Texas Court Addresses Anti-Washout Clause and Rule Against Perpetuities

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Yowell v. Granite Op. Co. and Apache Corp. v. Peyton Royalties, L.P. is another Rule Against Perpetuities case. Keep reading. The anti-washout protection for your reserved overriding royalty could be at risk.

The court of appeals (on remand from the Supreme Court) determined that a reserved overriding royalty interest in an oil and gas lease may be reformed under section 5.043 of the Texas Property Code to comply with the Rule.

Section 5.043 directs:

Within the limits of the rule against perpetuities, a court shall reform or construe an interest in real or personal property that violates the rule to effect the ascertainable general intent of the creator of the interest. A court shall liberally construe and apply this provision to validate an interest to the fullest extent consistent with the creator’s intent.

Facts

The Yowell group sued Granite Operating and Apache seeking a declaration that their reservation of an ORRI in a 1986 lease continued under a 2007 lease. Granite/Apache then sued owners of ORRIs in the 2007 lease (Peyton Group and PAC Group) seeking indemnity under a sales agreement.

The trial court granted Granite/Apache, PAC Group, and Peyton Group’s motions for summary judgment. On the first appeal the judgment was affirmed: (1) the Yowells’ reserved ORRI violated the Rule; and (2) the interest was not subject to reformation under Section 5.043 because the assignment creating the interest was not an inter vivos instrument; (3) the Yowells’ suit was not timely; and (4) Peyton Group was not required to indemnify Granite/Apache.

On petition for review the Supreme Court affirmed (see Gray Reed partner Paul Yale’s observations on that one) on some issues but concluded that the ORRI must be reformed, if possible, in accordance with Section 5.043, and that Section 5.043 is not subject to a four-year statute of limitations.

The reservation

The instrument purporting to extend the ORRI reads:

Should the Subject Leases . . . terminate and in the event Assignee [the lessee] obtains an extension, renewal or new lease or leases covering or affecting all or part of the mineral interest covered and affected by said lease or leases, then the [ORRI] reserved herein shall attach to said extension, renewal or new lease or leases  …  .

The result                                          

The court held that the Yowells’ property interest in the 2007 lease did not vest at the time of its creation; thus it was subject to the Rule. The interest violated the Rule because it was “contingent on at least three events that may not happen at all, let alone within the lives being plus twenty-one years stipulated by the Rule.”

The Court concluded that reformation was possible, and the interest can be brought within the Rule “by reforming it to limit the time period in which it might vest to no longer than twenty-one years after the death of any natural person whose life was in being at the time the ORRI was created.”

The Court next considered Section 5.043’s requirement that any reformation effect the intent of the interest’s creator. Because the record lacked guidance as to the creator’s intent, the court remanded the case to the trial court because it is in the best position to develop evidence of that intent and to reform the instrument to reflect the intent.

Granite/Apache also alleged claims against Peyton Royalties under theories of money had and received and unjust enrichment. Those claims were rejected.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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