Untitled Texas Attorney General Opinion

THEA~TORNEYGENEEZAIL OFTEXAS AUSTIN, TEXAS PRICE DANIEL A-P- ow- August 20, 1948 Hon. Bascom Glles, Commissioner Qeneral Land Office Austin, Texas Opinion NO. v-662 Re: RelinquishmentAct - Ten Cent per acre per annum minimum payment. Dear Sir: Your letter of Hay 26, 1948, furnishes for our considerationan 011 and gas lease, dated April 23, 1941, for a primary term of 10 years and exe- cuted pursuant to the RelinquishmentAct (Arts. 5367 and 5368, V. C. S.). The lease contains no delay rental provision but does provide for annual pay- ments which are designated "minimum royalty." The State received one-half of the amount paid when the lease was executed and has received one-half of all minimum royalty payments whfch have been made to date. All of the land covered by the lease is not subject to the RelinquishmentAct, but as to the land which Is subject to such act, the State and landowner have shared equally in all amounts so far received. You request opinion as to whether the annual minimum royalty payments provided for by the lease satisfy that portfon of the Relinquishment Act which requires that a minimum annual payment or rental of 10 cents per acre be paid to the State. The followingprovisions of the lease bear on this questlon: "2. This lease shall be for a term of ten (10) ears from this date (called primary term?I, without reference to the commencement,prosecutfon,or cessation at any time of drillfng or other develop- - . Hon. Bascom Glles - Page 2 - v-662 ment operations,or to maintenance or cessation of production, or to the dls- covery or nondiscovery during this primary term of oil, gas, or other mineral on the leased premises; but if and whenever oil, gas or other mineral is discovered in pay- ing quantities on the leases prelnisesduk- ing the pr?.maryterm, Lessee agrees to rea- sonably develop the area thereon capable of producing oil, gas, or other mineral in paying quantities,and shall at all times protect the leased premises from drainage by wells on adjacent property In the manner and to the extent that a reasonably prudent operator would under the same or similar circumstances. Except as expresslyprovided herein, Lessee shall not be under any obll- gation during the primary term to drill or develop the premises against its will. . . . "7. !Cheroyalties to be aid by Lessee, subject to Paragraphs8 and 9 hereof, are: (a) on oil, one-eighth of that produced and saved from said land, the same to be delivered at the wells or to the credit of Lessor into the pipe line to which the wells may be connected;Lessee may from time to time purchase any royalty oil in its possession, paying therefor the market price prevailing for the field where produced on the date of purchase; (b) on gas, Including caslngheadgas or other gaseous substance produced from said land and sold or used off the premises or in the manufacture of gaso- line or other product therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale; and (c) on all other minerals mined and marketed, one-eighth,either In kind or value, at the well or mine, at Lesseets election, except that on sulphur the royalty shall be One Dollar ($1.00) per long ton. * . . Hon. Bascom Ciles - Page 3 - V-662 "8. Lessee does hereby agree, bind, and obligate itself to pay to Lessor; ,or to the credit of Lessor in the Corpus Chrlsti Hational Dank at Corpus Christi, Texas> (which bank and its successors, arc Lessor's agent and shall continues as the depositoryhereunder regardless of ehangea 3.nthe ownershl~ of ,saidland or.the~,pay;: mcnts hereunder7 the sum of Forty-@qcc ':'~,l' 1" "' Thousand One Hundred Twen -twoDell&z!s "', and five cents ($43,122,05"g upon the be- ' livery of this lease, and on or before the' 23rd day of April, 1942, and on or,befere the 23rd day of April of each year there-~- after up to and.includingthe 23rd day oi' April, 1950, in like manner pay to Lessor, er tomLessor's credit in said depository bank Amy annual payment of Thirty Four Thousand Feur -HundredHinety-sevenDollars and six~+feur cents ($34,497.64). Such payments are to be the minimum royaltiespayable under this lease, The said payments may be made by cheek or draSt of Lessee mailed or delivered to Lessor,nor said bank, on or before eaah date of payment. Lessee shall alao'malce the payments due ;hk State of Texas eonthe mineral classifiedland as more Sully~set out in Paragraph 21 hereof. ~"9. It Is expressly agreed that should Lessee produce 011, gas, OF other mineral from the leased premises during the primary term, Lessee shall have the right and is hereby expressly authorized to appropriateand be the ouner of all the royalties provided for In Paragraph 7 sb@Oe accr&xg or to accrue under the tern@ a&d provisienahereof durin@;the year iaane& iately succeeding each annual minimum 'poyaltypayment due date, beginning pith April 23, 1942, until such royalties amount in value to the minimum royalty paid under Paragraph 8 for such year; it being the intention that this right QS Lessee to reimbursementis only the right to appropriatethe royalties accruing Hon. Bascom Giles - Page 4 - v-662 under the provisions of Paragraph 7 of this lease in any such year until they have In value equalled the minimum roy- alty paid under the provisions of Para- graph 8 for that year, Lessee having no right where the royalties paid under the provisions of Paragraph 7 during any such