1 IN THE SUPREME COURT OF THE STATE OF KANSAS

N o

. 109,297

L ARRY N ETAHLA and J ANET N ETAHLA C URTIS , Appe l l ants ,

v

.
M IKE N ETAHLA and D EBRA F RANCIS , Appell ees

.

SYLLABUS BY THE COUR T

On the facts of this case, a "subject to" clause in a mineral deed referring to a preexisting lease does not extend the term of the deed beyond its original 15 years. The payment of shut

- in royalties pursuant to the lease was not the equivalent of actual production or development necessary to perpetuate the deed.

Review of the judgment of the Court of Appeals in 49 Kan. App. 2d 396 , 307 P.3d 269 ( 2013 )

. Appeal from Sumner District C ourt; W ILLIAM R. M OTT , judge. Opinion filed April 10 , 2015. Jud gment of the Court of Appeals affirming the district court is reversed

. Judgment of the d istrict c ourt is reversed

.

Tyson R. Eisenhauer
, of Johnston Eisenhauer & Eisenhauer, LLC, of Pratt , argued the cause and
Robert R. Eisenhauer , of the same firm, w as on the briefs for appellant s

.

Gordon B. Stull
, of Stull & Beverlin, LLC, of Pratt, argued the cause
, and Josh V.C. Nicolay , of the same firm, was with him on the briefs for appellee s

.

The opinion of the court was delivered by

B EIER , J.: This appeal arises out of a dispute over whether the mineral interest conveyed by a 1970 mineral deed terminated after 15 years, despite its recitation that it2 was "subject to" a continuing oil and gas lease covering the same property. We hold that
the min eral deed terminated and thus reverse the district court and the Court of Appeals.

F ACTUAL AND P ROCEDURAL B ACKGROUND

Plaintiffs

- appellants Larry Netahla and Janet Netahla Curtis are the sole heirs of
Joe and Rose Netahla , the grantors

. Defendants

- a ppelle es Mike Netahla and Debra
Francis are the sole heirs of Frank Netahla , the grantee.

On November 24, 1969, g rantor s and Mack Oil Company entered into an oil and gas lease covering the property. The lease state d , in pertinent part:

"2. Subject to the provi sions herein contained, this lease shall remain in force for a term of five (5) years from this date (called 'primary term') and as long thereafter as oil, liquid hydrocarbons, gas or other respective constituent products, or any of them, is produced from said land or land with which said land is pooled.

"3.

. . . [A]t any time either before or after the expiration of the primary term of this lease, if there is a gas well or wells on the above land .

. . and such well or wells are
shut in before or after production therefrom, les s ee or any assignee hereunder may pay or tender annually at the end of each yearly period during which such gas well or gas wells are shut in, as substitute gas royalty, a sum equal to the amount of delay rentals provided
for in th is lease for the acreage then held under this lease by the party making such payments or tenders, and if such payments or tenders are made it shall be considered under all provisions of this lease that gas is being produced from the leased premises in payi ng quantities."

Less than 7 months later, g rantor s entered into a "Sale of Oil and Gas Royalty
, "
i.e. , a m ineral d eed , covering the same property. They conveyed to g rantee:3 "an undivided one

- half interest in and to all of the oil gas and other minerals i n and under, and that may be produced from [description of land], together with the right of ingress and egress at all times for the purpose of mining, drilling and exploring said lands for oil, gas, and other minerals and removing the same therefrom, with the right at any time to remove any or all equi pment in connection therewith."

The document also contained the following clause, which addresse d the existing lease agreement.

"Said land being now under an oil and gas lease executed in favor of, as appea rs of record, it is understood and agreed that this sale is made subject to the terms of said
lease , but covers and includes one

- half of all the oil royalty, and gas rental or royalty due and to be paid under the terms of said lease.

" It is understood and agreed that one

- half of the money rentals which may be paid to extend the term within which a well may be begun under the terms of said lease is to be paid to the said Grantee and in the event that the above described lease for any
reason becomes cancelle d or forfeited then and in the event an undivided one

- half of the lease interests and all future rentals and bonuses on said land for oil, gas and other mineral privileges shall be owned by the said Grantee Frank Netahla owning one

- half of all oil, gas, an d other minerals in and under said lands, together with one

- half interest in
all future events. " (Emphasis added.)

