12.003 After Payout Override

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Requirement 12.003

After Payout Override

 

 After Payout Override:  Pedro Zambini, and his wife, Lupe Zambini, attempted to grant Henry Smith an overriding royalty interest by instrument dated September 19, 2011, and recorded in Book 2011, page 15.  The deed to Smith described the overriding royalty interest, which was to be carved from the Lease 15 covering the captioned property, as follows:

 2% of all the oil, gas and other minerals produced, saved and marketed [under the above described lease;] provided, however, that said overriding royalty interest shall become effective and payable only after payout [defined to be when lessee shall have recovered out of the share of production attributable to each well, and after deducting applicable ad valorem and/or production taxes, a sum equal to the total cost incurred by lessee in the drilling, testing, completing and operating of such well].

 

 Since payout, as defined in the Smith deed, might never occur, Smith’s interest is susceptible to the harsh effects of the Rule Against Perpetuities.  The Alabama Supreme Court has not considered the effect of the Rule Against Perpetuities upon an interest such as that claimed by Smith.  There is a substantial risk, however, that the court would hold his interest invalid under the Rule.  Such a holding would free all working interests under Lease 15 from the burden of the Smith overriding royalty interest.

 Requirement:  If Oil Company is unwilling to ignore the risk of title failure to the overriding royalty interest claimed by Henry Smith due to the Rule Against Perpetuities, obtain a correction deed from the current owners of Lease 15 conveying the two percent overriding royalty interest to Henry Smith, and reserving to themselves all production until “payout,” as is defined in the April 24, 1979 deed to Smith, mentioned above.

Copyright 2011 by Edward G, Hawkins. All rights reserved.