Oil and Gas Land - Association of Indiana Counties

Report
BASICS OF MINERAL OWNERSHIP
OIL AND GAS LEASES AND
RECORDING REQUIREMENTS
SOME OF THE FOLLOWING INFORMATION ON OIL
AND
GAS
LEASES
IS
TAKEN
WITH
EXPRESS
PERMISSION FROM THE AMERICAN ASSOCIATION OF
PROFESSIONAL LANDMEN AND MAY BE FOUND IN ITS
PUBLICATION “OIL AND GAS LAND”, REFERENCE
VOLUME AND CPL AND RPL EXAM STUDY GUIDE,
R E V I S E D A P R I L 2 0 1 3 - 1 1 TH E D I T I O N , 2 ND P R I N T I N G ©
COPYRIGHT 2012.
The Illinois
Basin
covers
approximat
ely 60,000
square
miles in
Illinois,
Indiana and
Kentucky.
Who Do We Lease
MINERAL OWNER - THE OWNER OF THE FEE SIMPLE
ALSO
OWNS
A
100%
MINERAL
INTEREST.
A
CONVEYANCE
OF
THAT
INTEREST
SEVERS
THE
MINERALS FROM THE OTHER RIGHTS (SURFACE).
LEASES ARE TAKEN FROM THE MINERAL INTEREST
OWNER.
IF THAT INTEREST IS LESS THAN 100%,
THAT
PERSON
OWNS
A
FRACTIONAL
MINERAL
INTEREST OR AN UNDIVIDED MINERAL INTEREST.
Insert funny story 
WHAT IS AN OIL AND GAS
LEASE?
IT IS:
1 ) A CONVEYANCE,
2 ) A CONTRACT, AND
3) A BUSINESS TRANSACTION.
Conveyance
It is a conveyance because the mineral owner
(lessor) conveys a right to an oil company to
explore for and produce oil and gas.
Contract
IT IS A CONTRACT BECAUSE THE OIL
COMPANY (LESSEE) ACCEPTS THE RIGHT
TO EXPLORE AND PRODUCE BURDENED
BY
CERTAIN
EXPRESS
AND
IMPLIED
PROMISES. BECAUSE IT IS A CONTRACT,
INVOLVING AN INTEREST IN LAND, IT
MUST SATISFY THE STATUTE OF FRAUDS.
IN OTHER WORDS, IT MUST BE IN
WRITING. (ALSO K WHOSE TERM MAY
EXCEED 1 YEAR).
STANDARD LEASE
THERE IS NO SUCH THING AS A “STANDARD” OIL AND
GAS LEASE. EVERY LEASE IS DIFFERENT BUT MOST
CONTAIN
BASICALLY
THE
SAME
PROVISIONS.
PROVISIONS HAVE DEVELOPED AS SPECIAL NEEDS
AND PROBLEMS AROSE AND FROM DECISIONS OF THE
COURTS. THE COURTS GENERALLY ADHERE TO THE
“FOUR CORNERS RULE”, MEANING THEY WILL LOOK
AT THE ENTIRE LEASE FOR THE CORRECT MEANING
THEY APPLY TO A PARTICULAR CLAUSE OR PROBLEM.
COURTS GENERALLY CONSTRUE THE LEASE IN FAVOR
OF
THE
LESSOR
AND
AGAINST
THE
LESSEE.
(EXAMPLE LEASE PROVIDED IN YOUR MATERIALS)
WHO ARE THE PARTIES TO
AN OIL AND GAS LEASE?
MINERAL OWNER(S) = LESSOR(S)
OIL AND GAS COMPANY = LESSEE
Why is an Oil and Gas Lease Recorded?
Effect of not recording
Although a deed conveying real estate does not need to be recorded in Indiana to be
valid, if unrecorded, it will only be valid between the parties to the conveyance or persons
having notice. Indiana Code, states that:
A conveyance of any real estate in fee simple or for life, a conveyance of any future
estate, or a lease for more than three (3) years after the making of the lease is not valid and
effectual against any person other than:
(1) the grantor;
(2) the grantor's heirs and devisees; and
(3) persons having notice of the conveyance or lease;
unless the conveyance or lease is made by a deed recorded within the time and in the manner
provided in this chapter.
See I.C. 32-21-3-3.
Indiana Code provides that a lease covering real estate for period in excess of three
(3) years should be filed of record within forty-five (45) days of execution and, in the event, the
same is not recorded within said time frame it is void as to a subsequent purchaser or lessee for
consideration. I.C. §§ 32-31-2-1 and 32-31-2-2. [Regardless of Notice]?
WHAT INFORMATION IS NECESSARY TO RECORD LEASE
(Indiana Recording Statutes)
 Name of parties (lessor/lessee) There must be two identifiable parties to
