28Jun
The Texas Supreme Court Decides Whether “Subject To” Clause Alters Who Must Bear NPRI Burden

The Texas Supreme Court Decides Whether “Subject To” Clause Alters Who Must Bear NPRI Burden

In a decision that focuses on the parties’ intent as expressed within the four corners of the document, the Texas Supreme Court in Wenske v. Ealy [1]13-15-00012-CV, ___ S.W.3d ___ (Tex. 2017) decided whether the language of a deed puts the entire burden of an outstanding non-participating royalty interest (“NPRI”) on the grantees or whether the NPRI proportionately burdens both the grantor’s reserved interest and the interest conveyed to the grantees.  The grantors argued that their reserved interest is not burdened by the NPRI, while the grantees argued that the NPRI proportionately burdens both their interest and the grantors’ interest.  The Court ruled that, based on the language in the deed, the NPRI proportionately burdens both the conveyed and reserved interest.

In reaching this decision, the Court reaffirms the modern approach to deed interpretation that a court should endeavor to ascertain the parties’ intent from the four corners of the deed, and it rejects the now disfavored approach of applying arbitrary or mechanical rules of construction.  In fact, the Court declines to follow its own previous holding in a case dealing with a similar issue because that holding was based on a mechanical rule of construction.  While the Court acknowledges the general rule that a previously reserved NPRI burdens the entire mineral estate, it holds that the rule is not necessarily determinative because the parties to a deed may contract otherwise.  Instead, in an effort to achieve continuity and predictability, the Court emphasizes that each deed is unique because of the language used therein and that the parties’ intent as expressed in the language of the deed controls.

In 1988, the Wenskes purchased a 55-acre mineral estate from Marian Vyvjala, Margie Novak and others.  Vyvjala and Novak each reserved a 1/8 NPRI for a period of 25 years (the “Vyvjala NPRI”).  In 2003, the Wenskes sold the property to the Ealys by warranty deed.  The deed purported to convey to the Ealys 5/8ths of the mineral estate and reserve to the Wenskes 3/8ths of the mineral estate.

The relevant provisions of the deed are as follows:

Reservations from Conveyance:

For Grantor and Grantor’s heirs, successors, and assigns forever, a reservation of an undivided 3/8ths of all oil, gas, and other minerals in and under and that may be produced from the Property.  If the mineral estate is subject to existing production or an existing lease, the production, the lease and the benefits from it are allocated in proportion to ownership in the mineral estate.

Exceptions to Conveyance and Warranty:

Undivided one-fourth (1/4) interest in all of the oil, gas and other minerals in and under the herein described property, reserved by Marian Vyvjala, et al for a term of twenty-five (25) years in instrument recorded in Volume 400, Page 590 of the Deed Records of Lavaca County, Texas, together will all rights, express or implied, in and to the property herein described arising out of or connected with said interest and reservation, reference to which instrument is here made for all purposes.

*******

Grantor, for the Consideration and subject to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty, grants, sells, and conveys to Grantee the Property, together with all and singular the rights and appurtenances thereto in any way belonging, to have and to hold it to Grantee and Grantee’s heirs, successors, and assigns forever.  Grantor binds Grantor and Grantor’s heirs and successors to warrant and forever defend all and singular the Property Grantee . . . Except as to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty.

After the Wenskes and Ealys executed an oil and gas lease, a dispute arose concerning the effect of these provisions.    The Wenskes sought a declaratory judgment that their 3/8ths interest is unburdened by the Vyvjala NPRI.  According to the Wenske’s, the deed operates to convey only 3/8ths (5/8ths minus the 1/4 NPRI).  The Ealys sought a declaratory judgment that, under the deed, the Vyvjala NPRI burdens both the Ealys’ and the Wenskes’ mineral estates in proportion to each party’s fractional interest in the minerals.  The trial Court granted summary judgment in favor of the Ealys, and the Court of Appeals affirmed.

The Texas Supreme Court begins its analysis by addressing the Wenskes’ reliance on Bass v. Harper, 441 S.W.2d 825 (1969), which also involved the burden allocation of previously reserved minerals.