year exceed in value the minImum royal paid under the provisions of Paragraph3 for that year to apply the excess to the mhdmum royalty to be paid under the pro- visions of Paragraph 8 above for any other year where the royalties to be paid under the provisions of Paragraph 7 above have not been sufficient to repay such mlni- mum royalty, the purpose being to allow Lessee to reduce or to repay fully, as far as the amount of royalties payable un- der the provisions of Paragraph 7 hereof ~111 permit, the minimum royalty payable under the provisions of Paragraph 8 here- of for any such year with royalties accru- ing under the provisions of Paragraph 7 hereof during such year and not otherwise. Lessee shall have a lien on such royalties to secure Its reimbursementas limited by the provisions above. "10. Either before or after the ex- piration of the primary term of this lease, Lessee may at any time, and as often as it may elect, execute to the Lessor a record- able instrumentand deliver to the Lessor or to the depository designatedherein, or file for record In Jim Hogg County, Texas, a release or releases covering any portion or portions of the land then covered by this lease and thereby surrender this lease as to such portion or portions and be relieved of all obligationsas to the acreage surren- dered; provided, however, that no release shall relieve Lessee of its duty and obllga- tion to pay the minimum royalty installments as provided fn Paragraph 8 hereof exactly in accordance with the provisions of said Paragraph 8, subject only to Lessee's limi- Hon. Dascom Giles - Page 5 - v-662 ted right to appropriate the royalties accruing under the provisions of Para- graph 7 hereof by way of retibursement of minimum royalties payable under the provisions of Paragraph 8 hereof in the manner and under the circumstancesonly as provided in Paragraph 9 hereof. . . . "21. Of the lands covered by this lease, Section 210, Certificate105, John R. Gibson, containing640 acres, Section 212, Certificate24, C.C.S.D. & R.G.N.G. RY. Co., containing640 acres, Section 276, Certificate229 C.C.S.D. & R.G.N.G. Ry. Co., containing 640 acres, and sec- tlon 901, Certificate1604, J.G. EiIason, containing481 acres, were sold by the State of Texas with 8 mineral reservation. As to such lands Lessor acts lnd$vldually and as agent for the State of Texas. Lessee Is authorized and instructed to pay to the State of Texas fifty cents per acre on such mineral classifiedland, or a total of Twelve Hundred Dollars Fifty Cents ($l2OO.50),when this lease is executed and delivered and to pay to the State of Texas forty cents per acre on such mineral classified land, or a total of Nine Hundred Sixty Dollars forty cents ($960.40) on or before the 23rd day of April, 1942, and on or before the 23rd day of April of each year thereafteras long as minimum royalty payments are made in accordancewith Para- graph 8 of this lease." It is evident from the quoted provisions,and especially from Paragraph 10, that Lessee has abaolute- ly obligated Itself to pay the so-calledlninimumroy- alty provided for in Paragraph 8. It is also evident that the duration of the lease during its primazy term is In no way dependent upon these payments. For all practical purposes, the lease is a lo-vear "paid uprl lease. The benefits accruing to the State and Land- Hon. Bascom Giles - Page 6 - v-662 owner under a RelinquishmentAct lease are dls- cussed by R. W. Yarborough, former Assistant At- torney General, in a letter dated August 10, 1933, addressed to J. H, Walker, then Land CommissXoner, uherein It was said: "Followingthe Empire case, the Supreme Court of Texas has re-announcedthe rule In Lemar v. Garner/50 S.W. (28) 769, at page 773, In the followingwords: "'This holding of the Court of Civil Appeals conflictswith the holding of the Supreme Court In the following cases: Greene v. Robinson, supra; Em- pire Gas & Fuel Co. et al v. State, 47 S. W. (2d) 265, not yet recorded (In State report). It was held in those cases that the RelinquishmentAct authorized the 011 and gas to be sold retaining to the State as a minimum l/16 of all gas and minerals as royalty and 10 cents per acre per annum and l/2 of all amounts received by the owner over and above the fore- going amounts. In other words, it logl- tally follows that, by the language used in this act, as construed by the Supreme Court, the state Is to receive as a mln- lmum for the sale of the gas and oil l/16 of all gas and minerals as royalty and 10 cents per acre per annum as rental, and all amounts received over and above the foregoing amounts shall be equally divided- l/2 to be received by the state and l/2 to be received by the owner of the land for his services in making the lease as the agent of the state during the term of the lease.' "We construe the opinion of the Supreme Court to mean that the initial cash payment made at the execution of the lease is di- vided equally between the State and the landowner. If no subsequentlease rental be stlpulated,the State receives 104 per Hon. Bascom Giles - Page 7- v-662 acre . per - _ annum. If an annual lease rental oe expressly stipulated,the State and the landowner share equally, provided the State's share be not less, than lO# per acre per annum. l'nSigur- ing the annual rental installmentsof 104 per acre, the Initial bonus is not to be considered,but the initial bonus must be split 50-50 at the ttie of the