The opinion of the court was delivered by BEIER, 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 it was "subject to" a continuing oil and gas lease covering the same property. We hold that the mineral deed terminated and thus reverse the district court and the Court of Appeals.
Plaintiffs-appellants Larry Netahla and Janet Netahla Curtis are the sole heirs of Joe and Rose Netahla, the grantors. Defendants-appellees Mike Netahla and Debra Francis are the sole heirs of Frank Netahla, the grantee.
On November 24, 1969, grantors and Mack Oil Company entered into an oil and gas lease covering the property. The lease stated, in pertinent part:
Less than 7 months later, grantors entered into a "Sale of Oil and Gas Royalty," i.e., a mineral deed, covering the same property. They conveyed to grantee:
The document also contained the following clause, which addressed the existing lease agreement.
The mineral deed concluded with the following limitation on the conveyance:
An affidavit of production was executed on December 3, 1970, stating 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 produce 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 royalty interest held by defendants had terminated. The district court judge granted the defendants' 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:
The panel further held that "production" as defined in the lease was the same as "production" as defined in the mineral deed; thus "production" could either be actual or constructive. 49 Kan.App.2d at 402, 307 P.3d 269. 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, 307 P.3d 269.
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 issue 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, Syl. ¶ 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 incorporates 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 grantor from breach of warranty."
Generally, "[t]he event which perpetuates the term of the mineral interest must be found in the instrument creating it."
This court has previously addressed similar language in another mineral deed.
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/or 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 executed 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 shutin royalty clause, and a provision for unitization." 191 Kan. at 259, 380 P.2d 379. After the leases had been entered into, a well was completed; an affidavit of production was filed; and then shut-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, 380 P.2d 379. The parties "conceded that the reserved mineral interest would have expired by its terms ... in the absence of production." 191 Kan. at 260, 380 P.2d 379. 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
This court rejected the argument because "[t]he instruments were not executed by the same parties." 191 Kan. at 261, 380 P.2d 379.
The court noted that
The court also noted that
The court concluded:
The case before us today differs from Dewell because the lease here was entered into before the mineral deed, and defendants urge us to rely on this factual distinction to hold that the "subject to" clause in this case did
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 oil 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 oil, 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 subject 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
See Williams & Meyers, Manual of Oil and Gas Terms 1088 (15th ed.2012) (attributing "two-grant theory" to Hoffman v. Magnolia Petroleum Co., 273 S.W. 828 [Tex.Civ.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").
The 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 Kokernot court rejected both of the grantees' "subject to" arguments, holding the mineral interests terminated at the expiration of 20 years. 231 S.W.2d at 532-33. The court noted:
Investors Royalty Co. v. Childrens Hospital 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 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 shutin royalties to be the equivalent of production. Grantor argued that the "production" referred 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.
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 781.
Defendants urge us to 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 issues they gave rise to were substantially different from those before us and from those before the court in the Texas cases discussed above.
In Cockrell, the owner of a 729.7 acre tract held in fee simple leased the mineral rights to the whole of the land. The lease contained an entirety clause, which stated:
After the lease was executed, the owner conveyed portions of the mineral and royalty interests 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, 299 S.W.2d 672. The owner of the land then conveyed the entire 729.7 acre tract by warranty deed to Gulf Production Company. The owner had, however, expressly reserved "`6½ 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, 299 S.W.2d 672.
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 east 329.7 acres had been nonproductive. The disputed question was whether the 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
The court then addressed three references in the mineral deed making its conveyance "subject to" the existing lease. The grantee argued that the purpose of the "subject to" clauses was to protect the owner on her warranty. 157 Tex. at 17, 299 S.W.2d 672. The court rejected this argument, however, because of the particular language relating to the individual "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, 299 S.W.2d 672. 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, 299 S.W.2d 672.
The court concluded:
Although the Cockrell court ostensibly incorporated the lease into the deed, it did so under circumstances completely distinct from those presented here. And, rather 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 than was actually owned, and the court was reluctant to give effect to that reservation because it would affect the rights of third parties whose royalty interests had been determined 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 mineral deed 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 mineral deed at issue here required actual production for its term to perpetuate. Because it 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.
Under the authorities and the rationale described above, we reverse the decision of the Court of Appeals panel and the judgment of the district court.
MICHAEL J. MALONE, Senior Judge, assigned.