In Bass, the grantor owned 8/14ths of a 1/8 royalty because the other 6/14ths had been previously reserved.  The grantor conveyed an undivided 1/2 interest in the minerals.  A subject-to clause in the deed excepted from the conveyance various mineral interests totaling the reserved 6/14ths.  There, the grantor argued that the deed conveyed 1/2 of the minerals, as opposed to 1/2 of the grantor’s mineral interest, and that the interest conveyed was burdened by the entire 6/14ths previously reserved minerals.  Thus, according to the grantor in Bass, the deed only conveyed a 1/14th interest (7/14ths less 6/14ths previously reserved minerals).  The Court agreed with the grantor largely due to the placement of the subject-to clause in the document, which the Court reasoned tied it specifically to the grant.

In addressing the Wenskes’ assertions, the Court explains that its reasoning in Bass was limited to the specific wording of the instrument in that case and that, therefore, Bass does not apply.  Instead, the Court notes that the modern approach to deed interpretation is to ascertain the parties’ intent from all of the language within the four corners of the deed and that the parties’ intent prevails over arbitrary and mechanical rules of construction.

The Court also explains that the Court of Appeals’ decision was faulty because it used a “default rule” set forth in Pich v. Lankford, 302 S.W.2d 645, 650 (Tex. 1957), which provides that a royalty interest should ordinarily be carved proportionately from two mineral ownerships.  According to the Court, that application of Pich v. Lankford is not appropriate because it falls under the outdated approach to deed interpretation of applying mechanical rules of construction.

The Court then shifts its analysis to the subject-to clause, which the Court recognizes, generally, as operating to protect a grantor against a claim for breach of warranty when there is an outstanding mineral interest.  The Court also recognizes that a subject-to clause serves other functions, such as limiting the estate granted and maintaining an oil and gas lease in post-lease conveyances.

The Court acknowledges that a severed fraction of the royalty interest—like the Vyvjala NPRI—would ordinarily burden the entire mineral estate.  However, the Court also notes that parties are free to contract for whatever division of interests they desire; therefore, the general principle concerning burden allocation is not outcome determinative.  Here, the Court observes no evidence in the deed that the parties intended that the Vyvjala NPRI burden only the Ealys’ interest.  Instead, the Court determines that the language of the deed shows an intent of the parties was to protect against a breach of warranty.

The Court also relies on the following language from the deed: “If the mineral estate is subject to existing production or an existing lease, the production, the lease and the benefits from it are allocated in proportion to ownership in the minerals.”  According the Court, this language bolsters its position that the parties intended to split the benefits and burdens of the minerals in the same proportion as their ownership.

The Court rules that the deed 1) grants the minerals to the Ealys; 2) reserves 3/8ths of the minerals to the Wenskes; and 3) put the Ealys on notice that the entirety of the minerals is subject to the outstanding Vyvjala NPRI to avoid a warranty claim.

The Court goes on to state that this case does not mean that all conveyances of a fractional mineral interest subject to an outstanding NPRI will, by default, result in the various fractional-interest owners being proportionately responsible for satisfying the NPRI.  Recognizing the importance of continuity and predictability in the law, the Court states that “giving effect to the parties’ intent advances the principle of certainty under the law.”  The Court describes the deed in this case as “not a model of clarity,” but it says that, when read in its entirety, there is “only one reasonable interpretation.”

That assessment, although determinative for this deed, is somewhat at odds with the Court’s vote.

The Court was closely divided, with only four justices joining in Justice Brown’s majority opinion and three justices joining in Justice Boyd’s dissent.  That dissenting opinion reaches the exact opposite conclusion, which would appear to call into question the majority’s description that there is “only one reasonable interpretation.”

 

Ian McNeill
Ian McNeill's practice focuses on the oil and gas industry advising clients on division orders, title defects, curative requirements, royalty and rental issues as well as lease maintenance provisions and assignments analysis. Ian has also rendered division order opinions and title opinions involving complex ownerships, leases held by production, depth and mineral severances and pooling agreements in Texas and Ohio.
Ian McNeill

Footnotes   [ + ]

© Copyright 2014, Austin W. Brister. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
OR
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!
Note: When choosing facebook or google, alerts will be sent to the email listed in that account.
close
OR
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!
OR
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!
Note: When choosing facebook or google, alerts will be sent to the email listed in that account.
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!