It’s been more than 6 years since I have written about overriding royalty interests, (“ORRIs”), which still are a cause of contention in Texas. ORRI are carved out of the working interest created under a lease, so ORRIs generally terminate when the lease terminates. Over the years, lessees have tried to speed up the termination of the obligation of an ORRI that burdened the lessee’s net revenue interest. One way lessees do this is by choosing to choose to let a lease terminate, and then take a new lease without the ORRI burden. And that worked. To prevent this, many ORRI owners include language that “saves” the ORRI and applies it to amendments, extensions, and even new leases taken within a set amount of time (“anti-washout provisions”).

However, as in the recent Texas Supreme Court case I detail here – Yowell v. Granite Operationg Company, et al. – when an anti-washout provision doesn’t limit the period of time over which the ORRI is applicable to a new lease, the ORRI owner may be out of luck. Why? Because, as the Court noted, our “Texas Constitution prohibits perpetuities: ‘Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed.’ TEX. CONST. art. I, § 26.    A perpetuity is a restriction on the power of alienation that lasts longer than a prescribed period.” ORRIs are real property interests, and under Texas law, “no [property] interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance." This is known as the Rule Against Perpetuities (“The Rule”).

If the property interest is a present interest, or a future interest that vested at the time the interest is given, The Rule doesn’t apply. For this to be the case, “the owner of an interest must have ‘an immediate, fixed right of present or future enjoyment’ […].” The Court went on to explain that:

[i]f an interest can vest only ‘upon the happening of a condition or event,’ then it is an executory interest. An executory interest is a future interest, held by a third person, that either cuts off another's interest or begins after the natural termination of a preceding estate. Executory interests have historically been subject to invalidation by the Rule when they were limited upon conditions precedent not certain [to] occur, if ever, and followed a prior estate not certain to end.

In this case, when the “ORRI was reserved, it provided no immediate, fixed right of present or future enjoyment as to new leases because those leases were not yet in existence. Rather, the ORRI would not apply to a new lease unless the following additional events occurred: (1) the [original lease] terminated; (2) the lessor granted a new lease covering all or part of the same mineral interest; and (3) the new lease was obtained by a successor [in interest to] lessee at the time of the reservation.” Therefore, a “holder of an ORRI under potential future leases does not have a guaranteed, present right to a share of future production[.]” The Court held that because the reservation of an “ORRI under future leases postponed the interest's vesting”, the reservation of that ORRI under future leases was subject to The Rule (and its timeframe parameters).

Once again, to test whether an interest violates the time restrictions, we ask “whether the interest must vest, if at all, within twenty-one years after the death of some life in being at the time of the reservation.” The Court concluded that because the “ORRI in new leases is contingent on three events that may not occur” in that time period, the ORRI interest violated The Rule.

The Court, rather than declaring the provision void due to the violation of The Rule, ultimately determined that the Texas Property Code mandated that the Court reform the reservation when possible so that it would comply with the Rule. The case was remanded to the lower court for this purpose.