Case Information
*1 THEA~TORNEYGENEEZAIL OFTEXAS
AUSTIN, TEXAS PRICE DANIEL A-P- ow-
August 20, 1948 Hon. Bascom Glles, Commissioner
Qeneral Land Office
Austin, Texas
Opinion NO.
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 exe- cuted pursuant to the Relinquishment Act (Arts. 5367 and 5368, V. C. S.). The lease contains no delay rental provision but does provide for annual pay- ments 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 -
ment operations, or to maintenance or
cessation of production, or to the dls-
covery 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 pay- ing quantities on the leases prelnises duk- ing the pr?.mary term, Lessee agrees to rea- sonably 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 obll- gation 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 and
hereof, are: (a) 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 gaso- line 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 - 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 the sum of Forty-@qcc ': '~, l' 1" "' 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.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 -
under the provisions of Paragraph 7 of
this lease in any such year until they
have In value equalled the minimum roy-
alty paid under the provisions of Para-
graph 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 pro- visions 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 mlni-
mum royalty, the purpose being to allow
Lessee to reduce or to repay fully, as
far as the amount of royalties payable un- der the provisions of Paragraph 7 hereof ~111 permit, the minimum royalty payable under the provisions of Paragraph 8 here- of for any such year with royalties accru- ing under the provisions of Paragraph
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 ex- piration of the primary term of this lease, Lessee may at any time, and as often as it may elect, execute to the Lessor a record- able 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 surren- dered; provided, however, that no release shall relieve Lessee of its duty and obllga- tion to pay the minimum royalty installments as provided fn Paragraph hereof exactly in accordance with the provisions of said Paragraph 8, subject only to Lessee's limi- *5 Hon. Dascom Giles - Page 5 -
ted right to appropriate the royalties
accruing under the provisions of Para-
graph 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. 640 acres, and sec-
Ry. Co., containing tlon 901, Certificate 1604, J.G. EiIason, containing 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 Para- graph 8 of this lease."
It is evident from the quoted provisions, and especially from Paragraph 10, that Lessee has abaolute- ly obligated Itself to pay the so-called lninimum roy- alty 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- *6 Hon. Bascom Giles - Page -
owner under a Relinquishment Act lease are dls- cussed by R. W. Yarborough, former Assistant At- torney 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; Em-
pire Gas & Fuel Co. et al v. State,
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 fore-
going amounts. In other words, it logl- tally follows that, by the language used in this act, as construed by the Supreme Court, the state Is to receive as a mln- lmum 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 divided- l/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 di- vided equally between the State and the landowner. If no subsequent lease rental be stlpulated, the State receives 104 per *7 Hon. Bascom Giles - Page 7-
acre per annum. If an annual lease . - _ rental oe expressly stipulated, the
State and the landowner share equally,
provided the State's share be not less,
than lO# per acre per annum. l'n Sigur- ing 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 Relinquish- ment 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. Artl- cle 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 pay- ment is unlike the usual delay rental payment and par- takes more of the nature of ordinary rent. Texas Jurisprudence, Vol. 31a, page citing Commission- er of Internal Revenue v. Wflson [CCA, 5th X935), Fed. (2) 766, says "Delay rentals OR oil and that: gas are rents. They accrue by the mere lapse of time like any other rent, e e While having some like- *8 Eon. Bascom Giles - Page 8 -
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 %.', 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 then a payment absolutely to be made g&g,‘R$ e rdmam term would doubtless also be The-fact that the parties to the lease dezle;z- bonus: nate the 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 with- In 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 -
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 defi- nition 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 de- fined. It is equally clear that the minimum roy- alty 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 lndirec- tlon 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 land- owner have the right to adopt thls type of lease as being better suited to their individual situa- tions. 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 pay- able annually over a ten year period. Such a lease is in legal effect a.pald *10 Hon. Bascom Glles - Page IO-
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 one- half of the royalties.
Yours very truly A!PTORNEXGENERALOFTEXAS HDP:bt
Assistant