Oil & Gas Industry Representation

Oil and gas and mineral rights litigation is complex, and requires skilled legal representation.

When it comes to holding mineral rights, there are several vehicles to consider for effective asset management and protection. Two common choices are Limited Liability Companies (LLCs) and Trusts. In this blog post, we will examine the pros and cons of each, providing you with valuable insights to make an informed decision for your unique situation. As always, we at Bradley & Hammond Law Firm are here to help you navigate the complexities of mineral ownership and management. Limited Liability Companies (LLCs) An LLC, or Limited Liability Company, is a legal business structure that combines the benefits of both corporations and partnerships. It offers limited liability protection to its members (owners), meaning their personal assets are generally shielded from the business's debts and liabilities. Additionally, an LLC typically has pass-through taxation, where profits and losses are reported on the members' individual tax returns, avoiding the double taxation that can occur in corporations. This business structure also provides flexibility in management and operations, as it allows members to customize the company's organization and decision-making processes according to their specific needs. Overall, an LLC is a popular choice for entrepreneurs and small business owners seeking a balance between liability protection, tax advantages, and operational flexibility. Here are the pros and cons of using an LLC to hold mineral rights: Pros: Limited Liability Protection. An LLC provides limited liability protection to its members, meaning their personal assets are shielded from the business's liabilities and debts. This is a significant advantage when holding mineral rights, as it can minimize the risk of personal financial loss due to unforeseen circumstances or disputes. Flexibility in Management. LLCs offer flexibility in terms of management and structure, allowing members to tailor the company to their specific needs. This flexibility can be advantageous when dealing with mineral rights, as it allows for efficient decision-making and ease of operations. Pass-through Taxation. An LLC typically has pass-through taxation, meaning the profits and losses are reported on the members' individual tax returns. This structure can be beneficial as it avoids double taxation, which can occur in other business entities like corporations. Cons: State Fees and Annual Filings. LLCs are subject to state fees and annual filings, which can add to administrative burdens and costs. Public Record. Because LLCs are creatures of the state legislature, all LLC information is generally available in public records, potentially limiting the privacy of the members involved in the mineral rights. Self-employment Tax Considerations . Members of an LLC may be subject to self-employment taxes on their share of the profits, which can increase their overall tax liability. The LLC could elect to be taxed as an S-corp to avoid self-employment taxes, but doing so requires the LLC to follow more strict and complicated tax rules. Trusts A trust is a legal arrangement in which a grantor (also known as a settlor or trustor) transfers assets to a trustee, who then manages these assets for the benefit of one or more beneficiaries. Trusts are established through a written document called a trust agreement, which outlines the terms, conditions, and instructions for the management and distribution of the trust assets. There are various types of trusts, including revocable and irrevocable trusts, each with their own unique features and purposes. Trusts are commonly used for estate planning, asset protection, and tax planning purposes. They can provide privacy, avoid the probate process, and enable long-term control over assets, ensuring that the grantor's wishes are carried out and the beneficiaries' interests are protected. In the context of mineral ownership, it's essential to understand the differences between irrevocable and revocable trusts. An irrevocable trust is a trust that, once established, generally cannot be altered, modified, or terminated by the grantor without court approval or going through a legislatively-authorized decanting process. This inflexibility can offer certain benefits, such as enhanced asset protection from creditors and potential tax advantages. However, it can also be a disadvantage when dealing with mineral rights, where circumstances may change, and adjustments to the trust may become necessary. On the other hand, a revocable trust, also known as a living trust, can