### THEA~TORNEYGENEEZAIL

OFTEXAS
AUSTIN, TEXAS PRICE DANIEL A-P- owAugust 20, 1948

Hon. Bascom Glles, Commissioner Qeneral Land Office Austin,Texas
OpinionNO. 

### v-662

Re: Relinquishment Act - Ten Cent per acre per annum minimum payment.

Dear Sir:

Your letter of Hay 

### 26, 1948, furnishesfor

our consideration

an 011 and gas lease, dated April 23, 1941, for a primary term of 10 years and executed pursuant to the Relinquishment Act (Arts. 5367 and 

### 5368,V. C. S.). The lease containsno delay rental provisionbut does provide for annual payments which are designated "minimumroyalty." The State received one-half of the amount paid when the lease was executedand has received one-halfof all minimum royaltypaymentswhfch have been made to date. All of the land coveredby the lease is not subject to the Relinquishment Act, but as to the land which Is subject to such act, the State and landownerhave shared equally in all amounts so far received. You request opinion as to whether the annual minimum royaltypaymentsprovided 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 followingprovisionsof 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 maintenanceor cessationof production,or to the dlscovery or nondiscoveryduring this primary term of oil, gas, or other mineral on the leased premises;but if and whenever oil, gas or other mineral is discoveredin paying quantitieson the leasesprelnisesduking the pr?.mary

term, Lessee agrees to reasonablydevelop the area thereon capable of producingoil, gas, or other mineral in paying quantities,and shall at all times protect the leased premises from drainage by wells on adjacentproperty In the manner and to the extent that a reasonablyprudent operatorwould under the same or similar circumstances. Except as expresslyprovided herein, Lessee shall not be under any obllgation during the primary term to drill or develop the premises against its will.

. . .
"7. !Che

royalties to be aid by Lessee, subject to Paragraphs8 hereof, are: (a) and 

### 9
on oil, one-eighthof that produced and saved from said land, the
same to be deliveredat 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 manufactureof gasoline or other product therefrom,the market value at the well of one-eighthof 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 mineralsmined 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 ChrlstiHationalDank at Corpus Christi, Texas > (whichbank and its successors, arc Lessor's agent and shall continues as the depositoryhereunderregardlessof ehangea 3.n the ownershl~of ,said land or.

the~,pay;: mcnts hereunder the sum of Forty-@qcc ': '~, l' 1" "' 7 Thousand One Hundred Twen -twoDell&z!s "', and five cents ($43,122,05 upon the be- ' "g 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 tom Lessor's credit in said depositorybank Amy annual payment of Thirty Four ThousandFeur -Hundred

Hinety-seven

Dollars and six~+feur cents ($34,497.64). Such payments are to be the minimum royaltiespayable under this lease, The said paymentsmay be made by cheek or draSt of Lessee mailed or delivered to Lessor,

norsaid bank, on or before eaah date of payment. Lessee shall alao'malce the paymentsdue ;hk State of Texas eonthe mineral classifiedland as more Sully~set out in Paragraph21 hereof.

~"9. It Is expresslyagreed that should Lessee produce 011, gas, OF other mineral from the leased premisesduring the primary term, Lessee shall have the right and is hereby expresslyauthorized to appropriateand be the ouner of all the royaltiesprovided for In Paragraph7 sb@Oe accr&xg or to accrue under the tern@ a&d provisienahereof durin@; the year iaane& iately succeedingeach annual minimum 'poyalty

payment due date, beginningpith April 23, 1942, until such royalties amount in value to the minimum royalty paid under Paragraph8 for such year; it being the intentionthat this right QS Lessee to reimbursement is only the right to appropriatethe royaltiesaccruingHon. Bascom Giles - Page 4 - v-662