The mineral deed concluded with the following limitation on the conveyance:

"TO HAVE AND TO HOLD the above described property, together with all and singular the rights, appurtenance thereto in anywise belonging unto the said Grantee, herein, his heirs and assigns for a period of the next 15 years from June 1, 1970 and as long thereafter as oil and /or gas is produced from these premises or the property is being developed or operated and grantor s do hereby bind themselves, their heirs, executors and administrators to warrant and forever defend all and singular the said property unto said Grantee herein, his heirs and assigns, against every person4 whomsoever lawfully claiming or to claim the same or any part thereof, and agree that the Grantee shall have the right at any time to redeem for Grantors by payment, any mortgage, taxes or other items on the above described lands, in the event of default of payment by Grantors, and be subrogated to the rights of the holder thereof." (Emphasis added.)

A n affidavit of production was executed on December 3, 1970, s tating that a well capable of producing oil or gas had been drilled on the property. The well was later
declared a shut

- in gas well, and no oil or gas was produced from it from June 1, 1985, until 2003. In 2003, Vess Oil Corporation took over the operation of the lease and began

to pro duce oil or gas from the well.

In August of 2012, plaintiffs filed the declaratory judgment petition underlying this appeal. They sought a declaration that the r oyalty interest held by defendants had
terminated. The district court judge granted the de fendants' motion for summary judgment, declaring that the mineral interest remained " in full force and effect."

On appeal, a panel of the Court of Appeals affirmed , concluding:

" B ecause the Mineral Deed specifically states that it is subject to the terms of the oil and gas lease which was already in effect, and the landowner, or Grantor, was a party to both the lease and the mineral deed which were entered within a few months of each other, we find the parties intended that they be read together. " Netahla v. Netahla , 49 Kan. App . 2d 396, 402 , 307 P.3d 269 (2013)

.

T he panel further held that "production" as defined in the lease was the same as "production " as defined in the m ineral d eed ; thus "production" could either be actual or constructive. 49 Kan. App . 2d at 402. As a result, "the determinable fee mineral interest created from the Mineral Deed would also extend beyond its primary term through constructive production." 49 Kan. App. 2d at 402.5 D ISCUSSION

Our review of a district judge's ruling on a motion for summary judgment is "de novo as a question of law, granting no deference to the district court's judgment." Cady v.
Schroll , 298 Kan. 731, 734, 317 P.3d 90 (2014). In this case, resolution of the issu e requires us to interpret two written instruments
, the lease and the mineral deed. " The interpretation and legal effect of a written instrument is a matter of law over which an appellate court exercises unlimited review ." Hamel v. Hamel , 296 Kan. 1060, Sy l. ¶ 2
, 299 P.3d 278 (2013).

Defendants argue that "constructive production, via the shut

- in provisions of the Lease, .

. . perpetuate[s] the Sale of Oil and Gas Royalty's term interest" because the "subject to" clause in the mineral deed incorporate s the lease's shut

- in royalty provision

. Plaintiffs, on the other hand, argue that the " subject to " clause is not an incorporation provision. Rather, the "purpose of the 'subject to' clause is to protect the gra ntor from breach of warranty."

Generally, "[t]he event which perpetuates the term of the mineral interest must be found in the instrument creating it." Classen v. Fed eral Land Bank of Wichita , 228 Kan.
426 , Syl. ¶ 4, 617 P.2d 1255 (1980) . " A deed or other instrument conveying oil and gas in place for a f ixed term of years and so long thereafter as oil and/or gas is being produced from the property or the property is being developed or operated creates a base or
determinable fee ." 228 Kan. 426, Syl. ¶ 3.

This court has previously addressed similar languag e in an other mineral deed.6 In Dewell v. Federal Land Bank , 191 Kan. 258, 258

- 59, 380 P.2d 379 (1963), the landowner conveyed fee simple title to a tract of land by warranty deed but reserved "an
undivided one

- half interest in the minerals for a term of twenty years .

. . and 'so long thereafter as oil, gas and/o r other minerals or any of them are produced therefrom, or the premises are being developed or operated.'" After that conveyance, both the grantor and grantee exe cuted oil and gas leases covering their one

- half interest in the land for a primary term of 10 years "with the usual contingency for perpetuation by production, a
shut

- in royalty clause, and a provision for unitization." 191 Kan. at 259. After the leases had been entered into, a well was completed ; an affidavit of production was filed ; and
then shu t

- in royalty payments were made by the lessee and accepted by both lessors.

The issue in Dewell was whether "the payment of shut

- in royalty was the equivalent of 'being produced or developed' as the term is used in the mineral reservation for the purpose of extending the primary term." 191 Kan. at 260. The parties "conceded that the reserved mineral interest would have expired by its terms .