be modified or terminated by the grantor during their lifetime. While revocable trusts may not provide the same level of asset protection or tax benefits as irrevocable trusts, they offer greater flexibility in managing mineral rights and adapting to changing circumstances. Ultimately, the choice between an irrevocable and revocable trust for mineral ownership will depend on factors such as the grantor's goals, risk tolerance, and the need for control over the assets. Here are some pros and cons of holding your mineral rights in a trust: Pros: Potential Tax Advantages. Trusts can offer tax advantages, particularly in the estate planning context when transferring wealth to beneficiaries. These benefits may reduce the overall tax burden associated with mineral rights. Privacy. Trusts provide privacy for the grantor and beneficiaries, as they are generally not part of the public record. They are a contractual arrangement, rather than a creature of state legislatures like an LLC. This can be particularly advantageous when holding valuable assets like mineral rights. Avoids Probate. Assets held in a trust avoid the probate process, potentially saving time and expenses for beneficiaries. Mineral rights held personally or in an LLC, by contrast, must go through probate to pass to the next generation. Long-term Control. Trusts allow the grantor to maintain long-term control over assets, including mineral rights, and can provide specific instructions for their management and distribution. The trust itself, depending on how it is written, will often survive the death of the grantor. Cons: Irrevocability (in some cases). Some trusts, particularly irrevocable trusts, cannot be easily modified or terminated once established. This lack of flexibility can be a disadvantage when dealing with assets like mineral rights, where circumstances may change over time. Before setting up a trust, you should carefully evaluate whether an irrevocable trust or a revocable trust is right for your circumstances and goals. More Complex to Establish. Trusts can be more complex and time-consuming to establish compared to LLCs or simply holding the minerals individually, which may result in higher legal fees and additional planning. Trustee Fees. Trusts require the appointment of a trustee to manage the assets, and if the trust allows the trustee to collect management fees, those fees can add to the overall cost of maintaining the trust. Keep it simple: hold the minerals in your own name While LLCs and Trusts are common vehicles for holding mineral rights, another option is to hold these rights in your individual name. Below, we discuss the pros and cons of holding mineral rights in your name to help you better understand this option. Pros: Simplicity. Holding mineral rights in your individual name is the most straightforward option. There is no need to create a separate legal entity or trust, which can save time and legal fees. Direct Control. By owning mineral rights in your name, you retain direct control over the assets and their management. This allows you to make decisions without consulting other members, trustees, or managers. Easier Tax Reporting. As the sole owner of the mineral rights, you report any income, deductions, and credits related to the assets on your personal tax return. This approach can simplify tax reporting compared to managing an LLC or Trust. Cons: Lack of Asset Protection. Holding mineral rights in your individual name exposes your personal assets to potential liabilities associated with the mineral rights. This risk is significantly higher compared to holding assets through an LLC or Trust, which provides a degree of liability protection. Limited Estate Planning Options: When mineral rights are held in your individual name, they become part of your probate estate upon your death. This may result in a more complicated and time-consuming probate process for your beneficiaries. Trusts, in particular, can provide more efficient estate planning options. Ultimately, the decision to hold mineral rights in your individual name, an LLC, or a Trust will depend on your specific circumstances and goals. At Bradley & Hammond Attorneys at Law, we understand that each case is unique, and we are committed to providing personalized legal guidance tailored to your specific circumstances. Our experienced team is well-versed in business law, real estate, estate planning, probate, and oil and gas law, and we are ready to help you navigate the complexities of your mineral rights. Contact us today or call 412-533-2620 (PA) or 817-645-3993 (TX) to schedule a consultation and discuss your options.

