THEA~TORNEYGENEEZAIL 

OFTEXAS 

AUSTIN, TEXAS 

PRICE DANIEL 

A-P- owAugust 20, 1948 

Hon. Bascom Glles, Commissioner 

Qeneral Land Office 

Austin, Texas 

Opinion NO. v-662 

Re: Relinquishment Act - 

Ten Cent per acre per 

annum minimum payment. 

Dear Sir: 

Your letter of Hay 26, 1948, furnishes for 

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 contains no delay 

rental provision but does provide for annual payments 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 Relinquishment Act, 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 following provisions 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 dlscovery 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 paying quantities on the leases prelnises duking the pr?.mary term, Lessee agrees to reasonably 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 expressly provided 

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 Paragraphs 8 

hereof, are: (a) 

and 9 

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 

caslnghead gas or other gaseous substance 

produced from said land and sold or used off 

the premises or in the manufacture of gasoline 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 

depository hereunder regardless of ehangea 

3.n the ownershl~ of ,said land or. the~,pay;: 

mcnts hereunder 7 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.including the 23rd day oi' 

April, 1950, in like manner pay to Lessor, er 

tom Lessor's credit in said depository bank Amy 

annual payment of Thirty Four Thousand Feur 

-Hundred Hinety-seven Dollars and six~+feur 

cents ($34,497.64). Such payments are to be 

the minimum royalties payable 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 eon the 

mineral classified land 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 appropriate and be the ouner of all the 

royalties provided for In Paragraph 7 sb@Oe 

accr&xg or to accrue under the tern@ a&d 

provisiena hereof durin@; the year iaane& 

iately succeeding each annual minimum 

'poyalty payment 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 reimbursement is only the right 

to appropriate the 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 royalty paid under the provisions of Paragraph 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 Paragraph 3 

for that year to apply the excess to the 

mhdmum royalty to be paid under the provisions 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 mlnimum royalty, the purpose being to allow 

Lessee to reduce or to repay fully, as 

far as the amount of royalties payable under the provisions of Paragraph 7 hereof 

~111 permit, the minimum royalty payable 

under the provisions of Paragraph 8 hereof for any such year with royalties accruing under the provisions of Paragraph 7 

hereof during such year and not otherwise. 

Lessee shall have a lien on such royalties 

to secure Its reimbursement as limited by 

the provisions above. 

"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 instrument and deliver to the Lessor 

or to the depository designated herein, 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 obligations as 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 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 Paragraph 7 hereof by way of retibursement 

of minimum royalties payable under the 

provisions of Paragraph 8 hereof in the 

manner and under the circumstances only 

as provided in Paragraph 9 hereof. . . . 

"21. Of the lands covered by this 

lease, Section 210, Certificate 105, John 

R. Gibson, containing 640 acres, Section 

212, Certificate 24, C.C.S.D. & R.G.N.G. 

RY. Co., containing 640 acres, Section 

276, Certificate 229 C.C.S.D. & R.G.N.G. 

Ry. Co., containing 640 acres, and sectlon 901, Certificate 1604, J.G. EiIason, 

containing 481 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 classified land, 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 thereafter as long as minimum royalty 

payments are made in accordance with Paragraph 8 of this lease." 

It is evident from the quoted provisions, and 

especially from Paragraph 10, that Lessee has abaolutely obligated Itself to pay the so-called lninimum royalty 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 Relinquishment Act lease are dlscussed by R. W. Yarborough, former Assistant Attorney General, in a letter dated August 10, 1933, 

addressed to J. H, Walker, then Land CommissXoner, 

uherein It was said: 

"Following the Empire case, the Supreme 

Court of Texas has re-announced the rule 

In Lemar v. Garner/50 S.W. (28) 769, at 

page 773, In the following words: 

"'This holding of the Court of Civil 

Appeals conflicts with 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 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 foregoing amounts. In other words, it logltally follows that, by the language used 

in this act, as construed by 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 

foregoing amounts shall be equally dividedl/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 divided equally between the State and the 

landowner. If no subsequent lease rental 

be stlpulated, the State receives 104 per 
Hon. Bascom Giles - Page 

acre per annum. If . - _ rental oe expressly 

7- v-662 

an annual lease 

stipulated, the 

State and the landowner share equally, 

provided the State's share be not less, 

than lO# per acre per annum. l'n Siguring the annual rental installments of 

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 consideration in that letter 

was a LO-year paid up lease. The question was whether 

the 10 cent minimum payment required by the Relinquishment 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. 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 keeping with your departmental construction 

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 production and even though the lease contains no 

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 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 classification and analzsls, 

the 10 cent payment must be classlffed as rental” 

as distinguished from "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 definition was approved: 'Bonus is 

merely a convenient term applied indlscrimlnately 

to consideration for the lease (whether In money 

or oil) over and above the usual royalty." 

It would seem that the mlnimum royalty 

payments under Investigation constitute additional 

consideration over 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 fractional part 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 

bonus: 

e rdmam term would doubtless also be 

nate 

The-fact that the parties to the lease dezle;zthe 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 withIn the category of 'other payments" 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 obligations and their payment 

or non-payment has no effect upon the prQaary 

term of the lease. Whatever the technical definition 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 distinguished from bonus and royalty 

as these terms are ordinarily understood and defined. It is equally clear that the minimum royalty payments under consideration do 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 Relinquishment Act. 

Any other construction of the lease would 

permit the lessee and landowner to do by lndirectlon what otherwise could not be done. Under an 

ordinary paid up lease, the 3.0 cent Payment must 

be made. The lease under consideration is 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 individual situations. 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's agency. 

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 payable 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 consideration and onehalf of the royalties. 

Yours very truly 

A!PTORNEXGENERALOFTEXAS 

HDP:bt 

Assistant