Non-participating royalty interests (“NPRI”) are extremely common in the oil patch, and it is imperative that every land professional be familiar with the basic NPRI attributes and rights. The shale boom has spurred an unprecedented movement in landowner education, and NPRI owners have become more and more sophisticated. Therefore, it is important to understand the bargaining power and goals of the sophisticated NPRI owner.
Table of Contents
- 1 Recap of Parts One and Two
- 2 Overview of NPRI’s and Community Lease Concepts
Recap of Parts One and Two
NPRI’s Part One:Fundamental Characteristics
- Royalty Only: a right only to royalty, independent of a lease;
- Executive Negotiates Lease: the holder of the executive right (usually the mineral interest owner) negotiates the associated lease
- Two “Sizes:” NPRI’s can be in two sizes, fixed and floating;
NPRI’s Part Two:Pooling, Allocation and Ratification
- Pooling: While an NPRI owner is bound to most of the lease negotiated by the Executive, an NPRI cannot be pooled without his own consent;
- Option One: Not Pool:
- Can wait until a well is drilled, then decide whether to pool his interest;
- Non-pooled interests are not diluted, and can therefore be much larger;
- CATCH: non-pooled interests only receive royalties if well is located directly on his/her property;
- Option Two: Pool by Ratification:
- An NPRI owner can pool his interest by ratifying the oil and gas lease;
- This authorizes all subsequent pooling under terms of lease;
- Option Three: Selective Pooling:
- NPRI owner can execute Pooling Agreement;
- Can allow for limited pooling authority;
- Often allows NPRI to selectively decide, well by well, whether pooling or not pooling is most beneficial for his interest.
Overview of NPRI’s and Community Lease Concepts
In Part Three, we’re going to skim the surface of a somewhat “advanced” concept. NPRI’s can cause issues under the “community lease” doctrine. Generally, an NPRI will fall under the “community lease” doctrine when the NPRI is owned upon only a portion of the land covered by an oil and gas lease.
Basics of Community Lease Principles
Before we can understand the implications on NPRI’s, we must first understand what a community lease is.
Community Lease Definition: A community lease is one in which the owners of two or more tracts join in the execution of a single lease covering those tracts.
Effect of Community Lease: Unless the lease contains a provision to the contrary, a community lease pools the interests of the multiple executing lessors. Thereafter, their interests will be “apportioned,” meaning they will share the royalty on an acreage basis, pro rata, no matter which of the covered properties a well is drilled on and no matter which of the covered properties is included in a pooled unit. 1) Parker v. Parker, 144 S.W.2d 303 (Tex. Civ. App.–Galveston 1940, writ ref‟d); French v. George, 159 S.W.2d 566 (Tex. Civ. App.–Amarillo 1942, writ ref‟d).
Community Lease Principles and NPRI’s
Texas courts have held that community lease concepts may apply to NPRIs, reasoning that the execution of a community lease is the equivalent of an “offer to pool” made to the NPRI owners, of which the NPRI owner can accept or reject. 2) Ruiz, 559 S.W.2d at 843. Therefore, an NPRI will fall under a “community lease issue” where the NPRI is owned upon only a portion of the land covered by an oil and gas lease.
When the community lease principles were originally created, the courts probably believed that the community lease concepts would only apply where it was plainly obvious: multiple lessors and multiple tracts of land. However, as many land professionals can attest, mineral owners often have no idea their interest is burdened by an NPRI. Therefore, it is not uncommon to see an Oil and Gas Lease where an NPRI burdens only part of the land covered by the lease. And this situation may cause the lease to be a community lease! Why: again, we have multiple owners, multiple tracts, and a single lease.
So why do we care? Two basic reasons. First, if you have a unit which includes the lease, but not the NPRI portion of the lease, then you still may have to allocate royalties to the NPRI owner even though his interest lies entirely outside the unit. Second, a typical title examination and curative effort applies only to the land covered by the lease. When land professionals are required to open their examination to lands outside the unit, costs can substantially increase.
Avoiding Application of the Community Lease Principle
There are two common methods of avoiding this consequence of the community lease. First, lessors can sign separate leases for each tract of land. Second, parties can include an anti-communitization (aka anti-apportionment or anti-entireties) clause in the lease. An anti-communitization clause, essentially, states ‘if this lease covers multiple tracts, it shall not be treated as a community lease, and no pooling or unitization is hereby intended.”
However, Texas courts have refused to enforce anti-communitization clauses in leases in relation to NPRI’s, without the direct agreement of the nonparticipating royalty owner. 3) London v. Merriman, 756 S.W.2d 736 (Tex. App.–Corpus Christi 1988, writ denied) (holding that the ratification of a lease containing an anti-communitation clause still effected a communitization of the NPRI, under the concept of a community lease being an “offer to pool”).
The result is that an NPRI owner, even though his tract lies outside of a unit, but within a lease included in that unit, may be able to ratify the lease, thereby communitizing his interest, and thereafter be entitled to his share of royalties from the unit. This is an incredible power afforded to NPRI owners! An NPRI can “force” its way into an apportionment of royalties even though these “community leases” can often times be unintentional, and even where there is a direct effort to avoid communitization.
Curing the Community Lease “Issue”
As stated above, these community lease principles can be somewhat burdensome to land professionals, because: (1) they can cause the need to examine title outside the unit, (2) they can cause the need to cure title outside the unit, and (3) they can cause a dispute or strained relations with the lessor.
Operators have attempted several different “curative” measures aimed at preventing these burdens. Many of these are questionably effective, and some could, in my opinion, subject an attorney recommending these measures to malpractice liability. If you are faced with a community lease issue that you would like to “cure,” I suggest you speak to a licensed attorney who will examine the specific lease and chain of title in question to develop a recommended game plan. Potential measure include, but are not limited to, the following:
- Partial release; 4) Duffy v. Callaway, 309 S.W.2d 853 (Tex. Civ. App.–Eastland 1958, writ ref‟d), and Callaway v. Duffy, 337 S.W.2d 388 (Tex. Civ. App.–Eastland 1960, no writ).
- Top-leasing followed by bottom lease release;
- DISCLAIMER: I’m not discussing the effectiveness or legality of any of these curative measures, but I can’t keep my mouth closed on this one. I have seen this curative requirement all over the place. I personally believe the recommendation of this curative requirement would subject an attorney to potential malpractice risk. Why? What happens if there is a pre-existing top lease? You’ve just released your bottom lease! Here’s the deal: you’ve already negotiated or purchased a lease, and there is no reason to go back and completely rehash the deal. Additionally, I wouldnt’ be surprised if a court saw this as a breach of duty owed to the NPRI owner.
- Seeking express partial acreage ratification from the NPRI owner;
- Obtaining execution of separate anti-communitization agreements with each of the nonparticipating royalty owners in a community lease prior to beginning development. 5) Cummings, supra n. 12, at 35. Note also that a distinctly separate set of issues is presented by the inclusion of an entireties clause within a lease, which apportions royalties once tracts are divided after the execution of a lease.
DISCLAIMER: The effectiveness or legality of each of these methods is outside the scope of this article.
Footnotes [ + ]