As an oil and gas lawyer, I have seen too many landowners sign oil and gas leases without fully understanding the terms and conditions they are agreeing to. Before signing any oil and gas lease, you need to understand the key provisions of the lease agreement and to ask the right questions in order to negotiate favorable terms. In this guide, I will cover eight key provisions of oil and gas leases that you should be aware of, and provide you with questions you should ask before signing. 1. Royalty Amount and Post Production Costs The royalty amount is the percentage of the gross revenue that the landowner receives from the production of oil and gas from the leased property. The percentage offered should reflect current market conditions. You will want to do some research to determine what going rates are before signing. The rates will differ based on location and the market for oil and gas generally. For instance, rates in the Permian basin can be anywhere between 15 to 25%. In the Marcellus and Utica, they can be anywhere between 14 and 20%. Depending on how much of your acreage is located within a proposed drilling unit and when the well is scheduled to be drilled, you may be able to negotiate your rate to the higher end of the range. Royalties are usually paid as a percentage of gross revenue -- so revenue from production less post-production costs, such as transportation, processing, and marketing costs. You can sometimes negotiate a royalty based on net revenue which will not include deductions for post-production costs. Pay attention to the language in your royalty clause, not just the percentage offered. Questions to ask: What is the royalty rate? Is it based on the gross revenue or net revenue? What post-production costs will be deducted from the royalty payment ? 2. Bonus for Paid Up Leases vs. Delay Rentals A bonus is the upfront payment made by the lessee to the lessor for the right to explore and produce oil and gas on the leased property. A paid-up lease is a lease where the lessee makes a one-time payment made upfront (the bonus payment). Leases that do not provide for a bonus payment will contain a delay rental clause, which provides for an annual payment made to keep the lease in force until drilling occurs. Do you want a bonus payment or to receive delay rentals over time? Look at the amount offered. Rates for bonuses and delay rentals are based on total leased acreage. The rate will vary just like royalty rates depending on location and market conditions. Questions to ask: What is the bonus amount? Is it a paid-up lease? If it's not a paid-up lease, what is the amount offered for delay rentals, and how long is the delay period? 3. Pooling and Unitization A pooling and unitization clause in a lease allows the lessee to combine multiple leased properties into a single drilling unit, which can increase the efficiency and profitability of the oil and gas operation. Sometimes they contain an acreage limitation, such as the land can only be pooled in a unit not to exceed 640 acres plus allowances. When you get paid for production on oil and gas in a pooled or unitized unit, you get paid your royalty amount multiplied by your land's unit participation factor -- your acreage divided by the total unit acreage. If you have, say, 40 acres, and the unit is 640 acres, and all of your land is included in the unit, you will get paid your royalty x 40/640. You may think that you want a high unit participation factor and want to limit the size of pooled units, but depending on the circumstances you can actually receive more royalty revenue by including a broad pooling and unitization clause, rather than one that restricts the total acreage permitted to be pooled. As mentioned above, the purpose of pooling and unitization permits the lessee to more efficiently develop the oil and gas in an area. The amount of oil or gas produced from 640 acres will typically be a lot more than the oil and gas produced from only 180 acres. If your lease is silent on pooling and unitization (rare these days), be aware that some states have laws that allow the operator to pool and unitize leased acreage as long as they are not expressly prohibited from doing so in the lease. This is the case in Pennsylvania. Pennsylvania also allows for cross-unit drilling, which allows your acreage to be pooled or unitized more than once. Each state is different, and you should be aware of the rules that apply. Questions to ask: Will the lease allow for pooling and unitization? What is the unit size, and how will it be determined? How will the royalty payment be calculated for pooled or unitized production? 4. Continuous Development Clauses A continuous development clause requires the lessee to drill and produce oil and gas continuously throughout the lease term, or the lease will terminate. Sometimes they will require a new well to be drilled every year, or just a certain number of wells prior to termination. A problem can come up when the operator drills one well on the property, then does nothing further to develop the acreage. Without other language in the lease providing otherwise, the operator can hold all the leasehold acreage with one well as long as that well produces, which could be in perpetuity. A continuous development clause can ensure the operator continues to develop the leasehold and ensure maximum production and revenue for you. Questions to ask: Is there a continuous development clause in the lease? What is the drilling and production requirement, and what happens if it's not met? 5. Vertical and Horizontal Pugh Clauses A Pugh clause generally provides that production from a unitized or pooled area located on or including a portion of the leased lands will not be sufficient to extend the primary term for the entire leasehold. A vertical Pugh clause allows for the release of the undeveloped formations below or above the producing formation, while a horizontal Pugh clause allows for the release of the undeveloped acreage adjacent to the producing formation. These clauses are important to prevent the lessee from holding onto non-producing acreage for an extended period without further development. Ideally you will want all of your leased acreage to be developed