Legal FAQs for REALTORS®
— Contracts and Forms
What is an exception as it relates to mineral interests? (updated Nov. 27, 2007)
An exception is a right that relates to a specific property but is held by another person who may not be a party to the contract to sell a property or a mineral interest. For example, a seller of real property may sell the property with the exception that some other person already owns one-half of the mineral interests. This other person is usually identified somewhere in the chain of title.
As a broker, I wrote a reservation clause in special provisions in a contract form (either a TREC residential form or a TAR commercial form) because my seller said he wanted to retain the minerals. If a complaint is filed, will TREC initiate disciplinary action against me? (updated Nov. 27, 2007)
Maybe. The answer to the question depends on the specific facts that are determined by the investigation. TREC will likely look at whether the issue at hand was a complex matter. Additionally, TREC will likely look at the specific wording in the clause to see if it properly reflected the intent of the parties. Did the drafting of the clause contribute to any of the problems for which the complaint was filed? Of course, the broker's defense will be that the clause was a "business detail" and did not constitute the unauthorized practice of law. But this will be a fact issue.
What is an executive right? (updated Nov. 27, 2007)
Typically, the executive right is the power to lease the minerals. Many times, it is severed when the mineral estate is sold to multiple parties. For example, if a person sells half of the mineral estate to another, the seller may decide to retain the power to lease the entire mineral estate at his discretion. Under this example, the other mineral interest owners would not be able to participate in the decision to lease the minerals.
If the broker uses a TREC residential contract form, may the broker add a simple reservation clause with respect to the minerals in special provisions? (updated Nov. 27, 2007)
The Broker/Lawyer Committee at TREC has on several occasions chosen not to insert a reservation clause into the residential contract forms. The committee believes that the better public policy is to provide for the conveyance of the fee simple estate (without reservations) in residential sales that utilize the standard TREC forms. Due to the fact that most residential property owners in urban and suburban areas are not familiar with oil and gas transactions, the committee believes that the negotiation of such matters is best addressed by attorneys representing the parties in residential sales. Additionally, historically, these items have not been at issue during negotiations in the typical residential sale (probably due to the fact that the minerals may have been severed, the surface is too small to worry about drilling activity, and cities have regulated drilling activities within their jurisdictional limits). Based on the foregoing, the better alternative for the broker in this question is to suggest to the parties to seek the advice of counsel.
What is a bonus? (updated Nov. 27, 2007)
Most commonly, a bonus is paid to the lessor under a mineral lease or oil gas lease as an incentive to sign the lease. For example, an operator may agree to pay $500 to an owner as a signing bonus. There are other types of bonuses that may be negotiated.
When a broker completes the TREC Farm and Ranch Contract form, what is the best way to draft a reservation clause in Paragraph 2F? (updated Nov. 27, 2007)
There is no standard language that is suggested. The broker must exercise caution when completing Paragraph 2F because the reservation clause may become complex. The broker will need to determine the extent of the mineral interests and rights that the owner wishes to reserve. This may or may not become an issue of significant negotiations between the buyer and seller. The buyers and sellers may negotiate a number of provisions in a reservation clause. For example, will the seller retain all or just a specific portion of the mineral estate? Will the seller reserve all minerals or just certain minerals? Will the seller retain all executive rights? Will there be any limitations on drilling? If the reservation clause involves anything more than a very basic, simple reservation clause, the broker will likely need to suggest that the parties seek the assistance of counsel who can draft an appropriate addendum to the contract. A broker will not want to move into the unauthorized practice of law by drafting a complex legal clause or addendum.
What is a royalty? (updated Nov. 27, 2007)
It is a form of compensation to the lessor (or others) under a mineral lease. It is a share in the production. Royalties are typically expressed in fractions (e.g., one-eighth of production). However, they can be stipulated in other ways. Royalties can be sold separately from other mineral interests. The owner of a royalty retains the right to receive the royalty under an oil and gas lease; but the royalty owner may not necessarily be the mineral owner. Many times mineral owners will sell rights to royalties or they may retain rights to royalties when selling their interest. There are various types of royalty interests (e.g., overriding royalty, non-participating royalty, or a term royalty). The common elements of a royalty are: (1) the royalty owner does not have the right to use the surface; (2) it is contingent only on production (not on the profit or cost of the operator); (3) it does not carry the right to lease the minerals; and (4) it does not participate in other lease benefits (for example, bonuses or delay rentals).
