Opinion ID: 1111268
Heading Depth: 1
Heading Rank: 2

Heading: Some Basic Oil & Gas Law

Text: In the objective accessible world, of which the concurring opinion is much enamoured, but which both the concurring and the majority opinions ultimately ignore, the McLeods owned the surface and minerals of the 40 acres. In 1944, the McLeods leased their 40 acres in minerals to Frank Ryba. In 1945, the McLeods conveyed 20 full mineral acres to Thornhill; however, in the typed-in portion of the mineral deed, the McLeods retained the rights to all present and future bonuses and lease rentals. Appurtenant to ownership of minerals is the right to bonuses and delay rentals, along with the right to execute leases. The effect, then, of retaining the rights to bonuses and lease rentals turned what started out to be a mineral conveyance into a royalty deed. The reason this is so is because two of the rights appurtenant to ownership of minerals were retained by the McLeods, bonuses and delay rentals. But what of the right to execute leases? The right to receive bonuses and delay rentals are necessarily appurtenant to the right to execute leases. In order to understand why this is so, it is necessary to understand what a bonus is. A bonus is the cash consideration paid by the lessee for the execution of an oil and gas lease by the mineral owner. 7 Williams & Myers, Oil and Gas Law, Manual of Oil and Gas Terms 80. It is true that the bonus can take some other form than cash  it can be a royalty bonus or overriding royalty reserved to the mineral owner in addition to the usual mineral owner's royalty. But a bonus by any other name is still a bonus, and its purpose is to compensate the mineral owner for executing a lease. Where the majority opinion fails in this case is when it plays a theoretical game of separating the right to execute a lease from the consideration a mineral owner is paid to execute the lease. Here, the majority says that because McLeod, in an instrument which Thornhill drew up, did not expressly retain the right to execute leases on 20 acres, the right went to Thornhill, but McLeod is still entitled to receive the bonuses on any lease Thornhill executes on the other one-half of the mineral estate. Why in the world would Thornhill want the right to execute leases while allowing the McLeods to retain the bonuses from a lease he, Thornhill, executes, when the whole purpose of the bonus is to compensate the lessor for executing the lease? In the objective accessible world, an experienced oil and gas person, as Thornhill was, would not do that unless he, too, were playing games with the inexperienced McLeods. Furthermore, under today's majority opinion, if Thornhill executes a lease on his 20 mineral acres and there is delay in drilling, the delay rentals on Thornhill's lease would also go to the McLeods. Why would Thornhill do that? The point is that the executive right the majority creates today is no more than a legal theory. An executive right unhinged from the bonus is meaningless, because by definition whoever retains the right to execute leases has the right to the resulting bonus. The bonus is nothing more, or nothing less, than consideration paid for executing a lease. Harris v. Griffith, 210 So.2d 629 (Miss. 1968), was infinitely correct, in the real world, when it held that the retention of bonuses and lease rentals justifies an implication to retain the right to execute leases. Harris at 634. It is the only implication that makes any practical sense. Otherwise, both the grantor and the grantee are left with meaningless rights. For example, consider the following two scenarios. If the McLeods are entitled to the entire bonus on the property but have only a right to lease one-half of the property, as is the case under the majority opinion, then the McLeods' interest in the entire bonus is in effect limited to a one-half interest in the bonus if Thornhill should refuse to lease. Why would a grantor in the real world so limit his interest? In scenario two, Thornhill is left with a meaningless right as well. Under the majority opinion, Thornhill is vested with the right to bargain with and contract with a lessee for a lease covering his 20 mineral acres; however, the right to receive the cash bonuses and delay rentals is vested in the McLeods. No matter how hard a bargain Thornhill may drive with the lessee as to cash bonuses and delay rentals, nothing will inure to his benefit, because the bonus and delay rentals go to the McLeods. What can Thornhill do? He could perhaps refuse to bargain for a lease that provides for a cash bonus and delay rentals and instead negotiate for a paid-up lease for an excess royalty. But, Thornhill's duty of good faith and fair dealing to the McLeods under the conveyance dictate that he turn over the excess royalty to the McLeods  a bonus by any other name is still a bonus. So, Thornhill has no personal incentive to drive the hard bargain for a lease. In either scenario, the McLeods are potentially deprived of the very benefits, bonus and rentals, they expressly reserved in the conveyance. The avoidance of these problems formed the underlying rationale in Harris and that rationale did not, nor does not, stand alone in oil and gas jurisprudence. See, e.g., Hudgins v. Lincoln National Life Insurance Co., 144 F. Supp. 192 (E.D.Tex. 1956); McVey v. Hines, 385 P.2d 432 (Okl. 1963); Ledoux v. Voorhies, 222 La. 200, 62 So.2d 273 (1952); Skelly Oil Company v. Cities Service Oil Company, 160 Kan. 226, 160 P.2d 246 (1945). I further point out that Harris is no aberration from our previous decisions on oil and gas questions. In fact, Harris was the first case in which this Court had to decide the precise question of whether or not the right to execute