The Rule Against Perpetuities in Oil & Gas Law

By: Christopher Kulander Professor of Law South Texas College of Law Houston

“It was a dark and stormy night and no executory interest was good unless it had to become possessory, if at all, within 21 years following a life or lives in being at the creation of the interest.”

Did you just convulse a familiar fright? As long as possession of land has existed in any form, owners have worried about what will happen to their property—and on it—after they go to the grave. The question of what will immediately happen to the property of the recently deceased has been answered with elaborate schemes of disposition carved into the headstone of whatever legal scheme governs the law where the land in question lies. In this article, taken from my paper at TexasBarCLE’s “Oil & Gas Disputes” symposium back on January 10, 2020 here in Houston, let’s talk about the Rule Against Perpetuities—hereafter, “the Rule.”

An Introduction

The Duke of Earl

Countries following the English system of estates accept that the owner of real property can decide what happens to his property at death, who might inherit it, and in what amount and division. While this idea was leavened over the centuries with laws requiring dispositions meant to protect spouses and children from being left poor by such decisions, acceptance that the plans of immediate disposition of real property according to the wishes of deceased owners were generally recognized by society.

Difficulties and conflict arose, however, where the deceased tried to influence changes in the distribution of land long—long—after death and even to tie changes in ownership to activities conducted (or not) on the land and/or the activities of descendants. In the United Kingdom, this strife was particularly acute given the concerns of the nobility about their ancestral realms and what their noble descendants might get up to long centuries later. Courts were soon asked to make law. In 1682, The Duke of Norfolk’s Case launched the Rule into the common law tradition.1

An executory interest is a future interest, held by a third person, that either cuts off another’s interest or begins after the natural termination of a preceding estate. Further, a springing executory interest is one that operates to end an interest left in the transferor. The Duke of Norfolk’s Case established that executory interests are only valid and enforceable if they were sure to become possessory within a certain span of years.2 Instead of just ruling that the executory interests must be reduced to possession within a set time—say, forty years—the court in Norfolk (and courts after it) made the mandated time to take possession variable.3 Specifically, the point in the future at which possession must have been achieved was set according to the lives of the people involved in the grant—the so-called “lives in being”—that law students and property lawyers have wished death upon over the years. The modern version of the Rule was not laid exactly down in Norfolk; later cases took the idea and refined it. Subsequent evolution of the Rule converged on a measure of years ascertained such that no interest passed muster under the Rule save those that must vest, if at all, within twenty-one years following a life or lives in being at the creation of the interest.

The Rule eliminates future interests that do not transfer as described (“vest”) in the time necessary. The word “vest” in regard to the Rule refers to an immediate, fixed right of present or future enjoyment of the interest. The Rule does not apply to present or future interests that vest at their creation. In practice, in states like Texas where the Rule is applied immediately, clauses that violate the Rule are simply crossed out, leaving the instrument to be read without the struck clause(s) but with all other clauses intact. Estates that satisfy the Rule are considered “vested” from creation. Future estates in the grantor—possibilities of reverter, reversions, and rights of entry—are always vested. A possibility of reverter is, in turn, the grantor’s right to fee ownership in the real property reverting to him if the condition terminating the determinable fee occurs.

The Rule’s purpose is to reign in the application of executory interests so that tracts of land are not encumbered by perpetual interests that could potentially switch a tract’s ownership at the occurrence of some event many years later. A commonly encountered executory interest that violates the Rule is one where the grantor conveys an interest to a first party and his heirs, but if something happens (or stops happening) on the captioned tract in the future, the interest goes to a second party and his heirs. The executory interest of the second party violates the Rule because the event described may not be triggered for a period longer than the lives in being plus twenty-one years. A simpler variation is that the grantor keeps the interest presently, but if something happens (or stops happening) in the future on the captioned tract, the interest goes to another party and his heirs. In either case, the Rule requires the event to happen but, as described, the event may happen 1, 10, 100 or 1000 years later. Therefore, application of the Rule removes the executory interest of the second party and the first party receives the interest in fee simple in the first example and the grantor merely retains the interest in the second example.