under the provisionsof Paragraph7 of this lease in any such year until they have In value equalled the minimum royalty paid under the provisionsof Paragraph 8 for that year, Lessee having no right where the royaltiespaid under the provisionsof Paragraph7 during any such year exceed in value the minImum royal paid under the provisionsof Paragraph 3 for that year to apply the excess to the mhdmum royalty to be paid under the provisions of Paragraph8 above for any other year where the royaltiesto be paid under the provisionsof Paragraph7 above have not been sufficientto repay such mlnimum royalty, the purpose being to allow Lessee to reduce or to repay fully, as far as the amount of royaltiespayableunder the provisionsof Paragraph7 hereof ~111 permit, the minimum royalty payable under the provisionsof Paragraph8 hereof for any such year with royaltiesaccruing under the provisionsof Paragraph7 hereof during suchyear and not otherwise. Lessee shall have a lien on such royalties to secure Its reimbursement as limitedby the provisionsabove.

"10. Either before or after the expiration of the primary term of this lease, Lessee may at any time, and as often as it may elect, execute to the Lessor a recordable instrumentand deliver to the Lessor
or to the depositorydesignatedherein, or file for record In Jim Hogg County, Texas,
a release or releases coveringany portion
or portions of the land then coveredby this lease and thereby surrenderthis lease as to such portion or portions and be relieved of all obligationsas to the acreage surrendered; provided,however, that no release shall relieve Lessee of its duty and obllgation to pay the minimum royalty installments
as provided fn Paragraph8 hereof exactly in accordancewith the provisionsof said Paragraph8, subject only to Lessee's limi-Hon. Dascom Giles - Page 5 - v-662

ted right to appropriatethe royalties accruing under the provisionsof Paragraph 7 hereof **by** way of retibursement of minimum royaltiespayable under the provisionsof Paragraph8 hereof in the
manner and under the circumstances only
as provided in Paragraph 9 hereof.

. . .
"21. Of the lands coveredby 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 sectlon 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$vldually and as agent for the State of Texas. Lessee Is authorizedand instructedto pay to the State of Texas fifty cents per acre on such mineral classifiedland, or a total of Twelve Hundred Dollars Fifty Cents ($l2OO.50),

when this lease is executed and deliveredand to pay to the State of Texas forty cents per acre on such mineral classifiedland, 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 Paragraph 8 of this lease."

It is evident from the quotedprovisions,and especiallyfrom Paragraph10, that Lessee has abaolutely obligated Itself to pay the so-calledlninimumroyalty provided for in Paragraph 8. It is also evident that the duration of the lease during its primazy term is In no way dependentupon these payments. For all practicalpurposes, the lease is a lo-vear "paiduprl lease.

The benefits accruing to the State and Land-Hon. Bascom Giles - Page 6 - v-662

owner under a Relinquishment Act lease are dlscussed by R. W. Yarborough,formerAssistantAttorney General, in a letter dated August 10, 1933, addressedto 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:

"'Thisholding of the Court of Civil Appeals conflictswith the holding of the Supreme Court In the following cases: Greene v. Robinson, supra; Empire 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 Relinquishment Act authorizedthe 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 foregoing amounts. In other words, it logltally follows that, by the languageused in this act, as construedby the Supreme Court, the state Is to receive as a mlnlmum 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 foregoingamounts shall be equally dividedl/2 to be receivedby the state and l/2 to be receivedby 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 construethe opinion of the Supreme Court to mean that the initial cash payment made at the executionof the lease is divided equallybetween the State and the landowner. If no subsequentlease rental be stlpulated,the State receives 104 perHon. Bascom Giles - Page

acre per annum. If

. -
_ rental oe expressly7- v-662

an annual lease stipulated,the State and the landownershare equally, provided the State's share be not less, than lO# per acre per annum. l'nSiguring the annual rental installmentsof 104 per acre, the Initialbonus is not to be considered,

but the initialbonus must be split 50-50 at the ttie of the executionof the lease."