a lease for it to be effective.
 Description of land under lease – A third party must be able to locate the
lands described by reading the description referenced in the lease.
 Date of Instrument (or effective date) – The date of an oil and gas lease
sets commencement of the primary term, time for commencement of operations for drilling, and
the timing for payment of delay rentals. [Is dating lease a statutory requirement? –
delivery/acceptance - date of first acknowledgment]
 Signature(s) of Lessor(s) - legibly printed, typewritten, or stamped
immediately beneath the person’s signature or the signature itself is printed,
typewritten or stamped. I.C. 36-2-11-16
 Acknowledged by the [Lessor]; or proved by Judge, notary
public, etc. I.C. 32-21-2-3
 Affirmation Statement (SSN) I.C. 36-2-11-15
 Preparer of Instrument I.C. 36-2-11-15
Memo of Oil and Gas Lease
SOMETIMES PARTIES TO AN OIL AND
GAS LEASE DO NOT WANT SPECIFIC
TERMS OF THE LEASE MADE PUBLIC.
MOST COMMONLY, THE ROYALTY OR
OTHER NEGOTIATED TERMS.
I.C. 36-2-11-20
Sec. 20. (a) A memorandum of a lease may be recorded in lieu
of the lease itself if the memorandum is executed and
acknowledged by the lessor and the lessee and contains:
(1) the names of the lessor and the lessee;
(2) the term of the lease; *
(3) any option of the lessee to renew or extend the term
of the lease; and
(4) the specific legal description of the leased premises,
or a survey or plot plan authorized under subsection (c)
showing the location of the leased premises.
(b) A memorandum recorded under this section
may also contain any other agreement made
between the lessor and the lessee in the lease.
*Term of Lease
The term defines the period during which a lease will be effective – the
primary term. It is also called the “habendum clause”, which is derived
from the Latin words habendum et tenedum, meaning “ to have and to
hold”. Of particular importance in the habendum clause is the “and as long
thereafter as oil or gas and associated products are produced” wording,
which permits the term to continue as long as production is maintained.
This is referred to as the secondary term.
WHY IS THIS THE TERM OF THE LEASE IMPORTANT TO A
RECORDER?
1.
Remember the term of the lease needs to be included in
the Memorandum. I.C. 36-2-11-20
Also Important:
2.
3.
Affidavit of Cancellation
Dormant Mineral Act
AFFIDAVIT AND REQUEST FOR
CANCELLATION OF OIL AND GAS LEASE
IC 32-23-8-1 Void leases
Sec. 1. (a) Leases for oil and gas that are recorded in Indiana are void:
(1) after a period of one (1) year has elapsed since:
(A) the last payment of rentals on the oil and gas lease as stipulated
in the lease or contract [NOT IF PAID UP LEASE]; or
(B) operation for oil or gas has ceased, both by the nonproduction of
oil or gas and the nondevelopment of the lease
[SECONDARY TERM]; and
(2) upon the written request of the owner of the land, accompanied by the
affidavit of the owner stating that:
(A) no rentals have been paid to or received by the owner or any
person, bank, or corporation in the owner's behalf for a
period of one (1) year after they have become due; and
(B) the leases and contracts have not been operated for the
production of oil or gas for one (1) year.
IF THE LEASE IS STILL IN ITS PRIMARY TERM – THIS STATUTE IS NOT
APPLICABLE.
Certification of void lease
IC 32-23-8-2 Formerly cited as IN ST 32-5-8-1