Strict application of the Rule is both harsh and relentless. The Rule’s proper application pops up in some bizarre circumstances, such as the possibility of children born to very old or young people, future unborn widows to existing groomsto-be’s, scenarios with a ridiculous amount of sudden synchronized death, or events that may not occur for decades—even though one expects them to be easily completed within the Rule’s boundaries. For example, a grant wherein “T, a testator, wills $100,000 to A and his heirs upon the probate of his will” founders upon the Rule as the will isn’t guaranteed to be probated within the Rule’s time limit. Students mastering the Rule via problem sets in study aids learn to consider all manner of unlikely schemes that theoretically could happen.

Article I, section 26 of the Texas Constitution expressly provides: “Perpetuities… are contrary to the genius of a free government and shall never be allowed….”4 In Texas, the Rule states 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 the conveyance. The Rule requires that a challenged conveyance be viewed as of the date the instrument is executed, and it is void if by any possible contingency the grant or devise could violate the Rule.

In Texas, the Rule is harsh as it unravels instruments upon execution and can be a trapdoor to malpractice for unwary attorneys. Hence, various mechanisms have been introduced into property law to soften application of the Rule. For example, Missouri, Oklahoma, and Texas have adopted a reform known as “immediate reformation.” These statutes allow (or direct)

courts to interpret an interest found to be under the shadow of the Rule in such a way so that it avoids the violation so long as that interpretation matches the conveyor’s intent. For example, Tex. Prop. Code Ann. §5.043(a) (2003) requires that:

Within the limits of [the Rule], a court shall reform or construe an interest in real or personal property that violates [the Rule] to effect the ascertainable general intent of the creator of the interest. A court shall liberally construe and apply this provision to validate an interest to the fullest extent consistent with the creator’s intent.5

Another alternative application of the Rule is the “wait-and-see” approach. Under this approach, the interest threatened by application of the Rule is nevertheless valid even if it violates the Rule at execution if, in fact, the interest either vests or terminates during the vesting period provided for in the instrument. Only if it has not vested or terminated during the permissible vesting period is the interest deemed invalid under the Rule. Several states have adopted variations of the wait-and-see approach, such as Ohio, West Virginia, and Vermont, or had it in the past, like Pennsylvania.

What If No One Cares?

Many conveyances that could be subject to the Rule are not challenged. Case law regarding application of the Rule is made more capricious by the fact that parties claiming the Rule should apply in particular situations may look grasping by trying to unravel a settled deal and subsequent conveyance. This posture possibly explains reluctance by some courts to apply the Rule. In addition, times and attitudes have changed— dukes and earls have yielded to modern oil and gas practice. The Rule had its origin in England as a judicial reaction to labyrinthine estate schemes that were intended to tie up family domains for centuries with legalese. State constitutional prohibitions against “perpetuities,” like the comparable constitutional prohibitions against the fee tail, were cued by opposition to legal tricks that permitted surface owners to keep land within their families for generations by making the land practically unsellable by descendants. Modern commercial arrangements between sophisticated parties with access to counsel, such as those that give rise to oil and gas conveyances, rarely have this undesirable effect. Finally, there is the fundamental nature of the real property at issue. Minerals are not habitable like the surface and yet are often much more valuable, at once less familiar and more fungible, and courts have seemingly sensed this difference.

Still, avoiding pitfalls is the work of sound drafters in the oil and gas realm. When mindful of the realities of the business, opportunities avail themselves for practitioners to avoid the Rule. For example, does an oil company really care about still acquiring a top lease if it hasn’t vested in its possession after twenty years? Even ten years? Why not limit application of a top lease to a shorter term that reflects the horizon of realistic development plans and shelters the instrument from the Rule? The best quiet title action for a possible defendant is the one exorcised at spawning.

The “200-year Test”

One simple trick (sounds like a clickbait internet ad) to develop a sort of “spidey sense” about when the Rule might apply is to consider the following question when evaluating any interest you think is imperiled by the Rule: Because of this clause within this interest, 200 years from now, could something happen that would make the interest in question change ownership over to a third party? I picked 200 years because no one lives that long, minus twenty-one years, and it is a nice round number of students remember. Do not fall for the head-

fake—we are talking about interests going off to another party, not (typically) back to the grantor! In the oil and gas context, the “something” that “happens” is often the cessation of production in paying quantities, but it could be a preferential right or pooling agreement in a cross-conveyance state. Could that cause a defeasible interest to end and another to start, say, 200 years from now? Your “spidey sense” should be tingling when looking at various “top leases” and “top royalties” and such interests that purport to pop up whenever another ends, maybe 200 years from now!