. . in the absence of production." 191 Kan. at 260. The Dewell grantor contended "that the mineral reservation
and the separate oil and gas leases executed by the appellant and appellee should be construed together for the purpose of determining the intent of the parties," citing

"authority to the effect that where two or more instruments are executed by the same

par ties contemporaneously or at different times in the course of the same transaction and concern the same subject matter, they are to be construed together if doubt is entertained as to the intent of the parties." 191 Kan. at 261.

This court rejected the a rgument because "[t]he instruments were not executed by the same parties." 191 Kan. at 261.7 T he court noted that

" [t] he shut

- in royalty clause contained in the leases was for the sole benefit of the lessee. It is a privilege granted the lessee in lieu of production. It does not purport to convey any estate or rights to anyone else. Neither does it purport to extend the interest of the holders of the mineral rights." 191 Kan. at 261.

The court also noted that

"' [i] t is well settled in this jurisdiction that when a mineral deed has terminated because of failure to produce oil or gas, the court will not extend the term or revive rights which the parties themselves have definitely fixed by their contract .

. . and when a mineral deed
has terminated because of cessation of production, it is not revived by subsequent production of oil even though it be in the same well. ' " 191 Kan. at 261 (quoting Wagner v. Sunray Mid

- Continent Oil Co. , 182 Kan. 81, 318 P.2d 1039 [1957]).

The court concluded:

" The owner of a defeasance mineral interest cannot change the conditions by which the interest is to continue beyond the primary term, by any provision in an oil and gas lease to which the landowner is not a party.

" The payment of shut

- in royalty is not the equivalent o f ' production ' or 'being developed or operated.' As the land was not being produced, developed or operated, the mineral interest was not perpetuated or extended beyond the primary term. " Dewell , 191
Kan. at 263.

Th e case before us today differs from Dewell because the lease here was entered
into before the m ineral d eed , and d efendants urge us to rely on this factual distinction to hold that the "subject to" clause in this case did function as an incorporation clause. We8 decline to do so, finding suppo rt in two Texas decisions in circumstances materially
identical to those here.

In Kokernot v. Caldwell , 231 S.W.2d 528 , 528

- 29 (Tex. Civ. App. 1950), an oil and gas lease conveyed a mineral interest "for a period of five years 'and as long
thereafter as o il or gas, or either of them is produced from said land by the lessee.'" After
the lease was signed, the owner of the land conveyed an interest in the minerals by mineral deed "for a period of 20 years an undivided one

- half interest in and to all of the
oi l, gas and other minerals, in and under, and that may be produced from the following
described land .

. . ." 231 S.W.2d at 529. The mineral deed also contained a " subject to "
clause
, which stated: "' [I] t is understood and agreed that this sale is made sub ject to the terms of said lease, but covers and includes one

- half of all of the oil royalty, and gas rental or royalty due and to be paid under the terms of said lease.'" 231 S.W.2d at 529. At
the end of the 20

- year term, a dispute arose over rights to the lease royalties.

The Kokernot grantees made several arguments to support a continuation of their royalty interest past the 20

- year term.

Their first argument asserted that

" the mineral rights created and conveyed to them by the amended mineral deed consisted of two separate and distinct estates, first, a one

- half mineral estate in the land described

. . . for a definite term of 20 years .

. . and, second an interest in one

- half of the royalty
under the .

. . lease which exists so long as oil, gas and minerals are produced under said lease according to its terms." 231 S.W. 2d at 530

- 31

.

S ee Williams & Meyers, Manual of Oil and Gas Terms 1088 (15th ed. 2012) (attributing
"two

- grant theory" to Hoffman v. Ma g nolia Petroleum Co. , 273 S.W. 828 [Tex. Civ

.9 App. 1925], which held "subject to" clause of mineral, royalty deed referring to existing lease may have effect of second grant "so that the grantee will have one interest in production under the existing lease and a different interest in production under future leases").

T he grantees also argued that "the reference to the lease in the royalty deed incorporates in that deed all provisions of the lease , including the term for which the royalty is to continue." (Emphasis added.) 231 S.W. 2d at 530

- 31.

The Ko kernot court rejected both of the grantees' "subject to" argument s , holding
the mineral interests terminated at the e xpiration of 20 year s. 231 S.W.2d at 5 32

- 33. T he
court noted:

" The term 'subject to' as used in the mineral deed has a well recognized meaning.