to ensure maximum revenue from royalties, and none of your acreage held by a lease but not being produced. Pay attention to your lease for Pugh clause language. Example: You leased 100 acres to an operator. The operator pooled 50 of your acres with an adjacent 130 acres covered by another lease to form a 180 acre unit. A well is drilled to 5,000 feet. 50 of your acres is developed down to 5,000 feet, and 50 acres are undeveloped. Operations and production from that well will hold your lease by production as to all 100 of your leasehold acres if there is no Pugh clause. You will receive royalties in proportion to your acreage in the unit, so your royalty rate x 50/180. The remaining 50 acres will sit stagnant, doing nothing for you, unless the operator forms another unit that includes it. If your lease has a horizontal Pugh clause though, the lease will terminate as to your undeveloped 50 acres upon the expiration of the lease's primary term, allowing you to lease it to another operator who might develop it. If you have a vertical Pugh clause, the lease will terminate as to depths below 5,000 feet on your 50 developed acres, allowing you to lease it to another operator for deeper development. Questions to ask: Is there a vertical or horizontal Pugh clause in the lease? What are the terms and conditions of the clause? 6. Surface Use and Restoration Clauses Surface use and restoration clauses protect the landowner's surface rights and ensure that the leased property is restored to its original condition after drilling and production activities are completed. You will want to tailor this provision to your specific property and where the well is located. For instance, will the operator need to build an access road that interferes with cattle fencing? Will they need to re-grade your land to build a stable well pad? What will they do with all of the dirt removed and trees cut? You should ask questions to confirm exactly what they are going to do and think about the features of your property that are important to you. If the operator does not know their plans yet, you can make surface use conditional upon your written consent in a separate surface use agreement to be negotiated at a later date. Questions to ask: Is there a surface use and restoration clause in the lease? What are the terms and conditions of the clause? What protections are provided for the landowner's property? 7. Lease Term and Extensions The lease term is the duration of the lease agreement. The lease can also contain an option to extend the lease beyond it's initial period. Typical lease terms range from 3 to 7 years, sometimes more or less, depending on the location. Extensions allow the lessee to pay the landowner additional consideration to extend the lease term for an additional term, sometimes equivalent to the initial term, and sometimes less. The longer the term, the longer your acreage could be held without development. You will want to research market conditions and the operator's history of production and development to determine if the term is reasonable under the circumstances. Questions to ask: What is the initial lease term? Is there an option to extend the lease term? What are the terms and conditions of the lease extension? What is the additional consideration to be paid for extension? Is the operator active in your area, and does it have competition from other operators who might lease your acreage after termination of this lease? 8. Title Warranty Oil and gas leases often contain a warranty clause. A title warranty ensures that the landowner has the legal right to lease the property and that there are no encumbrances on the property that would prevent the lessee from exploring and producing oil and gas. The lease can contain a general warranty, a special warranty, or no warranty at all. Warranties of title is a complex area of the law, dating back hundreds of years. If the landowner breaches the title warranty by not owning what he says he owns, the operator can sue the landowner for breach of title warranty and recover damages. For a landowner, the ideal is a no warranty oil and gas lease. If the operator is not willing to accept a lease with no warranty, the landowner's next best option is a special warranty. A special warranty is a promise that the landowner himself did not do something to impair title. Claims for breach of the special warranty can only be brought by claimants who claim title by, through and under the landowner, and not a predecessor in title. A general warranty provision will leave the landowner on the hook for damages even for impairments to title caused by a prior owner of the land. Questions to ask: Does the lease include a title warranty? What is the scope of the warranty? What happens if there is a title defect? Negotiating an oil and gas lease can be a complex process, and it's important to have a clear understanding of the terms and conditions of the lease before signing. Here are some additional tips for negotiating an oil and gas lease: Research the current market conditions for oil and gas leases in your area. Consult with an experienced oil and gas lawyer who can help you navigate the lease negotiation process and ensure that your rights are protected. Don't be afraid to negotiate. You have the right to ask for changes to the lease agreement to better suit your needs and interests. Review the lease agreement carefully and ask questions about any terms or provisions that you don't understand or that you think may be unfair or unclear. Signing an oil and gas lease without fully understanding the terms and conditions of the agreement can have significant adverse consequences for landowners. By understanding these eight key provisions of oil and gas leases and asking the right questions, you can negotiate an equitable lease agreement that protects your interests and ensures that you receive a fair share of the profits from oil and gas production on your property. The attorneys at Bradley & Hammond can help you negotiate favorable terms in an oil and gas lease. We have offices located in Pittsburgh, Pennsylvania, and Cleburne and Midland, Texas. Contact us today to schedule a consultation or call 412-533-2620 (PA) or 817-645-3993 (TX).

