Face Challenges Confidently

225 Bowers. v. Taylor

Monday, August 31st, 2015

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Bowers v. Taylor, No. 01-05-00667-CV, 2007 WL 1299440 (Tex. App.—Houston [1st Dist] 2007, no pet.), holds that the terms of a mineral deed convey a presently vested interest in the possibility of reverter under an oil and gas lease, rather than a springing executory interest that would violate the rule against perpetuities. Both the lease and the mineral deed were executed about eighty years ago, when the fundamental nature of property rights in oil and gas was not fully developed and certainly not fully understood. The lease and the deed (which incorporated the lease) were created by the same parties. When two instruments involve the same parties and are related to the same transaction, the court reads the documents together in order to ascertain the parties’ intent. In 1919, Taylor’s predecessors in interest, as lessor, granted the lease to Bowers’ predecessors in interest, as lessee. The lease provided that the “lease would last so long as such mineral or minerals can be produced in paying quantities”.
 
In 1927, Taylor’s predecessors, as grantor, conveyed a mineral interest to Bowers’ predecessors, as grantee.  The conveyance provided:
 
[I]f said lease should be forfeited, then . . . [Bowers] is to become vested with one-third (1/3) interest in the fee title in and to the oil, gas and minerals in all portions of said above described tracts . . . .
 
Production under the lease ended in 1988, but in 2002 production was obtained under new leases from Taylor and Bowers. Taylor and Bowers disputed the allocation of production as between them based on the 1927 deed. Taylor asserted that the purported transfer of a one-third interest to Bowers violated the rule against perpetuities. Taylor also asserted, in the alternative, that the lease was never “forfeited,” but instead terminated for lack of production, and thus the condition precedent to Bowers’ ownership had not occurred.
 
The court held that the deed conveyed a one-third interest in the possibility of reverter under the lease, which was a present conveyance that did not violate the rule against perpetuities, and that by the use of the word “forfeiture,” the parties intended to include the termination of the lease due to cessation of production. An oil and gas lease is not a typical lease because the lessor (actually a grantor) grants a mineral interest in fee simple determinable to the lessee (actually a grantee). Upon termination of the “lease”, the mineral estate reverts to the grantors of the lease, their heirs, or their assigns (the possibility of reverter). The lessor or grantor may sell or assign the possibility of reverter.
 
As applied in Texas, the rule against perpetuities provides that an interest is not valid unless it must vest, if at all, within 21 years after the death of some life or lives in being at the time of the conveyance. The court compared and distinguished between two leading Texas Supreme Court opinions.  In Peveto, the Supreme Court held that a conveyance which provided:
 

“This grant shall become effective only on the expiration of the above described Royalty Deed,” violated the rule. In Jupiter Oil, the Supreme Court held that a conveyance which provided: “[I]n the event the lease now on said land is forfeited or terminated withou[t] producing mineral of any kind, then . . .” and “[I]t is the intention of the grantors herein that in the event said lease is forfeited, then . . .,” did not violate the rule. In Bowers, the court found that Peveto was distinguishable because in Peveto, it was the conveyance itself that was delayed, and there was no further explanation of grantors’ intent. The Taylor to Bowers deed was a present conveyance and included an expression of intent and a habendum clause that did not mention any delay. Therefore, applying the “four corners” rule and construing the lease and deed together, there was no violation of the rule against perpetuities.

 

Again guided by the intent of the parties and construing both instruments together, the court found the term “forfeit” was intended to be read broadly, so as to include automatic termination. Thus, the parties intended to transfer a possibility of reverter, which takes effect at the termination of the lease for any reason, including cessation of production.
 
The significance of the case is that once again Peveto is distinguished and found not to be controlling. In the context of an industry accustomed to dealing with interests which revert after decades, parties generally do not expect that their property rights will be derailed by a rule that is rarely given serious thought. The case also illustrates a serious trend to re-invigorate the “four corners” rule and to consider multiple documents together when they constitute a single transaction. Under today’s practice of complex purchase and sale agreements, this suggests that, unless limited by agreement, deeds may be construed by reference to other documents not carefully considered as they might relate to deed construction.