Texas Supreme Court Exempts Oil and Gas Conveyances from the Rule Against Perpetuities

The rule against perpetuities (“RAP”) and its archaic and frequently confusing interpretation of when an interest is “vested” has plagued generations of law students and property lawyers.  RAP requires that “no interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of conveyance.”  BP Am. Pro. Co. v. Laddex, Ltd., 513 S.W.3d 476, 479 (Tex. 2017).  Traditionally, RAP imposed the draconian consequence of voiding any interest if any possible contingency of the grant violated RAP.  Over time, courts have continued to relax the penalty imposed by RAP.  Rosson v. Bennett, 294 S.W. 660, 662 (Tex. 1927) (holding that an oil and gas lease, which grants a lessee the right to explore and develop for a certain period of time and for so long thereafter as oil and gas is produced, creates a fee simple determinable estate that does not violate RAP).

In ConocoPhillips Co. Koopman, No. 16-0662, 2018 Tex. LEXIS 247 (Mar. 23, 2018), the Texas Supreme Court addressed the applicability of RAP to mineral interests.  In Koopman, in 1996, Lois Streiber conveyed 120 acres of land in Dewitt County to Lorene Koopman, which deed included the following language:

“RESERVATIONS FROM AND EXCEPTIONS TO CONVEYANCE AND WARRANTY:

There is EXCEPTED from this conveyance and RESERVED to the Grantor and her heirs and assigns for the term hereinafter set forth one-half (1/2) of the royalties from the production of oil, gas . . . and all other minerals . . . which reserved royalty interest is a non-participating interest and is reserved for the limited term of 15 years from the date of this Deed and as long thereafter as there is production in paying commercial quantities of oil, gas, or said other minerals from said land or lands pooled therewith. . . .  It is expressly understood, however, that if any oil, gas, or mineral or mining lease covering said land . . . is maintained in force and effect by payment of shut-in or any other similar payments made to lessors or royalty holder in lieu of actual production. . . .”  (emphasis added).

Id., 2018 Tex. LEXIS 247, at *2-3.

Based on the above language, Streiber reserved a 15-year term non-participating royalty interest (“NPRI”).  Subsequently, Lorene Koopman conveyed an undivided two-thirds of her mineral interest to her children (the “Koopmans”).  Next, Lorene Koopman leased the land, which lease was eventually acquired by Burlington Oil & Gas Company, LP (“Burlington”).  Burlington identified a well to be drilled, but actual production was not obtained until February 2012 – two months after the Streiber term expired on December 27, 2011.  However, prior to December 27, 2011, Burlington tendered “shut-in royalty payments” to the Koopmans and explained that the payments “were made ‘to ensure that all parties’ interest, if any, in the well is maintained.’”  Id., 2018 Tex. LEXIS 247, at *4.  The dispute centered on the Koopmans’ assertion that the term NPRI interest expired.

Burlington argued that “the ‘as long thereafter’ language Streiber used in her reservation created in the Koopmans a springing executory interest, which is not certain to vest, if at all, within the period required by [RAP]: twenty-one years after the death of some life of lives in being at the time of the conveyance.”  Id., 2018 Tex. LEXIS 247, at *10.  The Texas Supreme Court explained:

“Under the common law [RAP], with respect to the NPRI, the deed created in Streiber a fee simple subject to executory limitation and in the Koopmans an executory interest.  The Koopmans received a future interest created in someone other than the grantor that would become possessory by the divesting of Streiber’s prior freehold estate, i.e., an executory interest.

Thus, at the time it was created, it was uncertain whether the Koopmans’ future interest would vest within the period required by [RAP].  The Koopmans’ argument that their future right to the NPRI ‘vested in interest’ immediately upon execution of the deed is simply not the law: springing executory interests do not vest, by definition, until the condition terminating the grantor’s possessory interest is met.”

Koopman, 2018 Tex. LEXIS 247, at *14-15.  Here, the condition terminating the possessory interest, a lack of production in paying quantities, may not occur within twenty-one years after the death of some life or lives in being, and, thus, violated RAP.  The Texas Supreme Court noted that if the conveyance had been a grant of the NPRI instead of a reservation, then the conveyance would not have violated RAP.  Id., 2018 Tex. LEXIS 247, at *15-16.

The Texas Supreme Court, however, did not invalidate the conveyance because voiding the interest would not serve the purpose of RAP, which was to prevent landowners “from using remote contingencies to preclude alienability of land for generations.”  Id., 2018 Tex. LEXIS 247, at *17.  The Texas Supreme Court explained that limitation of the term NPRI, being production in paying quantities, was an event that was certain to occur at some point.  Thus, the Texas Supreme Court saw “no persuasive reason to treat the Koopmans’ future interest in the NPRI as uncertain and thus subject to invalidation by [RAP] simply because it was created through reservation rather than a grant, when the event upon which their interest will vest was certain to occur.”  Id., 2018 Tex. LEXIS 247, at *25.

After determining that RAP did invalidate the conveyance, the Texas Supreme Court analyzed the ownership of the NPRI interest at the conclusion of the 15-year term.  Burlington and Streiber both argued that the payment tendered in December 2011 to the Koopmans “to extend the primary term of its lease on the tract is ‘similar’ to a shut-in royalty and thus meets the third savings-clause requirement.”  Id., Tex. LEXIS 247, at *33.  The Texas Supreme Court affirmed the decision of the court of appeals that the interpretation of “other similar payments” in the NPRI reservation constituted a factual issue to be determined by a jury.

The Koopman decision is significant because the Texas Supreme Court clearly stated its position that RAP should not be applied to invalidate conveyances of oil and gas interests when the holder of the interest can be ascertained and the condition is certain to terminate.  Koopman upholds the long-standing industry practice of inclusion of “as long thereafter as there is production in paying quantities” language in oil and gas conveyances.