Oil & Gas Leases

Since the possessory working interest of minerals, or at least the exclusive license to develop them, reverts to the mineral owner at the end of an oil and gas lease, the leases themselves would seem to be largely removed from concerns of violating the Rule. While this is largely true outside of lease renewals and top leases (covered later), it has not always been so. The modern lease, with its fixed terms followed by a term dependent on production, is the result of various development schemes that have been tried and forgotten over the last 150 years. Fixed term leases, wherein the primary term was fixed and followed by no secondary term via a habendum clause, were popular at the dawn of the industry. Soon “no-term” leases became ascendant, being defined as “a lease that allows a lessee to extend the primary term indefinitely by paying delay rentals or nominal fixed royalties.” Both are effectively extinct today.

Depending on the local case law’s interpretation of when possession of the minerals takes place, title to the minerals under no-term leases may not become possessory until minerals are actually produced, raising the specter of the application of the Rule. Fortunately, the first half of the 1900s saw a series of cases that buried that notion, culminating later with Parker v. Reynolds in 1990, a Georgia opinion that allowed a mining lease with a fifty-year term.6 With that validation, it appears that the modern oil and gas lease is safe from application of the Rule.

Renewal of Leases

Options allowing for the renewal of property rights that are of indeterminate length can potentially run counter to the Rule. While the case law is unsettled in some instances, with some courts preferring to not apply the Rule because of other considerations, most courts have generally found the Rule applicable to options to purchase and repurchase real property. Although leases are considered real property in some states, a case considering the application of the Rule to a lease with a perpetual option to renew declined to apply it. 7 Approximately thirty years later, another California court of appeals discussed in dicta why a perpetual option to renew an oil and gas lease did not violate the Rule as it was real property and could be distinguished from “ordinary” commercial leases.8 A court in Canada did not see the distinction, however, and applied the Rule to a similar perpetual renewal option, excising it from the contested lease.9

Top Leases

Top leases are prevalent and contentious in the oil patch, raising concerns related to the Rule as they are interests that may not vest for as long as the existing “bottom” lease is in effect, preventing the leasehold interest from reverting to the mineral owner.

The Texas Supreme Court considered the application of the Rule to a “top deed” in Peveto v. Starkey. 10 Far less common than a top lease, the top deed involved a conveyed terminable royalty lasting “for a period of fifteen years” and “as long thereafter oil, gas or other minerals, or either of them is produced….in paying commercial quantities.”11 Thirteen years later, the

grantors executed a second royalty deed, which according to its express terms, would “become effective only upon the expiration” of the initial, terminable royalty.12 The validity of the second deed was soon challenged as void per the Rule.13 The Court held that the second royalty was invalidated by application of the Rule, stating “[t]he words ‘effective only upon’ created a springing executory interest in [the grantee] which may not vest within the period of [the Rule]; therefore, the deed is void.”14

The cases in Texas continued with Hamman v. Bright & Co.. 15 In the early 1950’s, John and George Hamman leased approximately 19,000 acres to Shell Oil Co. and 1,800 acres to Superior Oil Co. (the “bottom leases”). 16 Shortly thereafter, they executed two top leases to John Hamman, Jr. that covered the land leased to Shell and Superior.17 These top leases provided for a ten year, primary term that would commence “after and subsequent to the forfeiture, or to the expiration” of the bottom leases.18 The top leases also stipulated that during the existence of the bottom leases “the rights, interests, estate, privileges and royalties, as fixed thereby, of said Lessors shall remain vested in . . . said Lessors . . . .”19 Subsequently, a dispute arose between the lessors and an assignee under the top leases over payment of royalty and wrongful pooling. 20 A remote purchaser of part of the lessor’s mineral estate was joined as a party and asserted that the top leases were void under the Rule.21

Following the lead of Peveto, the court held that the top leases were void because they would not vest until the termination of the bottom leases.22 Since the Rule invalidates any interest if there is any possibility, however unlikely, that it may vest beyond lives in being plus twenty-one years, any interest that will not vest until oil or gas production terminates is invalid because vesting is postponed for an indefinite time that may outlast the period of the Rule.

