John owns the surface and minerals of 10 acres of Texas land. He executes an oil and gas lease covering the 10 acres with ABC Operator. John then sells the south 5 acres to Wayne. ABC Operator drills a producing well on John’s northern 5 acres. So who gets the royalties under the lease?
The oil, and its royalty, belongs to the lucky one who owns the land when and where the well is located. Japhet v. McRae, 276 S.W. 669, 672 (Tex. 1925). Here, that’s John. This is the result of the Texas rule of non-apportionment, which is based on the premise that a post-leasing purchaser of land could have and should have known of the previously executed oil and gas lease and had the freedom to negotiate terms into the conveyance granting him a portion of the royalties. The rule of non-apportionment is supposed to be the clear-cut law of the land in Texas. But is it?
Although most people rely on the rule of non-apportionment when sorting out royalties, non-apportionment may not apply in many situations. The most common way around the rule of non-apportionment is a lease’s “entireties” clause. An entireties clause usually states that even if the leased premises are subsequently divided, the land will still be developed and operated as one lease and the royalties will be divided proportionately amongst the owners of the leased acreage. Montgomery v. Rittersbacher, 424 S.W.2d 210, 212 (Tex. 1968). There are also other situations—albeit odd and complicated ones—where the rule of non-apportionment may not apply, even without an entireties clause.
Consider the following post-leasing partition scenario. Three siblings and their mother owned undivided interests in three tracts of land. The siblings and their mother executed one oil and gas lease covering all the land with ABC Operator. The lease did not have an entireties clause. After signing the lease, the mother died and the siblings split up the land, taking full surface and mineral ownership of one tract each. ABC Operator subsequently drilled a producing oil well on only one of the three tracts of land. Do all the siblings share in the royalties from the producing well—or does only the one sibling who owns the tract where the well is located get paid?
The answer is ultimately, it depends. The rule of non-apportionment generates the easy answer that only the one who owns the well site gets paid. But Texas courts actually consider several variables in trying to find the most equitable solution. As discussed in Howell v. Union Producing Co., 392 F.2d 95 (5th Cir. 1968), executing one lease covering all the tracts may suggest that the lessors intended for the all the tracts to be developed as one unit. Also, would it be fair to bind the owners of the non-developed tracts to a held-by-production lease without the protections often afforded by separate leases, such as offset wells? What effect does the language in the documents partitioning the tracts say?
Although the rule of non-apportionment is often cited and relied on, it is not really the end all be all. So you might be entitled to that glorious mailbox money after all.