' The words "subject to," used in their ordinary sense, mean " subordinat e to," "subservient
to" or "limited by." There is nothing in the use of the words "subject to," in their ordinary use, which would even hint at the creation of affirmative rights.' Englestein v. Mintz , 345 Ill. 48, 177 N.E. 746, 752. Shell Oil Co. v. Manley Oil Corporation , 7 Cir., 124 F.2d 714.

"'Subject to,' as used in conveyances, is a term of qualification and not of

contra ct. Cox v. Butts , 48 Okl. 147, 149 P. 1090; Consolidated Coal Co. v. Peers , 166 Ill. 361, 46 N.E. 1105, 38 L.R.A. 624.

" The last part of the paragraph, ' * * *, but covers and includes one

- half of all of the oil royalty, and gas rental or royalty due and t o be paid under the terms of said lease,' is not a part of the granting clause and there is nothing in the granting clause itself which it could supplement. It was necessary to place this paragraph in the deed in order that appellees would be protected und er the general warranty clause; and appellants were entitled (in connection with, and as a part of, the ' subject to ' clause) to assure themselves that they would receive their share of the royalty under the lease to which their mineral interest, recited in the granting clause, entitled them. " Kokernot , 231 S.W.2d at 531

.10 Investors Royalty Co. v. Childrens Hosp ital Med. Ctr. , 364 S.W.2d 779, 780 (Tex. Civ. App. 1963), writ refused n.r.e. (May 8, 1963) , reached the same result when a lease had been entered into before a mineral deed, and the mineral deed contained a " subject

to " clause.

The conveyance in the mineral deed was "for a period of fifteen (15) years from date hereof and as long thereafter as oil, gas or other minerals, or either of them is produced or mined from the lands described herein, in paying or commercial quantities." The lease, in contrast, allowed for the payment of shut

- in royalties to be the equivalent of production. Grantor argued that the "production" referre d to in the mineral deed was actual production, not the constructive production that is the byproduct of payments of
shut

- in royalties. The court agreed.

" When we look to that paragraph, the term royalty deed terminated after fifteen years plus the period of actual production. The shut

- in royalty was paid under the terms of the lease, for a period of thirteen months. During that time there was no actual production. As
we understand Archer County v. Webb , supra, this was not a mere temporary cessation of

ac tual production. " Investors Royalty Co.
, 364 S.W.2d at 78.

The court rejected the grantee's argument that the " subject to " clause conveyed "something more" and relied on Kokernot in doing so. Investors Royalty Co.
, 364 S.W.2d
at 78.

Defendants urge us t o rely instead on Cockrell v. Texas Gulf Sulphur Co. , 157 Tex. 10, 299 S.W.2d 672 (1956)
, as an example of a case in which a " subject to " clause
was viewed as an incorporation clause. We are unpersuaded by Cockrell because its subject conveyances and the i ssues they gave rise to were substantially different from
those before us and from those before the court in the Texas cases discussed above.11 In Cockrell , the owner of a 729.7 acre tract held in fee simple leased the mineral rights to the whole of the la nd. The lease contained an entirety clause, which stated:

"' It is further agreed that all the conditions and terms herein shall extend to the heirs, executors, legal representatives, successors in interest and assigns of the parties hereto; but no change of ownership of the land, or part thereof, shall impose any additional obligations or burden on the Lessee, and to that end Lessors hereby covenant for themselves, their heirs, assigns and successors in interest, that in case of any change of ownership of said land, or part thereof, whether by conveyance, will, inheritance, partition or otherwise, all rentals and royalties accruing hereunder shall be paid to the new owners in proportion to their ownership of the whole of the land hereby leased so
that no o wner of a segregated part of said land shall be entitled to the whole royalties accruing from developments on said segregated tract, but only to such part of such royalty as the acreage in his tract is to the whole acreage embraced in this lease ; this

cove nant shall be taken and construed as a covenant running with the land and binding on
all successors in interests to Lessors herein.'" (Emphasis added.) 157 Tex. at 13.

After the lease was executed, the owner conveyed portions of the mineral and royalt y in terests until she "owned, subject to the outstanding leases, 1/8th of the mineral
fee interest under the west 400 acres of the 729.7 acres and one

- half of the mineral fee
interest on the east 329.7 acres of the tract." 157 Tex. at 12

- 13. The owner of the l and then conveyed the entire 729.7 acre tract by warranty deed to Gulf Production Company. The owner had, however, expressly reserved "'6 1/2 cents per ton .

