rush County, Kansas (the “1967 Deeds”).  Each 1967 Deed excepted the mineral estate “for a period of 20 years or as long thereafter as oil and/or gas and/or other minerals may be produced.”  Upon the expiration of 20 years, no drilling operations had been conducted on the lands and no oil and gas had been produced from either tract.  Ostensibly, the term interest expired and the excepted minerals became vested in the Grantees’ successors.

In 2016, Jason Oil Co. took oil and gas leases from the Grantees’ successors.  The Grantor’s heirs challenged the validity of said leases alleging that the 1967 Deeds violated the rule against perpetuities (the “Rule”), and were thus void ab initio.  The Grantor’s heirs argued that the exception created a fee simple determinable in the minerals, and that the Grantees’ successors’ interests were “springing executory interest” that were voided by the Rule.  The Grantor’s heirs filed a suit to quiet their title to the minerals, which was eventually appealed to the Supreme Court.

Kansas has adopted the Uniform Statutory Rule Against Perpetuities (“USRAP”), which applies to non-vested property interests.  Under Kan. Stat. Ann. § 59-3401, a non-vested property interest is valid unless it is certain to vest or terminate no later than 21 years after the death of an individual then alive when the interest was created (or within 90 years).  In other words, an interest violates the Rule if a hypothetical situation can be posed in which the interest will vest later than lives in being plus 21 years.  See In re Estate of Freeman, 404 P.2d 222 (Kan. 1965).  However, because the USRAP was not adopted until 1992, the Court applied the similar common law Rule to the 1967 Deeds.

The Court began by noting that this was a case of first impression, and that it must decide the validity of the common practice of reserving a term interest in minerals.  It immediately voiced its concern that applying the Rule in this situation this would “voi[d] innumerable transfers of minerals and creating marketable title problems of epic proportions.” The Court then held that the future interest created in the 1967 Deeds could become possessory in the Grantees’ successors more than 21 years after the death of the last of the Grantor or Grantees’ heirs and that it did, theoretically, violate the Rule.  However, the Court went on to explain that the interest originally created in the Grantees was not a reversion, but rather a present, vested interest to which the “Rule is simply inapplicable.”

The Court did not mince words in dispensing with the Grantor’s heirs’ arguments, stating that because there is no binding precedent, it was “free to decide if the Rule should apply” in this context.  It summarily dismissed the Grantor’s heirs’ “quibble” that the deeds created an exception as opposed to a reservation or the “legal fiction” of a grant and regrant theory.  The Court further rejected the Grantor’s heirs’ plea for a “remorseless” application of the Rule.

Instead, the Court looked to the underlying purpose of the Rule, which is to avoid fettering real property with future interests dependent upon unduly remote contingencies.  It also underscored the fact that the Rule originally developed to prevent the practice of tying up family properties for generations.

The Court ultimately concluded that in the arena of term oil and gas interests, the Rule amounts to a “nonsensical act of legal formalism.”  Applying the Rule would result in the Grantor’s Heirs holding the mineral interests in the real estate in perpetuity, ironically frustrating alienability and the basic premise of the Rule.  The key takeaway from Jason Oil Co., LLC v. Littler is that where a grantor creates a defeasible term-plus-production mineral interest by exception, leaving a future interest in an ascertainable grantee, the future interest in minerals is exempt from the Rule.

Kansas has joined the growing number of states that are tempering the rule against perpetuities and declining to apply it in the context of term oil and gas interests.  This is a comforting trend for practitioners as many leases, deeds and assignments are built around the core concept of a primary term of years and a secondary term lasting “as long thereafter as oil and gas are produced in paying quantities.”  It is also noteworthy that, in reaching its decision, the Court found particularly persuasive the recent Texas case of ConocoPhillips Co. v. Koopman, 547 S.W.3d 858 (Tex. 2018), which holds that the common law rule against perpetuities did not invalidate a future interest in a term NPRI, even though the grantees’ springing executory interest technically violated the Rule, because the future interest was certain to vest and did not interfere with the Rule’s purpose.