leases follows the right to receive bonus and delay rentals where the conveyance expressly retained in the grantor the bonus and delay rentals but was silent as to the right to execute leases. In deciding the question, the Harris Court applied long established principles of oil and gas law and deed construction. The similarities between this case and Harris are striking. Attached to this opinion is a copy of the conveyance in Harris. A copy of the conveyance from the McLeods to Thornhill, the subject of today's case, is also attached for comparison purposes. The same Mineral Right and Royalty Transfer form was employed in both cases. Considering this form, the Harris Court commented: The parole evidence offered by appellees, as to conversations between Griffith and Payne before execution of the deed, and the inquiries of Griffith concerning the effect of the deed as changed, was not competent. Parol evidence of this nature is not ordinarily admissible in the construction of a mineral deed. Because of the need for a consistent, coherent body of law on this subject, ordinarily such instruments are regarded as unambiguous, and a construction is placed upon them that will best comport with the parties' intention appearing from the instrument itself. Williams & Meyers, Oil & Gas Law, §§ 219.4, 204.10, at 501 (1964). [emphasis added] Harris, 210 So.2d at 633. Furthermore, the Harris Court employed long established principles of contract construction first outlined in Richardson v. Moore, 198 Miss. 741, 749-50, 22 So.2d 494, 495 (1945): (1) the deed must be read in the light of the circumstances surrounding the parties when it was executed; (2) that the construction should be upon the entire instrument, and each word and clause therein should be reconciled and given a meaning, if that can be reasonably done; (3) that the main document and that to which it refers must be construed together; (4) that if the wording of the deed is ambiguous, the practical construction placed thereon by the parties will have much weight in determining the meaning... . Harris at 633. Of the Mineral Right and Royalty Transfer form, the Harris Court stated: This form has been in use in this state for a long time. It is well known that unchanged it has the effect of conveying a fractional interest in the minerals in place. See Ford v. Jones, 226 Miss. 716, 85 So.2d 215 (1956); Gulf Refining Co. v. Harrison, 201 Miss. 294, 28 So.2d 221, 30 So.2d 44, suggestion of error overruled, 201 Miss, 294, 335, 30 So.2d 807 (1947); Cummings v. Midstate Oil Corp., 193 Miss. 675, 9 So.2d 648 (1942). Harris at 633-34. However, the parties to the conveyance in Harris, as in today's case, made changes on the form. They clearly intended to change in a substantial way the effect of the instrument. Harris at 634. Speaking of the parties' intent, the Harris Court noted: Payne, an experienced oil and gas investor, must have been well aware of the significance of the form used, and must have intended material alterations in its effect. In short, the parties were unwilling to use the regular printed form, which would have conveyed to Payne the minerals, including the executive right. Harris at 634. Thornhill, in this case, as was Payne in the Harris case, was an experienced oil and gas investor, and by making the changes in the conveyance form, must have intended at the time the conveyance was executed, to receive a royalty interest. Thus, as Harris pointed out: A non-participating mineral interest is in substance a royalty interest. This deed does not create a non-executive mineral interest, which is defined as the right to royalty and to either bonus or rental, or both, under existing or future leases, the owner of which has no development right and no executive right. Bonus or rental in the present deed were not conveyed. 1 Williams & Meyers, Oil & Gas Law, § 301 at 441 (1964) [emphasis added] Harris at 634. Summarizing, then, the effect of the conveyance, Harris states: The printed granting clause, on its face, conveyed a 1/4 mineral estate. However, when considered along with the non-participating clause ... an intent to make the interest conveyed non-participating is significantly indicated. Moreover, the retention of bonuses and lease rentals under these circumstances justifies the implication of an intent to retain the executive right in the grantor. They are closely and materially related to the executive right. The latter may be separated, but this should be done explicitly. Harris at 634. And then, the Court in Harris hit the nail squarely on the head when it said: The potential difficulties from an opposite approach are illustrated in the instant case. Mesdames Crain and Griffith executed the purported lease on their 1/8 interest to Harris without receiving any bonus, but instead took an overriding royalty. Yet Griffith, clearly entitled under the deed to receive lease bonuses, is deprived of any such benefit under the Harris lease. This is not consistent with a duty of good faith and fair dealing by the owner of the executive right. Harris at 634 [emphasis added]. The Harris Court, then, clearly recognized these potential problems, problems that will now arise under today's majority opinion in the McLeod lease, as discussed above. The cases cited by the majority that led up to the Harris decision construed other limitations on oil and mineral conveyances, but did not address the precise issue before the Harris Court and before us today  does the right to execute leases follow the right to a bonus? It must, by virtue of the plain meaning of a bonus. Harris correctly applied basic concepts of oil and gas law to decide the issue and cannot, therefore, be a case that stands outside our precedent, as the majority claims.