12.005 Top Leases
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Rule Against Perpetuities – Top Leases. On October 1, 2010, you acquired the following top leases:
On October 1, 2010, the interests of Robert Jones and of Jim Jones in the coal bed methane gas underlying the captioned property were covered by and subject to a lease from their mother, Katy Jones to Deep South E&P, dated September 14, 2009, and recorded in Deed Book 2009, page 15. The Katy Jones lease was valid through December 14, 2012, and as long thereafter as oil and gas were produced under that lease.
Lease 1 and Lease 2 were what is known as a “Top Lease,” which is defined as: “one granted by a landowner, during the existence of a recorded lease, which is to become effective if and when the existing lease expires or is terminated. Williams and Meyers, 8 Oil and Gas Law 1147 (Matthew Bender & Co., Inc. 1995).” Hamman v. Bright & Co., 924 S.W. 168, 170 (Tex. Civ. App. – Amarillo, 1996).
Each top lease contained the following attached paragraph:
14. Lessee’s rights hereunder are subordinate to that certain oil, gas and mineral lease dated September 14, 2009, and recorded in the records of the Judge of Probate’s office of Dewitt County under book 2009, page 15 (“Prior Lease”) and Lessee shall have no rights hereunder to the extent such exercise may be adverse to the right of the prior Lessee, during the term of the Prior Lease. Notwithstanding anything stated herein to the contrary, it is recognized by the parties to this agreement that there is a valid, prior and subsisting lease covering all or a portion of the lands described in this lease instrument and said the lands are subject to the Prior Lease which Prior Lease will expire, but for operations, on September 14, 2012. It is the intention of parties to this instrument that this lease will become effective upon the expiration of said Prior Lease for the full term stated herein from the expiration date of said Prior Lease (September 14, 2012). (emphasis added).
The Texas Supreme Court held in the seminal case of Peveto v. Starkey, 645 S.W.2d 770 (Tex. 1982), that a “top” interest that was to “become effective” only at the expiration of a prior, determinable interest, was void ab initio under the Rule Against Perpetuities. Other Texas courts have applied Peveto to invalid top leases that were to become effective only upon the expiration of a prior lease, which was a prior determinable interest. Hamman v. Bright & Co., supra.
The common law Rule Against Perpetuities applies in Alabama. Ala. Code §35-4-4 (1975); see Earle v. International Paper Co., 429 So.2d 989 (Ala. 1983). A major Rule Against Perpetuities issue with the Leases 1 and 2 (the Jones top leases), is that the added Paragraph 14 to each lease expressly states that the leases are not “become effective upon the expiration of said Prior Lease.” That very expression caused the Texas Supreme Court to invalidate the top royalty deed in Peveto. Since Alabama recognizes and enforces the common law against perpetuities, the holdings in Peveto and Hamman v. Bright & Co. create a substantial risk of failure to your leasehold interests under Leases 1 and 2, if those titles were to become involved in litigation.
Since the Rule Against Perpetuities would hold Leases 1 and 2 to be void ab initio, a simple ratification of those leases would not help you. The court in Hamman v. Bright & Co., held “An agreement made in violation of the constitution or a statute is illegal and absolutely void, and is not subject to ratification.” Id, 924 S.W.2d at 174. Any curative documents that you obtain from Robert Jones and Jim Jones to cure the perpetuities problem should words of present lease and grant.
Requirement. Obtain new leases from Robert Jones and Jim Jones to cover their interest in the mineral estate underlying the captioned property.
Copyright 2011 by Edward G, Hawkins. All rights reserved.