Sec. 2. (a) The recorder of the county in which real estate
described in section 1 of this chapter is situated shall
certify upon the face of the record of the oil and gas lease
that:
(1) the leases and contracts are invalid and void by
reason of nonpayment of rentals; and
(2) the oil and gas lease is canceled of record.
(b) The request and affidavit shall be
recorded in the miscellaneous records of the
recorder's office.
Voiding of cancellation
 IC 32-23-8-3 Formerly cited as IN ST 32-5-8-1
Sec. 3. If, at any time after the cancellation of a lease and contract
and within the term provided in the lease or contract, the lessee
submits to the recorder:
(1) a receipt or a canceled check, or an affidavit, showing
that the rental has been paid; or
(2) an affidavit that:
(A) the lease has been operated within a period of
one (1) year before the cancellation, as stipulated in
the lease or contract; and
(B) the affidavit of the lessor provided under this
chapter is false or fraudulent;
the cancellation is void, and the recorder shall so certify at the place
where the cancellation of the lease and contract has been entered.
DORMANT MINERAL ACT
DORMANT
MINERAL
ACT
Indiana does not have a
statute directly setting
forth a procedure for
obtaining an oil and gas
lease from a mineral
owner who cannot be
located such as the
Severed Mineral Interest
Act of Illinois. Instead,
Indiana has a statutorily
created mechanism for
“dormant” mineral
interests to lapse and
automatically revert
to the estate from which
they were carved
(typically, however, this
does not necessarily
mean the surface estate).
 The original DMA was codified at
I.C. 32-5-11-1, et seq., and had an
effective date of September 2,
1971. The DMA was subsequently
re-codified and is now found at
I.C. 32-23-10-1, et seq. The
purposes of the DMA “are [1] to
remedy uncertainties in titles and
[2] to facilitate the exploitation of
energy sources and other valuable
mineral resources.”
Section 1
AS USED IN THIS CHAPTER, “MINERAL INTEREST”
MEANS THE INTEREST THAT IS CREATED BY AN
INSTRUMENT THAT TRANSFERS, BY:
(1) GRANT;
(2) ASSIGNMENT;
(3) RESERVATION; OR
(4) OTHERWISE;
AN INTEREST OF ANY KIND IN COAL, OIL AND GAS,
AND OTHER MINERALS.
 Section 2 of the DMA provides that a
Section 2
Section 2 of the DMA,
provides, as follows: “[a]n
interest in coal, oil and gas,
and other minerals, if
unused for a period of
twenty (20) years, is
extinguished and the
ownership reverts to the
owner of the interest
out of which the
interest in coal, oil and
gas, and other minerals
was carved. However,
if a Statement of Claim
is filed in accordance
with this chapter, the
reversion does not
occur.”
lapsed mineral interest reverts to the
owner out of which the interest in the
severed mineral was “carved.” It does
not state that a lapsed mineral interest
automatically reverts to the owner of the
surface. By way of example, assume that
A controls fee simple title to a tract of
land and subsequently conveys the coal,
oil, gas and other minerals to B; then B
conveys the coal to C, reserving the oil
and gas and other minerals. If C’s
interest lapses under the DMA for C’s
failure to use his mineral interest or for
failing to file a Statement of Claim, C’s
interest would lapse to the owner of the
interest out of which his/her interest in
the coal was carved; i.e., B.
WHAT IS CONSIDERED A USE?

