Nobody knows better than the oil and gas industry that land agreements are never just land agreements. Easements, royalty interests, and environmental requirements keep things interesting, and changes to law, regulation, and case precedent require constant attention to ensure the protection of your interests. It is not, of course, only about what most people see when they look at the land, but what potential lies beneath it and who stands to profit from it.
The Supreme Court of Texas finished 2024 by issuing a long-awaited decision in Hahn v. ConocoPhillips Company. Its decision impacts what effect ratifications of an oil and gas lease and stipulations of interests have on land titles in the state. After four attempts to finalize a decision in the lower courts, the state Supreme Court reversed the decision of the court of appeals and ruled in favor of ConocoPhillips Company. When it comes to ratifications and stipulations in oil and gas lease agreements – what they entail is important to understand.
Hahn v. ConocoPhillips Company Set a Precedent on Oil and Gas Lease Agreements
The Hahn family shared ownership of the surface estate and mineral estate of a tract of land. After the siblings partitioned the estate into two tracts, one of them sold their interest, reserving a non-participating royalty interest (NPRI), and the purchaser leased the oil and gas rights to ConocoPhillips Company. The original dispute arose over whether the Hahn siblings’ interest was fixed or floating.
The trial court found that a stipulation of interest signed by Hahn and the landowner meant Hahn had a floating interest that was affected by the royalty the landowner received. The lower appellate court, however, reversed the trial court’s decision, holding that Hahn had a fixed royalty. ConocoPhillps then petitioned the Supreme Court of Texas, submitting that the royalty was based on the stipulation of interest because Hahn had ratified the lease between the landowner and ConocoPhillips.
Ultimately, the highest court in the state found that Hahn’s ratification of the lease between the landowner and the company did not switch Hahn’s NPRI from the fixed rate established between the landowner and Hahn to a floating rate. The court did, however, find that the stipulation reduced Hahn’s fixed rate due to conveyance of part of their interest to the mineral fee owner. Despite its complicated history, this decision provides clarity to landowners and oil and gas companies regarding how lease ratifications and stipulations impact royalty interests in Texas.
How Does This Decision Impact Lease Ratifications in the Oil and Gas Industry?
When an owner has an NPRI in a tract, they retain the right to ratify or refuse a lease that includes provisions that impact their interest if the landowner has no authority to include those provisions. If, however, the NPRI owner ratifies a lease that includes a pooling agreement, the remaining interest is bound by the entire lease agreement. Put differently, an NPRI owner cannot pick and choose which lease provisions bind them and which do not.
An important piece of this situation to remember is that an NPRI ownership is not a fractional title of the mineral fee or any type of ownership of the mineral fee. Rather, the NPRI is fixed and does not float with the lease royalty. What we saw in this case, and what will serve as precedent for any similar future claims, is that the NPRI is fixed regardless of the royalty in any future leases.
Oil and gas companies should understand that an NPRI owner’s ratification of a lease does not change royalty calculations unless it is explicitly stated that there is a change to the fixed interest. More broadly, this decision highlights the need for precision when negotiating lease agreements and following ratifications for those who hold an NPRI in the land you are leasing. Care must be taken to avoid litigation and the associated costly delays related to royalty disputes.
How Does This Decision Impact Stipulations of Interest in the Oil and Gas Industry?
Generally, the law favors stipulations in everything from interpersonal agreements to presentations to the court. Stipulations have proven helpful in avoiding litigation because they show that both parties shared an understanding of the agreement and, in the case of disputes related to land, provide clarity regarding titles and ownership interests more broadly. The Supreme Court of Texas, in understanding the importance of stipulations, took time in its decision to discuss contractual requirements for satisfaction of the Statute of Frauds.
The previous case precedent on this point left some doubt about the impact a stipulation would have and under what circumstances it would be effective. In this case, the court clarified that it is not necessary for a party to prove subjective uncertainty to enforce a stipulation. Further, the Court made clear that stipulations can apply to agreements other than those that establish property boundaries.
Overall, the oil and gas industry must be aware of the fact that royalty calculations for an NPRI owner may change after signing a stipulation. It will be important to monitor the impact this case precedent has in future litigation, as one can expect that courts will be examining more closely all stipulations as to their enforceability. The increased scrutiny may cause delays in drafting and ratifying lease agreements and related stipulations.
Contact Our Legal Team for Help With Ratifications and Stipulations
Pursuing rights to a parcel or a portion of a parcel of land or mineral estate is no simple task, and this latest case from the Supreme Court of Texas adds a new layer of complexity to ongoing evaluations. Ensuring you understand who has which rights to an estate, and whether those rights are subject to change based on what overall royalties are, is important to understand at the time of lease ratification and throughout your work on the land.
When you are evaluating a lease agreement or a stipulation about land in which you have a stake, you want a knowledgeable oil and gas lawyer to back you up. Contact MehaffyWeber to help you determine how to handle the nuances of your agreements.