The Hamman court also held that a top lease that runs afoul of the Rule cannot be ratified whatever the status of the bottom lease.23 This would seem contradictory to other Texas cases where a grantee in a conveyance could later ratify an invalid instrument once the reason for its invalidity was removed. Although the decisions may seem contradictory, it is possible that the Hamman court was concerned that landowners may inadvertently ratify previously void leases by executing division orders or other instruments that contain specific language of ratification. This concern can hardly rise to the level of constitutional policy, however, for the problem can be dealt with on a case-by-case basis by requiring the beneficiary of lease ratification to show that the other party understood the full effect of his or her actions. It is difficult to articulate any state policy that would disallow a knowing and informed ratification of a top lease after the bottom lease terminates.

Top leases and the Rule present drafting challenges. The result in Hamman may have been different if the top lease had contained a clause stipulating that the lease “is granted on lessor’s reversionary interest and is hereby vested in interest, but is subject to an existing oil and gas lease and will become possessory only upon the expiration of that lease.” This language avoids the perpetuities problem by granting the top lease in the lessor’s possibility of reverter. Although a possibility of reverter is a future interest, it is presently vested, and the Rule voids only interests that may vest too remotely. If an interest is vested at the moment of creation, it is not affected by the Rule, even though the interest may not become possessory for an indefinitely long period. A device similar to the one suggested by the language in the question was used in Bowers v.

24 and successfully survived a challenge that the grantee’s interest violated the Rule.

Another method of avoiding the Rule is to use a clause that recites that the lease is subject to an existing lease, states it shall become effective upon the expiration of such lease, but further provides that if the existing lease has not expired within one year (or whatever period under twenty-one years with which the lessee is comfortable) after its primary term, the top lease automatically terminates. This method of avoiding the Rule should work in most situations. It would not work in the highly unlikely situation where the bottom lease has more than twenty years remaining in its primary term—a fact that should be evident when choosing a clause to avoid the Rule.

Overriding royalty, being carved out of the working interest in a lease, is susceptible to being “washed out” when the lease expires and then the tract is re-leased. In some instances, lessees and lessors have conspired to allow a lease encumbered by an overriding royalty to expire so that another lease can be issues that is not subject to the override. It can be difficult to draft a clause which will protect the owner of the overriding royalty from a top lease washout at the creation of the override without running afoul of either the Rule or the statute of frauds. The former problem can be avoided by providing at severance that the overriding royalty applies only to new leases executed within twenty-one years.

Drafting to cover all contingencies is still difficult. GHR Energy Corp. v. TransAmerican Natural Gas Corp., 25 provides a good illustration. El Paso Natural Gas Co., which owned the land in question, leased it to TransAmerican, which assigned an overriding royalty to Medallion Oil Company. 26 The assignment specified that the overriding royalty would apply to any extensions and renewals of the underlying lease.27 The lessee later had a dispute with El Paso, which was the purchaser of the lessee’s gas as well as its lessor, however, and as part of the dispute settlement the lessee surrendered its lease to El Paso in return for receiving a transfer of the mineral fee. 28 Although there was no break in production as a result of the dispute of the settlement transactions, Medallion’s overriding royalties were held to have terminated.29 The court pointed out that the assignment stated that the overriding royalties would extend to and include renewals and extensions of the oil and gas, but that here the lessee did not acquire a new or extended lease, but received a fee interest in the mineral estate.30

Defeasible Term Interests

A deed conveying or (more commonly) reserving an interest in minerals for a fixed term of years and so long thereafter as minerals are produced creates and typically immediately vests a defeasible property interest. A common example would be the conveyance of a fee simple absolute in the surface and minerals subject to a reservation of a portion of the mineral estate lasting as long as production of minerals is maintained, commonly after a set term of years. Such reservations read much like the habendum clause in an oil and gas lease.