Section 3 of the DMA provides that: (a) A mineral interest is considered to be used when:

(1) minerals are produced under the mineral interest;

(2) operations are conducted on the mineral interest for injection, withdrawal, storage, or
disposal of water, gas, or other fluid substances;

(3) rentals or royalties are paid by the owner of the mineral interest for the purpose of
delaying or enjoying the use or exercise of the rights;

(4) a use described in subdivisions 1 through 3 is carried out on a tract with which the mineral
interest may be unitized or pooled for production purposes;

(5) in the case of coal or other solid minerals, there is production from a common vein or seam
by the owners of the mineral interest; or

(6) taxes are paid on the mineral interest by the owner of the mineral interest.
The case law interpreting Section 3 of
the DMA has construed Section 3
narrowly, and supports the conclusion
that the uses described in Section 3
are not illustrative of types of activity
that can constitute a use, but are
indeed the only types of activity
that constitute a use for purposes
of preserving the mineral interest.
See McCoy v. Richards, 581 F.Supp. 143 (S.D. Ind. 1983) (conveyance of
grantor’s coal was not a sufficient “use” under the DMA so as to preserve
his interest in all other minerals reserved); Kirby v. Ashland Oil, Inc.,
463 N.E.2d 1127, 1129 (Ind. Ct. App. 1984) (“the mere act of leasing
one’s mineral interests is not a sufficient use to prevent a
lapse”); but see Miller v. Weber, 839 N.E.2d 204, 208 (Ind. Ct. App.
2005) (lessee’s payment of royalties to lessor of mineral rights
constituted a use under the DMA preserving the lessee’s interest);
Plymouth Fertilizer Co., Inc. v. Balmer, 488 N.E.2d 1129, 1134 (Ind. Ct.
App. 1986) (payment of shut-in rentals by lessee was a sufficient use of
the interest to prevent an extinguishment of the lease). The payment
of property taxes by the mineral interest owner constitutes
sufficient use under the DMA. See Consolidation Coal Co. v.
Mutchman, 565 N.E.2d 1074, 1080 (Ind. Ct. App. 1990); but see Miller,
839 N.E.2d at 211 (lessor’s payment of capital gains taxes due from
receipt of advance royalties was not considered a sufficient use).
Section 4
STATEMENT OF
CLAIM
If there is a sufficient “use”
within the statutory period,
as provided in Section 3 of
the DMA, it is not necessary
to file a Statement of Claim.
However, given the
uncertainties with application
of the statute it is
recommended. The
Statement of Claim must
be filed in the “Dormant
Mineral Interest Record
Book.” (See Section 7)
Section 4 of the DMA provides that:
(a) [t]he Statement of Claim under section 2 of this
chapter must:
(1) be filed by the owner of the mineral interest
before the end of the twenty (20) year period set forth in
section 2 of this chapter; and
(2) contain:
(A) the name and address of the
owner of the mineral interest; and
(B) a description of the land on
or under which the mineral interest is located.
(b) A Statement of Claim described in subsection (a) must
be filed in the office of the recorder of deeds in the
county in which the land is located.
(c) Upon the filing of a Statement of Claim within the time
provided in this section, the mineral interest is considered
to be in use on the date the Statement of Claim is
filed.
The former version of the DMA provided a two-year
grace period for filing a Statement of Claim for those
mineral interests that were un-used for the 20 years
that preceded the effective date of the DMA, i.e.,
September 2, 1971.
E X A M PL E : I F M I N E R A L I N TE R E S T W A S
C R E A T ED O N SE P T E M B E R 2 , 1 9 5 1 A N D
T H E I R W A S N O U SE D U R IN G TH E 2 0
Y E A R P E R I O D TH A T P R E C E D ED TH E
E F F E CT I V E D A T E O F T H E D M A , TH E
O W N E R O F TH E M IN E R A L I N T E RE ST
HAD UNTIL SEPTEMBER 2, 1973 TO FILE
A STATEMENT OF CLAIM.
If there is a sufficient “use”
within the statutory period, as
provided in Section 3 of the
DMA, it is not necessary to file
a Statement of Claim.
However, given the
uncertainties with application
of the statute it is
recommended.
IF THERE HAS NOT BEEN A
