I’ve had a few landmen ask me about the proper way to handle payments of bonus and royalties under oil and gas leases involving a life tenant. Judging by the guesses people have given, it may not be entirely common sense. The entire analysis changes even further if the Open Mines Doctrine applies. I suppose that’s one reason it’s always good to make sure you have an excellent title attorney preparing your title opinions and division orders!
The answer: Once a lease is granted by both the life tenant and the remaindermen, courts generally allocate funds between them as follows:
However, the Open Mines Doctrine is of key importance when dealing with an active lease, because the entire division of proceeds changes when this doctrine applies. The Cornell School of Law defines the Open Mines Doctrine as follows:
In property law, a doctrine that permits a tenant to commit voluntary waste on a piece of land by depleting it of natural resources when mining was previously done on the land and mines were currently open at the time the tenant took possession of the land. In this situation, a tenant is allowed to continue mining on the land, but can only continue to mine in the open mines already in existence and cannot open any new mines on the land.
The Open Mines Doctrine, while borrowed from the law of hard minerals, has been adopted in most oil-producing states. Under this doctrine, where it applies, courts generally allocate funds between the life tenant and remaindermen as follows:
- Life Tenant: Delay Rentals, all Bonus Payments and Royalty Payments.
So when does the Open Mines Doctrine apply? Generally, a “mine” (oil and gas lease) is “open” when the oil and gas lease exists when the life tenancy is created. Perhaps counter-intuitively, this may also include additional wells drilled under that lease. One important limitation is that the Open Mines Doctrine generally does not apply to future leases or top leases.