The lease under consideration in that letter
was a LO-yearpaid up lease. The questionwas whether the 10 cent minimum payment requiredby the Relinquishment Act shouldbe 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 clearlyheld in the Empire case and in Lemar v. Garner, cited fn the foregoingletter, one-halfof all amounts received for the lease, over and above royalty, and the 10 cent mix&man Payment,go to&e State.

Actual productionand payment of royalty thereonwill not abate the 10 cent payment,which must be paid to the State throughoutthe life of the lease and is in addition to the sums receivedby the State as rovalts from the oil and gas nroduced. Artlcle 5368; N&a&o Oil Co. v. Cross; 162 S-W, (2) 677, 679, Corn.

App. 1942, opinion adopted Supreme Court. This is in keepingwith your departmentalconstruction of the Act.

From the foregoing,it is evident that the 10 cent per acre per annum minimum payment required by the Relinquishment Act must be made irrespective of productionand even though the lease containsno delay rental provlsfon. For these reasons, the payment is unlike the usual delay rental payment and partakes more of the nature of ordinary rent. Texas Jurisprudence,

Vol. 31a,page 826 citing Commissioner of InternalRevenue v. Wflson [CCA, 5th X935), 76 Fed. (2) 766, says that: "Delayrentals 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 Indirectlyfop oil to be produced, but is for additionaltime to utilize the land." For the purpose of classification and analzsls, the 10 cent paymentmust be classlffedas rental”

as distinguishedfrom "bonus"or "royalty."

The terms "bonus"and "royalty"are discussed In State NationalBank of Corpus Christ1 %.', 143 S W (2) 737~ i-60 Corn. App. 1940
on adoDted bv ihe SuDr&e Co&t. wherein the' followingdefinitionwas approved: 'Bonus is merely a convenientterm applied indlscrimlnately to considerationfor the lease (whetherIn money or oil) over and above the usual royalty."

It would seem that the mlnimum royalty paymentsunder Investigation constituteadditional consideration

over and above the usual and customary royaltywhich in Sheppardv. StanolindOil & Gas it refused) is and gas or its value when produced. If an oil payment,payable out of a fractional part of production,is bonus,
as was held in State Nat'1 Bank of Corpus Christ3 g&g,‘R$ then a payment absolutelyto be made

bonus: e rdmam term would doubtlessalso be

nate The-fact that the parties to the lease dezle;zthe payment royalty does not make It so. NationalBank of Corpus Christ1 v. Morgan. -

Treating the paymentsunder 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 withIn the categoryof 'other payments"which according to the Empire case are to go one-half to the State and one-half to the landownerand 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 paymentsunder 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,nordo they permit lessee an additionaltime within which to utilize the land. Althoughpayable annually, they are absolute obligationsand their payment
or non-paymenthas no effect upon the prQaary term of the lease. Whatever the technicaldefinition 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 ordinarilyunderstoodand defined. It is equally clear that the minimum royalty paymentsunder consideration do not constitute, in any respect, a form of rent, and, In our opinion, their paymentwill not satisfy the 10 cent payment requiredby the Relinquishment Act.

Any other constructionof the lease would permit the lessee and landowner to do by lndirectlon what otherwise could not be done. Under an ordinarypaid up lease, the 3.0 cent Paymentmust be made. The lease under considerationis 3~ all material respects "paid up." A lessee and landowner have the right to adopt thls type of lease
as being better suited to their individualsituations. 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 Relinquishment Act as so extending the scope of the landowner'sagency.

The annual payment of 10 cents
an acre requiredby the Relinquishment Act (Art. 5368, V.C.S.) applies to a lease by a landownerproviding for a "minimumroyalty" in a fixed amount payable annually over a ten year period. Such a lease is in legal effect a.paldHon. Bascom Glles - Page IO- v-662

up 10 year lease and the 10 cent per acre statutorypayment is due the State in addition to one-half of the cash consideration and onehalf of the royalties.

Yours very truly

A!PTORNEXGENERALOFTEXAS

HDP:bt

Assistant