. . on all sulphur produced and marketed from the West 400 acres ' " and " ' 25 cents per ton .

. . on all sulphur produced and marketed from the East 329.7 acres. ' " 157 Tex. at 13

- 14.

The plaintiff in Cockrell held all the rights that the owner had reserved in the conveyance to Gulf Production. Sulphur had been produced from the west 400 acres, but
the e ast 329.7 acres had been nonproductive. The disputed question was w hether the12 plaintiff was entitled to a royalty based on the entirety clause of the lease or based on the
reservation clause of the deed.

The court began its analysis by noting that "a deed can pass no greater estate than that owned by the grantor" and "that a warranty deed will pass all of the estate owned by the grantor at the time of conveyance unless there are reservations or exceptions which reduce the estate conveyed." 157 Tex. at 15. It then calculated the royalty interest the
owner h eld i n each tract at the time of conveyance to Gulf Production. On the west 400 acres, the owner had conveyed 7/8ths mineral interest and retained 1/8th i nterest. Based on the ownership of the west tract, the owner was entitled to 3.42606551 cents per long ton produced anywhere on the 729.7 acre tract. On the east 329.7 acres, the owner had
retained a 1/2 mineral interest. This entitled her to 11.295737796 cents per long ton produced anywhere on the 729.7 acre tract. T he owner's actual royalty interest w ould
therefore be less than that claimed to be reserved in the mineral deed , but the court observed that it was " clear that [owner] and her grantee could not make a contract for royalty payments which would affect the rights of previous purchasers from [owner], not parties to such contract." 157 Tex. at 16.

The court then addressed three references in the mineral deed ma king its

conveyance "subject to" the existing lease. The grantee argued that the purpose of the

" subject to " clauses w as to protect the owner on her warranty. 157 Tex. at 17. The court rejected this argument, however, because of the particular language relating to the
individ ual "subject to" clauses and the fact that the owner had attempted to reserve a larger royalty interest than she actually owned. 157 Tex. at 17. This allowed the court to give effect to the entirety clause of the lease without completely setting aside the sulfur
reservations made in the deed. 157 Tex. at 17.13 The court concluded:

"Since a 'subject to' clause is a limiting clause, and a qualifying term, Kokernot v.
Caldwell , supra, the entirety clause of the leases and conveyances referred to [owner's]
deed to Gulf Production Company. To hold with the defendants is to hold that a repugnancy exists between the entirety clause in the leases and the reservations in the deed, which results in setting aside the entirety clause. It also is to hold that [owner]

res erved in her deed more royalty than she owned at the time of the conveyance. To hold that the entirety clause limited and qualified the sulphur royalty reserved will give effect to all parts of the deed, and will not be a holding that [owner] attempted to reserve more royalty than she owned. " Cockrell
, 157 Tex. at 17

- 18

.
Although the Cockrell court ostensibly incorporated the lease into the deed, it did
so under circumstances completely distinct from those presented here. And, r ather than dealing with the duration of the mineral interest conveyed in a deed, Cockrell addressed apportionment of royalty interests, which had been specifically restricted by the lease.
The deed in Cockrell attempted to reserve for the owner a larger mineral interest in the
land t han was actually owned , and the court was reluctant to give effect to that
reservation because it would a ffect the rights of third parties whose royalty interests had
been determine d under the lease.

In light of the caselaw cited above, we hold that the " subject to" clause in the
mineral deed here did not incorporate the provisions of the lease

. We therefore look only
at the provisions of the m ineral d eed itself to determine whether defendants' mineral
interest has terminated.

In Dewell
, we established that
, absent a provision in a mineral deed stating otherwise, the payment of shut

- in royalties pursuant to a lease is not the equivalent of
actual production or development. Standing alone, the m ineral de ed at issue here required14 a ctual produc tion for its t erm to perpetuate. Because i t is undisputed that there was no actual production as of June 1, 1985 , the defendants' mineral interest did not continue past its 15

- year term.

C ONCLUSION

Under the authorities and the rationale described above, we reverse the decision of
the Court of Appeals panel and the judgment of the d istrict c ourt.

J OHNSON , J., not participating.
M ICHAEL J. M ALONE , Senior Judge, assigned. 1

1 REPORTER'S NOTE: Senior Judge Malone was appointed to hear case No. 109,297 under the authority vested in the Supreme Court by K.S.A. 20

- 2616 to fill the vacancy on the court created by the appointment of Justice N ancy Moritz to the United States 10th Circuit Court of Appeals.