Property transfers involving mineral rights can be complex. As a Texas oil and gas attorney, I help my clients navigate these difficult legal issues. Mineral rights and potential royalties from those minerals can have a significant impact on the value of a property. Therefore, whether you are buying or selling property, it is critical that the deed and other documents accurately address the mineral rights.
One especially tricky, but not uncommon, scenario, was the subject of a recent article in Tierra Grande, a publication from Texas A & M’s Real Estate Center. This situation involves a transfer in which the original sales agreement or earnest money contract reserves the mineral rights to the seller, but the reservation of mineral rights is not stated in the actual deed delivered to the buyer at closing.
Sometimes both parties admit the error and correct it in a non-contentious fashion by executing a correction deed. However, when a friendly solution does not materialize, there are several key legal issues of law that determine whether the deed can be reformed to match the sales contract and include the mineral reservation.
The first legal principle is the statute of frauds, which in Texas is contained in Section 26.01 of the Texas Business and Commerce Code and Section 5.021 of the Texas Property Code. The Texas statute of frauds provides that all terms of a real estate sale must be in writing and signed by both parties to be enforceable. The second legal principle is the merger doctrine, which provides that the deed is the final expression of the parties’ agreement and supersedes all prior written or oral agreements, including the sales contract or the earnest money contract. The third legal principle that often applies is the statute of limitations, which, according to Texas Civil Practices and Remedies Code Section 16.051, is four years from the date of delivery of the deed to the buyer. Texas recognizes an exception to the statute of limitations, however, called the “discovery rule”. In other words, the seller has four years from the time the seller discovered or reasonably should have discovered the mistake in the deed within which to file suit for reformation of the deed This date may be a later date than four years subsequent to the delivery of the deed.
If the statute of limitations has expired, even with the application of the discovery rule, then the seller’s remedies have expired and that’s the end of the story. If the statute of limitations has not expired, then we consider the merger doctrine. Generally, the merger rule dictates that the deed is the parties’ final agreement. However, an exception to the merger doctrine can be based on a mistake, accident, or fraud in the deed. The concept of mistake is especially interesting in this context. In general, it has to have been a mutual mistake, that is, both parties must have intended to agree to something that did not end up in the deed. A Texas court in Gail v. Berry earlier this year ruled that, if the buyer notices the mistake in the deed at the time the buyer signed it, this will be considered to be a mutual mistake, even though this might appear to be a unilateral mistake by the seller. In the Gail case, the seller was allowed to reform the deed to reflect the mineral rights reservation.
The next question a Texas oil and gas attorney often encounters is what happens when the buyer has signed an oil and gas lease before the deed is reformed? In most cases, if the lessee/oil and gas company did not know about the mistake and could not have reasonably discovered the mistake, it is considered to be a bona fide purchaser, i.e., an innocent party. As a result, the oil and gas lease will be allowed to stand.
There is, of course, a lesson to all this. Have an experienced attorney handle mineral and real estate transactions. The small amount of money you may save by foregoing competent representation could cost you dearly in the long run.