Life Estate Ownership in Texas Oil and Gas

Life Estate Ownership in Texas Oil and Gas

Life estate ownership in Texas real property, particularly in oil and gas, can be complex and create many headaches. While a life estate that is created via a properly drafted deed can cover many of the common issues associated with life estates in oil and gas, this is unfortunately rare when discussing the creation of a life estate that involves oil and gas property.

Creation of Life Estates in Oil and Gas Properties

The most common means for the creation of a life estate is through the death of the owner of an oil and gas property, whether that person dies with or without a will. For purposes of this article, we shall focus on a situation where a life estate is created either through the intestate death of an owner, or the testate death of said owner where their will does not specifically account for the powers of the life estate holder in the property. The default rule in Texas in this scenario is that neither a life estate owner nor the remainder owners of the interest can execute an oil and gas lease unilaterally. In other words, an oil and gas lease executed by one party, without the joinder or ratification of the other party, is void.

The confusion does not stop here though, as even after you have a valid oil and gas lease in place from both the life estate owner and the remainder owners, there is still the issue of who has the right to what payments under the lease. In Texas, the life estate owner has the right to full payment of any delay rentals under an oil and gas lease, while any royalty or bonus payments that are to be paid under the terms of the lease are to be held in an interest-bearing suspense account for the remainder owner, with the corpus of this account to be distributed to the remainder interest owners upon the death of the life estate owner. During the life of the life estate owner, the life tenant shall have the right to periodic payments of interest from this suspense account.

Exceptions and Special Considerations

Of course, there are several exceptions to the above rules. One such example is the Open Mine Doctrine, which allows the life estate owner to collect all payments including royalty and bonus money, if the “mine” was open at the time that the life estate was created. What does this mean for our purposes? The Open Mine Doctrine shall apply in Texas if either: a) a producing well is located on the property in question at the time that the life estate is created, or b) there is an active oil and gas lease on the property at the time the life estate is created. Further, many oil and gas companies will ask for a signed agreement between the life estate and remainder interest owners which sets forth how the owners would like the money to be paid during the life of the life tenant.

Mineral owners in Texas should be aware of the ramifications of life estates that are created by means that are not explicit as to the potential life estate owner’s powers and rights during their life. The diligent owner will spend a little more time in the planning of this potential divestiture which will lead to a clear path forward for oil and gas production under that interest down the road. If you need assistance or guidance with life estate ownership, reach out to KMD Law today to book a consultation.

Written by Robert Scales, Shareholder and Director in the Oil & Gas division with KMD Law