Of all the oil and gas-related interests that could run afoul of the Rule, defeasible term interests are probably the most like “traditional” real property interests in that the instruments at peril may not be seen as specialty instruments like oil and gas leases, joint operating agreements, pooling agreements, or subdivided interests of the mineral estate like royalty or executive interests, each of which are more commonly owned and exchanged between parties familiar with the business. In contrast, defeasible term mineral interests are simply defeasible term interests covering the “dirt” instead of the surface and which are more commonly reserved by individuals. As such, these interests generally

might seem less likely to receive the “you’re in the oil business, you get a pass” treatment regarding application of the Rule.

Still, courts continue to pass over opportunities to cull such suspect instruments with the Rule. In ConocoPhillips Co. v. Koopmann, the Supreme Court of Texas held that the Rule did not impact an NPRI reservation that lasted for fifteen years and as long thereafter as production continued in paying quantities.31 The Court started by opining that the fee simple interest in the NPRI was certain to end, either because production in paying quantities stopped or because all the producible minerals were extracted. 32 For these reasons, the grantor’s reserved interest was ruled similar enough to a vested remainder merely because the grantee could take possession upon the expiration of the former estate.33

Accordingly, the Court changed this niche application of the Rule in Texas: it will not void a mineral deed if, regardless of the grant or reservation, the holder of the future remainder interest is at all times ascertainable and the prior estate is “certain” to terminate. The Court appeared to take an expansive view of “certain to terminate” in that the words “production in commercial quantities” in the disputed reservation and the fact that reservoirs of oil and gas are indeed finite was enough to convince the Court the reservation would certainly end.34

Ultimately, the Court held that in an oil and gas context, where a defeasible term interest is created by reservation, leaving an executory interest that is certain to vest in an ascertainable grantee, the Rule does not invalidate the grantee’s future interest. 35 From a public policy perspective, recognizing the modern aspect of oil and gas transactions over the late medieval roots of the problems the Rule was originally crafted to solve, the Court held that application of the Rule in this instance would not serve its purpose.

Most recently, Kansas has wrestled with the nature of defeasible term interests in the case of Jason Oil Co. LLC v. Littler. 36 On December 30, 1967, Frank Littler, as Grantor, executed two deeds conveying tracts of land situated in a single section located in Rush County, Kansas, to two couples: (i) Franklin G. Littler and Elaine Littler and (ii) Ruby I. Myers and George E. Myers, as the Grantees therein.37 The east half of the section was conveyed to the first grantee couple, and the northwest quarter of the section was conveyed to the second grantee couple.38 Both deeds stated, “[e]xcept and Subject to: Grantor saves and excepts all oil, gas and other minerals in and under or that may be produced from said land for a period of twenty years or as long thereafter as oil and/or gas and/or other minerals may be produced therefrom and thereunder.”39 Upon the Grantor’s death in 1973, the Rush County probate court distributed the grantor’s estate, including the reserved mineral interest, to the grantor’s heirs.40

On December 30, 1987, the twenty year term ended, along with any drilling activity or further production, and the term interest expired. 41 At this point, the reserved mineral interests vested in the Grantees’ successors. 42 Almost thirty years later, in 2016, a producer named Jason Oil Co. leased from the Grantees’ successors.43 Jason Oil Co. sued to quiet title in itself after the Grantor’s heirs claimed the leases were not valid because the underlying mineral interests sprang from springing executory interests subject to the Rule and thus, void.44

At trial, the district court held that the contested interest reserved by the decedent was a defeasible term interest, but added some falderal about how the future estate reserved to the Grantees was a reversion not possibly subject to

the Rule as it did no harm to the public policy of using the Rule to ease restrictions on alienation.45 An appeal to the Kansas Supreme Court followed, where the Court was asked to determine whether the prevalent practice of reserving a term interest in minerals that continues so long as there is production creates a springing executory interest in violation of the Rule.46 To starters, the Court stated that because no binding precedent existed in Kansas, it was “free to decide if the Rule should apply” in this situation.47 Thus fortified, the Court then held that the future interest could become possessory in the Grantees more than twenty-one years after the death of the last of the relevant parties, and therefore, it technically violated the Rule.48 The Court went on to explain, however, 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.”49 From a broader policy context, the Court, citing Koopmann, declined to apply the Rule, noting the “chaos” that would result in the realm of oil and gas title.50

Oil and gas practitioners ought to breathe easier after these rulings as it has long been commonplace for grantors to reserve defeasible freestanding royalties when conveyancing minerals. Applying the Rule as promoted by the losing party would have made all such royalty reservations perpetual, invalidating hundreds—if not thousands—of similar interests not yet litigated.