STATUTORY USE AND A STATEMENT
OF CLAIM HAS NOT BEEN FILED THE
LAPSE IS AUTOMATIC!!!
Except for the protection afforded in
Section 5, there is no requirement that a
person who succeeds to the lapsed
mineral interest provide notice of the
lapse (Section 6).
Section 6
Succession of
Ownership
NOTICE OF
LAPSE
RECORDER
ALERT!!!
Sec. 6. (a) A person who succeeds to the ownership of a
mineral interest may, upon the lapse of the mineral interest,
give notice of the lapse of the mineral interest by:
(1) publishing notice in a newspaper of general
circulation in the county in which the mineral interest is
located; and
(2) if the address of the mineral interest owner is
shown of record or can be determined upon reasonable
inquiry, by mailing, not more than ten (10) days after
publication, a copy of the notice to the owner of the mineral
interest.
(b) The notice required under subsection (a) must state:
(1) the name of the owner of the mineral
interest, as shown of record;
(2) a description of the land; and
(3) the name of the person giving the notice.
(c) If a copy of the notice required under subsection (a) and
an affidavit of service of the notice are promptly filed in the
office of the recorder in the county where the land is located,
the record is prima facie evidence in a legal proceeding that
notice was given.
It provides that: Failure to file a Statement of Claim within the
time provided in section 4 of this chapter does not cause a
mineral interest to be extinguished if the owner of the mineral
interest:
Section 5
FAILURE TO
FILE
Section 5 of the
DMA is intended to
provide an
additional layer of
protection for
holders of several
mineral interests in
a county and one or
more interests
failed to be
otherwise preserved
due to inadvertent
oversight.
(1)
was, at the time of the expiration of the period specified
in section 4 of this chapter, the owner of ten (10) or
more mineral interests in the county in which the
mineral interest is located;
(2)
made a diligent effort to preserve all the mineral
interests that were not being used, and not more than
ten (10) years before the expiration of the period
specified in section 4 of this chapter, preserved other
mineral interests in the county by filing statements of
claim as required under this chapter;
(3)
failed to preserve the mineral interest through
inadvertence; and
(4)
filed the Statement of Claim required under this
chapter:
(A) not more than sixty (60) days after publication
of notice as specified in section 6 of this chapter;
and
(B) if a notice referred to in clause (A) is not
published, not more than sixty (60) days after
receiving actual knowledge that the mineral
interest had lapsed.
One uncertainty regarding application of the DMA is
whether a single instrument that constitutes a conveyance
or reservation of minerals containing multiple tracts creates
a single “mineral interest,” as that term is defined in
Section 1 of the DMA, or whether it creates a separate and
distinct mineral interest in each tract. There is currently no
case law in Indiana addressing this issue, which can be
significant to analysis of the application of the DMA. If
multiple interests are created in such a case, then otherwise
lapsed interests may be afforded the additional protections
in Section 5. Conversely, if they are a single interest, and
there was an actual use of one tract (which is a part of an
aggregate mineral interest), then presumably the entire
interest - or in other words all of the tracts - are preserved.
Section 7
Duties of
Recorder
RECORDER
ALERT!!!
Sec. 7. Upon the filing of the statement
of claim specified in section 4 of this
chapter or the proof of service of
notice specified in section 6 of this
chapter in the recorder's office for the
county where a mineral interest is
located, the recorder shall:
(1) record the filing in a book to
be kept for that purpose, to be known
as the “dormant mineral interest
record”; and
(2) indicate by marginal
notation on the instrument creating
the original mineral interest the filing
of the statement of claim or affidavit of
publication and service of notice.

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