How are mineral and royalty interests addressed in the TREC contract forms and the TAR commercial contract forms? (updated Nov. 27, 2007)
The TREC residential forms and the TAR forms are silent as to the reservation or exception of any mineral interests or royalty interests. Under those forms, the seller has, therefore, agreed to convey all interests in the property, including the mineral interests (unless such is specifically excluded otherwise by a special provision or addendum). In the TREC Farm and Ranch Contract form, Paragraph 6E provides space for the owner to specify the exact documents that evidence exceptions. Exceptions should be referenced by the specific recording data. Paragraph 2F of the same form contains a few lines for the seller to reserve minerals or other interests to himself.
What is an oil and gas lease or a mineral lease? (updated Nov. 27, 2007)
It is an agreement between the owners of the mineral estate (or mineral interests) and a producer or operator. In exchange for compensation specified in the lease, the lessee is given the right to search for, develop, and produce the oil and gas or minerals. Commonly, the industry states that the lessee "works" or "operates" the interest leased because he performs the work. The lease can encompass the right to work all the minerals or only those specified in the lease (e.g., limited to oil and gas).
How does one determine the value of the mineral interest or royalty interest he owns? (updated Nov. 27, 2007)
This determination is similar to determining the value of any other asset. Namely, what is the price at which a willing seller would agree to sell, and what is the price at which a willing buyer would agree to buy? This requires a familiarity with transactions involving mineral interests and royalty interests and current market prices for such interests. One should contact an expert to make this determination.
What is a mineral? (updated Nov. 27, 2007)
Oil and gas are the most common minerals that bring value to property in Texas. However, the definition of a mineral is broader than oil and gas and can include uranium, sulfur, lignite, coal, and any other substance that is ordinarily and naturally considered a mineral.
Why would a buyer of property in or near an urban area care if the seller conveys or reserves mineral interests? (updated Nov. 27, 2007)
Money, surface rights, and possible drilling activities are probably the three most concerning factors. The mineral interests may be of value to the buyer. The buyer will also want to know if there is a possibility or likelihood that an operator will need to use all or part of the surface that the buyer controls. The buyer will also want to know if there is a possibility or likelihood that an operator will place a well or other machinery on or near the property and whether the operator may need to cross the property.
How does a landowner determine the extent of the minerals or royalty interest he owns? (updated Nov. 27, 2007)
Determining the precise extent of ownership of the mineral estate requires a review of the chain of title of the property in question. The owner will need to consult with an expert, such as oil and gas attorney or landman, to make this determination. Some title companies may, for a fee, provide this service.
What is a mineral interest? (updated Nov. 27, 2007)
Briefly, a mineral interest is part of the ownership rights related to owning real property. The owner of a mineral interest owns all or part of the mineral estate. The owner of the mineral estate typically holds the right to search for, develop and produce minerals from the property. A mineral interest can be severed from the surface rights and can be sold or leased separately from the surface once it is severed from the surface. Usually, the owner of the mineral estate holds the right to use the surface to the extent that is reasonably necessary to extract the minerals (implied easement). Just as one may have multiple owners of the surface, there may be multiple owners of the mineral interests. Each mineral interest holder may have different rights. The holders of the mineral interests together own the mineral estate.
Why would a seller want to retain mineral interests in a sale of property in or near an urban area? (updated Nov. 27, 2007)
Money. The seller may believe that the mineral interests may generate some income or value to him. The determination of this value may be small or it may be significant.
What is a reservation as it relates to mineral interests? (updated Nov. 27, 2007)
A reservation is a retention of rights in the property by the seller. For example, the seller may sell a property but may reserve to himself (or others) one-half of the mineral interest in the property. Under this example, one-half of the mineral interests are severed from the property, assuming that the seller owned all of the mineral interests before agreeing to sell.
I noticed that the Texas Association of REALTORS® has a new form about mineral clauses in contracts. Who should sign this form, and should it be attached as an addendum to the contract? (updated Feb. 20, 2008)
The Texas Association of REALTORS® does have a new form about mineral clauses, Information about Mineral Clauses in Contract Forms (TAR 2509). This form is designed to provide general information about minerals and mineral clauses. It can be given to a buyer or a seller to explain what mineral clauses are and why REALTORS® are not permitted to draft and add such clauses to contracts. This form can be signed by whoever receives it in order to acknowledge receipt of the form. Since the form is informational in nature, it is not intended to be an agreement between a buyer and a seller and should not be attached to or made a part of any contract. If the parties wish to have mineral clauses made part of their contract, an oil and gas attorney should be retained to draft and include the appropriate clauses for the contract.
Why is concern over mineral interests only recently being made an issue in sales in or near urban areas? (updated Nov. 27, 2007)
A number of factors probably contribute to the cause. The increased price of oil and gas, better technologies for finding and extracting oil, and the increased growth of our cities are variables that, taken together, may be part of the cause.
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