The facts of Susan Davis Van Dyke, et al. v. The Navigator Group, et al., Case No. 21-0146 (Tx Supreme Court Feb. 17, 2023) are straightforward, as far as title litigation goes. In 1924, George H. Mulkey and his wife conveyed their ranch and the underlying minerals to G.R. White and G. W. Tom, reserving “one-half of one-eighth of all minerals”. Facts were introduced at trial showing a 90-year history of the parties’ predecessors treating the interest as a 1/2 mineral interest in leases, division orders, conveyances, probate inventories, stipulations and other recorded documents. The parties are the successors in interest to White and Tom, and Mulkey. Despite this history, in 2013, after Endeavor Energy drilled a well and started paying a floating 1/2 royalty, the successors in title to White and Tom (the “White parties”) filed suit arguing that the deed reserved only a 1/16 of the minerals, or simply 1/2 of 1/8 mathematically. Susan Van Dyke, et al., the successors to George H. Mulkey (the “Mulkey parties”), argued that the interest reserved was a 1/2, and that the referenced 1/8 was a term of art at the time the deed was drafted. They further argued that the Estate Misconception Theory applied – the once common misconception that a lessor only retained a 1/8 interest in the minerals after executing an oil and gas lease – to allow a rebuttable presumption that the reference to a 1/8 is a reference to the mineral estate as a whole. The trial court agreed with the White parties and held that the deed was unambiguous and reserved only a 1/16. On appeal, the Appellate Court for the Eleventh District affirmed the trial court’s decision. It further held that the Estate Misconception Theory did not apply because (1) the deed did not contain any conflicting provisions requiring harmonization and (2) there was no lease in existence at the time of the conveyance. The Texas Supreme Court disagreed and overturned the appellate court’s decision, holding that the interest reserved was a 1/2. The Court explicitly used the case as an opportunity to clarify its previous holding in Hysaw v. Dawkins , 438 S.W.3d 1 (Tex. 2016), and how to apply the Estate Misconception Theory. Under standard rules of deed of interpretation, Texas courts will adopt a word’s ordinary meaning unless otherwise defined in the document. The words in a deed must be given the meaning they had when the text was adopted and given their historic context. Unless a deed is ambiguous, courts are limited to the four corners of the deed and must determine, objectively and not subjectively, what the parties meant by the words they used in the deed. The Court relied on its opinion in Hysaw to discuss the historical use of 1/8 as a reference to the standard royalty reserved in an oil and gas lease and the Estate Misconception Theory. In Hysaw , the Court construed the terms of a 1947 will that bequeathed to each child “one-third of one-eighth royalty” to be a 1/3 floating royalty, and explicitly rejected “a mechanical approach requiring rote multiplication of double fractions whenever they exist.” To reach this conclusion, the Court relied on (1) the Estate Misconception Theory and (2) the historical use of 1/8 as the standard royalty in oil and gas leases. The Court noted that even after Hysaw , state courts still used conflicting approaches to interpret deeds containing double fractions, and that clear guidance for the courts and the public is necessary to prevent wasteful litigation over double fractions. To address this problem, the Court laid out an approach that it feels is flexible, and advances stability and predictability from case to case: When courts confront a double fraction involving 1/8 in an instrument, the logic of our analysis in Hysaw requires that we begin with a presumption that the mere use of such a double fraction was purposeful and that 1/8 reflects the entire mineral interest, not just 1/8 of it. . . . Our analysis in Hysaw thus warrants the use of a rebuttable presumption that the term 1/8 in a double fraction in mineral instruments of this era refers to the entire