Untitled Texas Attorney General Opinion ( 1948 )

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