Royalty and Executive Interests

A fee simple absolute ownership interest in minerals, such as hydrocarbons, can be further split into more elemental components that relate to development and recovery of profits for development. In Texas, the mineral estate in a specific mineral, such as uranium, or particular group of minerals, such as oil and gas, is generally thought to consist of five components: (1) the right to develop (the right of ingress and egress); (2) the right to lease (the executive right); (3) the right to receive bonus payments; (4) the right to receive delay rentals; and (5) the right to receive royalty payments. These attributes, when taken together, are often referred to as a “bundle of sticks,” and it has been recognized that individual “sticks” can be sold while others are retained. While no case law directly relating the Rule to the right to collect bonus and rentals was found, the right to receive royalty and the executive right have had brushes with the Rule in case law.

Non-Participating Royalty Interests

A freestanding royalty or non-participatory royalty interest (NPRI) is an expense-free real property mineral interest that does not participate (hence the name) in collecting bonus or delay rentals, or participating in leasing, exploration, and development. This interest is “nonpossessory in that it does not entitle its owner to produce the minerals himself,” as the Texas Supreme Court has described it, going on to say the NPRI “merely entitles its owner to a share of the production proceeds, free of the expenses of exploration and production.” 51 The size of an NPRI can be expressed in two general ways: the NPRI can be reserved or conveyed as a fixed fraction of gross production, commonly 1/16, or it can “float”—being dependent upon the lessor’s royalty in the existing lease and every lease covering the captioned land thereafter. In the second instance, the NPRI fraction is typically multiplied by whatever lessor’s royalty is found in whatever oil and gas lease covers the captioned land at any particular time.

Floating NPRIs have run afoul of the Rule because some jurisdictions, namely Kansas, have assumed that such conveyances only vest when production occurs. To start, the court in Miller v.

Sooy52 opined in dicta that NPRIs to be paid by as-yet non-existent leases would violate the Rule. A quarter of a century later, the Kansas Supreme Court again endorsed the view of Miller in its opinion of Lathrop v. Eyestone.

53 In the case, the captioned tract was covered by an oil and gas lease.54 The lessor/mineral owner then acted as grantor and, using two distinct instruments, attempted to convey a fractional interest in the existing lease and interests in the bonus and royalty from any future leases. 55 Thereafter, the grantor conveyed his own reserved interests to another party. 56 This wily newcomer soon challenged the first doublebarreled conveyance with a quiet title action brought on grounds that the conveyance of future royalty interests from leases not yet taken violated the Rule, and the Kansas Supreme Court agreed.57

The Rule has played a significant role in determining the validity of perpetual NPRIs in Kansas. Kansas appears unique in taking this position, however, and the validity and scope of the application of the Rule to NPRIs has been repeatedly questioned by the Kansas lower courts. Meanwhile, the highest courts in Arkansas, Alabama and Florida have declined to apply the Rule, finding it archaic.

Occasionally litigants in other jurisdictions argue that the language of a specific instrument compels the application of the Kansas rule. For example, the grantor in Luecke v. Wallace, reserved “an undivided one-half (1/2) nonparticipating interest in any and all oil, gas and mineral royalties reserved by Grantee, his heirs and assigns at any time in the future and which may be payable to Grantee, his heirs and assigns under any future lease of the property.” 58 The grantee’s successor argued that the grantor’s retained interest violated the Rule both because it was contingent upon a future reservation by the grantee or his successors and because it vested only if and when future leases were executed.59 The court held that the grantor’s retained NPRI was a presently vested interest because there was no language that expressly delayed vesting until some future event.60 The language relied on by the grantee’s successor merely made clear that the grantor’s enjoyment of the interest depended upon the execution of future leases and future production.61 That no suspect language was found in the instrument in Luecke to invoke the Rule leaves open the possibility that future instruments with different language might not be so lucky.