mineral estate. Because there is ‘little explanation’ for using a double fraction for any other purpose, this presumption reflects historical usage and common sense. The presumption can be rebutted with evidence in the deed itself that the parties’ intent was otherwise. The Court made clear that sometimes the language in the deed itself will confirm the presumption, sometimes it will rebut it, and sometimes, due to the nature of mineral conveyances, it may do neither. Either way, courts should begin with a presumption that the 1/8 in a double fraction was meant to refer to the mineral estate as a whole, and then look for language in the deed that could indicate the parties’ intent was otherwise. The Court examined the Estate Misconception Theory and noted that the appellate court got the analysis backward. To rely on the Estate Misconception Theory, a court does not need to first identify a lack of inconsistent provisions in the deed and then use the presumption to harmonize the language used. Instead, courts should begin with the presumption and then look for language in the deed that rebuts it. “The use of a double fraction in a deed, combined with the lack of anything that could rebut the presumption, is precisely why we can conclude as a matter of law that this deed did not use a 1/8 in its arithmetical sense . . .” The confusion in how to use the Estate Misconception Theory likely stemmed from its use in Hysaw , Luckel v. White , 819 S.W.2d 459 (Tex. 1991), and Concord Oil Co. v Penzoil Expl. & Prod. Co. , 966 S.W.2d 451 (Tex. 1998), which all required harmonization of language in the instrument. According to the Court, however, the presumption that 1/8 is a reference to the entire mineral interest is not, and has never been, limited to harmonization cases. So, what are the takeaways for mineral owners and oil and gas operators? Interpreting deeds containing double fractions is now a lot easier. The rule to apply is that parties are permitted to a rebuttable presumption that a reference to 1/8 in a double fraction in historic mineral conveyances refers to the mineral estate as a whole. The presumption can be rebutted by evidence in the deed that the reference to 1/8 in the double fraction means otherwise, permitting rote multiplication or some other means of determining the amount of the interest reserved or conveyed. The litigation risk around most double fraction conveyances should be greatly reduced. The winner in such a dispute will be clear. As far as litigation risk is concerned, whenever there is a clarification in the law which resolves an area that previously posed a high risk of uncertainty, mineral owners that are paying attention will likely examine how the clarification affects their interests. With clearer case law, however, we predict that most disputes should be resolvable outside of court with a written stipulation of interest. What about overpayments or underpayments? Is a mineral owner who was overpaid responsible for repaying those funds to a party who was underpaid? Yes, unless a statute of limitations applies. Typically, a party who was underpaid should pursue the party that was overpaid to obtain what is rightfully theirs under the law, but often the operator can prospectively balance payments between the parties by adjusting future payments to both. Oil and gas operators will need to take note of the change and plan to address disputes that could arise. They should review whether they are protected by a title opinion and whether a new title opinion should be obtained before making a change to an owner’s payment status. Operators should also evaluate how the Court’s holding affects suspended royalty payments and pending or threatened litigation. Does the Texas Supreme Court's holding affect you? Contact one of our oil and gas attorneys to discuss further. Our office can be reached by calling (817) 645-3993 or you can contact us online to schedule a consultation.

Understand your Inherited Mineral Rights: Types, Options, and What to Consider. Get expert insight on leasehold interests, working interests, and more.