execution of the lease." The lease under considerationin that letter was a LO-year paid up lease. The question was whether the 10 cent minimum payment required by the Relinquish- ment Act should be deducted from the State's share of the bonus, and It was decided that the payment should be made in all events and should not be deducted. As was clearly held in the Empire case and in Lemar v. Garner, cited fn the foregoing letter, one-half of all amounts received for the lease, over and above royalty, and the 10 cent mix&man Payment, go to&e State. Actual production and payment of royalty thereon will not abate the 10 cent payment, which must be paid to the State throughout the life of the lease and is in addition to the sums received by the State as rovalts from the oil and gas nroduced. Artl- cle 5368; N&a&o Oil Co. v. Cross; 162 S-W, (2) 677, 679, Corn.App. 1942, opinion adopted Supreme Court. This is in keeping with your departmentalconstruction of the Act. From the foregoing, it is evident that the 10 cent per acre per annum minimum payment required by the RelinquishmentAct must be made irrespective of production and even though the lease contains no delay rental provlsfon. For these reasons, the pay- ment is unlike the usual delay rental payment and par- takes more of the nature of ordinary rent. Texas Jurisprudence,Vol. 31a, page 826 citing Commission- er of Internal Revenue v. Wflson [CCA, 5th X935), 76 Fed. (2) 766, says that: "Delay rentals OR oil and gas are rents. They accrue by the mere lapse of time like any other rent, e e While having some like- Eon. Bascom Giles - Page 8 - v-662 ness to a bonus payment, the delay rental Is not directly or Indirectly fop oil to be produced, but is for additional time to utilize the land." For the purpose of classificationand analzsls, the 10 cent payment must be classlffed as rental” as distinguishedfrom "bonus" or "royalty." The terms "bonus" and "royalty"are discussed In State National Bank of Corpus Christ1 %.', 143 S W (2) 737~ i-60 Corn.App. 1940 on adoDted bv ihe SuDr&e Co&t. wherein the' following definitionwas approved: 'Bonus is merely a convenient term applied indlscrimlnately to considerationfor the lease (whetherIn money or oil) over and above the usual royalty." It would seem that the mlnimum royalty payments under Investigationconstituteadditional considerationover and above the usual and customary royalty which in Sheppard v. Stanolind Oil & Gas it refused) is and gas or its value when produced. If an oil payment, payable out of a fractionalpart of production, is bonus, as was held in State Nat'1 Bank of Corpus Christ3 g&g,‘R$ then a payment absolutely to be made e rdmam term would doubtless also be bonus: The-fact that the parties to the lease dezle;z- nate the payment royalty does not make It so. National Bank of Corpus Christ1 v. Morgan. - Treating the payments under consideration as "royalty",if the 10 cent payment is required even though the lease Is producing,why should the payment abate if the "royalty" is paid In cash In advance of production? If the payments are "bonus", they fall with- In the category of 'otherpayments" which according to the Empire case are to go one-half to the State and one-half to the landowner and in addition to which the State is to receive royalty and 10 cents per acre per annum. Hon. Rascom Gfles - Page 9 - v-662 Whether the payments under consideration be *royalty"or "bonus they are not "rental" since they do not become due iy mere lapse of time, but are simply payable over a 10 year peridd,nor do they permit lessee an additional time within which to utilize the land. Although payable annually, they are absolute obligationsand their payment or non-payment has no effect upon the prQaary term of the lease. Whatever the technical defi- nition of the 10 cent minimum payment, it is clear to us that the payment is a form of rent and as such Is to be distinguishedfrom bonus and royalty as these terms are ordinarilyunderstood and de- fined. It is equally clear that the minimum roy- alty payments under considerationdo not constitute, in any respect, a form of rent, and, In our opinion, their payment will not satisfy the 10 cent payment required by the RelinquishmentAct. Any other constructionof the lease would permit the lessee and landowner to do by lndirec- tlon what otherwise could not be done. Under an ordinary paid up lease, the 3.0cent Payment must be made. The lease under considerationis 3~ all material respects "paid up." A lessee and land- owner have the right to adopt thls type of lease as being better suited to their individual situa- tions. They should not, however, be allowed to have a lease by the terms of which all of the benefits of a paid up lease are secured to them and at the same time effect a saving at the expense of the State. We cannot construe the RelinquishmentAct as so extending the scope of the landowner'sagency. The annual payment of 10 cents an acre required by the Relinquishment Act (Art. 5368, V.C.S.) applies to a lease by a landowner providing for a "minimum royalty" in a fixed amount pay- able annually over a ten year period. Such a lease is in legal effect a.pald Hon. Bascom Glles - Page IO- v-662 up 10 year lease and the 10 cent per acre statutory payment is due the State in addition to one-half of the cash considerationand one- half of the royalties. Yours very truly A!PTORNEXGENERALOFTEXAS HDP:bt Assistant