The Executive Right

The executive right has been defined by Smith and Weaver in their oil and gas law treatise as “the right to take or authorize all actions which affect the exploration and development of the mineral estate … [including] the right to engage in or authorize geophysical exploration, drilling or mining, and producing oil, gas, and other minerals.”62 However, courts rarely use the term in this broad sense. More commonly, they equate the executive right with the right to execute oil and gas leases.

The executive right can, in most jurisdictions it appears, be held independently of any other right in the minerals as in Texas. Some authority exists for the proposition that an exclusive executive right divorced from any ownership interest in the mineral estate is subject to the Rule. In Dallapi v. Campbell, the California Supreme Court treated such a right as a special power of appointment and held that it was void because it could be exercised beyond the period permitted by the Rule.63 The result would likely be different in a jurisdiction like Texas that follows the Day & Co. view that the executive right is a severable interest in property because of the conceptually different nature of the executive right. If the executive right is a severable interest in property, like a royalty or an easement, it vests immediately

in its holder. The Rule is inapplicable to presently vested interests, regardless of their nature.

Joint Operating Agreements (JOAs) and Pref Rights

The Rule can menace JOAs in a number of circumstances, some more obvious than others. One of the conspicuous clauses that could incur the Rule is the “preferential right to purchase” clause. This optional clause, currently somewhat unpopular, gives signatories the right to purchase another signatory’s interest if it attempts to sell a property subject to the JOA. An early Texas case suggested the “pref right” clause would fall outside coverage of the Rule, and more contemporary commentators agreed. Then, in 1967, the Oklahoma Supreme Court considered a case wherein a party was granted the option to receive an assignment of any possible future lease over certain captioned minerals if those minerals were ever leased by the grantor. 64 The Court invalidated the pref right interest, considering it a contract that created an interest in real property instead of a personal contractual right.

Later, this led to a federal district court, applying Oklahoma law, to invalidate a pref right provision in a JOA.65 The court, after opining that it seemed the Rule’s purpose would not be advanced by application in the present case, still felt compelled to apply the Rule due to the similarity of the facts and judicial analysis found in Melcher. 66 After the case was appealed to the Tenth Circuit Court of Appeals, a certified question was sent by that federal court to the Oklahoma Supreme Court regarding the Rule’s application to the pref right clause in the JOA.67 The Oklahoma high court answered that the pref right was distinguishable from an option as found in Melcher as it was limited to activation when the owner of the right so encumbered sought to sell—it did not compel a sale itself like the option nor potentially hinder alienation but instead just redirected the sale.68 Further, the Court noted that the pref right in the present case only lasted as long as the JOA and the leases that comprised it, and thus, holding that a pref right that was so limited does not violate the Rule.69

After this, when courts were asked to choose between Melcher or Producers Oil Co., most went with the latter. For example, the New Mexico Supreme Court, when asked to consider application of the Rule to an option to repurchase a working interest in a lease that would arise after a certain production threshold was met, decided against it.70 The litigation had erupted when the party retaining the repurchase right attempted to assign it to a third party.71 After determining that the right was assignable, the Court, drawing from Producers Oil Co., held that since the option was likely to vest (or not) within a reasonable amount of time—an interval largely dependent on the geology of the field and reservoir dynamics—immediate application of the Rule to the option was forestalled even though the option had no express expiration date.72 In such an instance, the Court held, the language of the option would instead be construed to imply a reasonable time limit for vesting, a result similar to the wait-and-see approach to applying the Rule as described above.73

In Texas, pref rights also appear safe from the Rule, with one court recently boldly stating, “[i]n Texas, a preferential right to purchase or a right of first refusal does not violate the [Rule].”74 This safety lies in Texas courts considering that the Rule was devised to prevent “unreasonable” restraints on alienation.75 Since the pref right does not itself prevent alienation, but rather merely determines who will have the first right to obtain a certain property when and if the owner decides to sell it. This is in contrast to the option-to-

purchase described above in Oklahoma and in the Texas case of Maupin v. Dunn, in which a court held an “option agreement was illegal and void from its inception and violated the [Rule].”76

