The Life Estate in Texas. A good idea that often goes wrong.

Just as title to land cannot be abandoned, there can be no gap in the perpetual ownership of the land. Thus, whenever an interest in land ownership may not be capable of perpetual duration, such "Present" Interest must be subject to ascertainable ownership of the "Future" Interest. By far the most common occurrence of successive ownership is when the land ownership is divided between a Life Estate, followed by a Remainderman and creates two special complications where mineral rights are involved:

* Which owner(s) -- if any -- can authorize development?

* To whom are the various payments arising under an Oil & Gas Lease (or the revenues generated by personal development) to be paid?

A thoughtfully-drawn will or deed provision will solve all this by providing:

(i) who has the power to lease (or personally develop);

(ii) how long the lease may last (i.e., would it survive termination of the present interest,
if it is the Present Interest holder who is authorized to lease/develop); and

(iii) how bonus, delay rentals and royalties are to be divided between the Present and Future Interest
holders.

In most instances, and particularly where a spousal Life Estate is involved, permitting the Life Tenant to lease (with such lease having the potential to survive the death of the Life Tenant) and to receive all payments generated during the spouse's life time, including royalties, will best suit the needs, intentions and expectations of the family members.

If the document creating the Life Estate did not adequately set forth the sharing of revenues, there is a great body of law in Texas that has evolved concerning this situation. Unfortunately, the body of law does not necessarily best suit the needs nor intentions of what was wanted to be created.

The Open Mine Doctrine has to do with the sharing of proceeds from an oil and gas lease, which must be considered as to determining who owns or controls what portion of production.

The Open Mine Doctrine relating to oil and gas production may be summarized as:

a. If there was a producing well or wells in existence when the life estate was created, the life tenant will continue to receive all of the royalty from the wells, and the remaindermen will take nothing until termination of the life estate.

b. If there was no producing well on the property, and it was not subject to an oil and gas lease when the life estate was created, the life tenant is not entitled to royalty on any new lease, but is allowed to “use” the royalty for life. This usually means the life tenant’s royalty share is held in trust and the tenant receives the interest earned from the royalty (“banking” interest). On the death of the life tenant, the remaindermen is entitled to all of the accrued royalty income.

c. If a lease was taken prior to the creation of a life estate, and production was developed after the creation of the life estate, the Open Mine Doctrine is applied. The life tenant gets all of the royalty for life.

If the mine was not open at the time of the creation of the Life Estate, and the Remaindermen do not ratify the lease, then the lease will terminate on the death of the Life Tenant, unless the document creating the life estate specifically states that any lease granted by the life tenant will NOT terminate on the death of the life tenant and the remaindermen are specifically subject to the lease.

If the owner of the Life estate is a trust then some special circumstances could apply. Where a trust is involved, local trust acts, or the state's version of the Uniform Principal and Interest Act, may dictate how monies are to be divided between the Life Tenant and Remainderman (e.g., 72-½% to the Life Tenant and 27-½% to the Remainderman).

As so often happens, what Dad wanted to create was not what actually happened, due to poorly or carelessly drafted agreements.

R. D. Cotten

www.cottenoilproperties.com