1 Duke of Norfolk’s Case, 3 Ch. Cas. 1, 22 Eng. Rep. 931 (1682). 2 Id. 3 Id. 4 Tex. Const. art. I, § 26. 5 Tex. Prop. Code Ann. § 5.043(a) (2019). 6 Parker v. Reynolds Metals Co., 747 F. Supp. 711, 713 (M.D.Ga. 1990). 7 See Becker v. Submarine Oil Co., 204 P. 245, 247 (Cal.App. 1921). 8 See Epstein v. Zahloute, 222 P.2d 318, 319 (Cal.App.2d 1950). 9 See Canadian Export Gas & Oil Ltd. v. Flegal, 80 D.L.R.3d 679 (1978) 1 W.W.R. 185 (Alta.S.Ct., Trial Div. 1977). 10 Peveto v. Starkey, 645 S.W.2d 770, 771 (Tex. 1982). 11 Id. 12 Id. 13 Id. at 772. 14 Id. 15 Hamman v. Bright & Co.,924 S.W.2d 168 (Tex.App.— Amarillo 1996). 16 Id. at 170. 17 Id. 18 Id. at 172. 19 Id. 20 Id. at 170–71. 21 Id. at 171. 22 Id. at 172–173. 23 Id. at 174. 24 Bowers v. Taylor, 263 S.W.3d 260 (Tex. App.—Houston [1st Dist.] 2007, no pet.). 25 GHR Energy Corp. v. TransAmerican Natural Gas Corp.,972 F.2d 96 (5th Cir. 1992). 26 Id. at 97. 27 Id. at 99. 28 Id. at 100. 29 Id. 30 Id. 31 ConocoPhillips Co. v. Koopmann, 547 S.W.3d 858, 865 (Tex. 2018). 32 Id. 33 Id. at 873. 34 From a geologic perspective, such production is not absolutely certain to terminate within a non-geologic period of time as a reservoir could conceivably be replenished as fast as production occurs. In addition, as history has shown, humans have proven very technically adept at finding new ways to wring more and still more hydrocarbons from a discrete formation (hydraulic fracturing, etc.), continually pushing back the date of reservoir exhaustion. 35 Koopmann, 547 S.W.3d at 873. 36 See Jason Oil Co. v. Littler, 446 P.3d 1058 (Kan. 2019). 37 Id. at 1060. 38 Id. 39 Id. 40 Id. 41 Id. 42 Id. 43 Id. 44 Id. 45 Id. 46 Id. 47 Id. 48 Id. 49 Id. 50 Id. 51 Plainsman Trading Co. v. Crews, 898 S.W.2d 786, 789 (Tex. 1995). 52 Miller v. Sooy, 242 P. 140 (Kan. 1926). 53 See, e.g., Lathrop v. Eyestone, 227 P.2d 136, 143–44 (Kan. 1951). 54 Id. at 138–40. 55 Id. 56 Id. 57 Id. at 144. 58 Luecke v. Wallace, 951 S.W.2d 267, 272 (Tex. App.— Austin, n.w.h. (1997). 59 Id. at 273. 60 Id. at 274. 61 Id. 62 Ernest Smith & Jaqueline Weaver, Texas Law of Oil and Gas § 2.6 (2d ed. 2000). 63 Dallapi v. Campbell, 45 Cal. App. 2d 541, 545 (114 P.2d 646 (1941)). 64 Melcher v. Camp, 435 P.2d 107, 112 (Okla. 1967). 65 Producers Oil Co. v. Gore, 437 F.Supp. 737 (E.D. Okla. 1977), vacated, 634 F.2d 487 (10th Cir. 1980). 66 Id. at 742. 67 Producers Oil Co. v. Gore, 610 P.2d 772 (Okla. 1980). 68 Id. at 774. 69 Id. at 776. 70 El Paso Prod. Co. v. PWG P’ship, 866 P.2d 311 (N.M. 1993). 71 Id. at 315. 72 Id. at 316. 73 Id. 74 Jarvis v. Peltier, 400 S.W.3d 644, 652 (Tex. App.—Tyler 2013, pet. denied). 75 Forderhause v. Cherokee Water Co., 623 S.W.2d 435, 438-39 (Tex. Civ. App.—Texarkana 1981); rev’d on other grounds, 641 S.W.2d 522 (Tex. 1982). 76 Maupin v. Dunn, 678 S.W.2d 180, 182 (Tex. App.— Waco 1984, no writ).