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Over the last several years, the use of “oil and gas royalty leases” has proliferated throughout the State of Texas. The goal is simple: purchase non-participating royalty interests from unsuspecting sellers at fire sale prices. But make no mistake, the so called “royalty lease” is a scam.

Typically, scammers offer royalty owners an opportunity to receive a “bonus” in exchange for executing a “paid up lease” of royalty. The so called “royalty lease” is designed to look like an oil and gas lease—in some cases, right down to the font and formatting. Scammers purchase the interests with a sales price guised as a “bonus”,  and the “paid up lease” operates as a term royalty deed.

Texas caselaw is exceedingly clear: non-executive interest owners have no power to execute an oil and gas lease, and a purported lease signed by a royalty owner is void. Scammers defend their use of “royalty leases” by claiming a non-executive interest owner may sell a defeasible fee estate for a set primary term, with a secondary term for so long thereafter as oil and gas are produced.

The fraud—and the estoppel—come from the terminology used in the offer letters and the royalty lease. Everyone agrees a royalty owner can convey an interest for a term of years using a habendum clause. It’s a different matter to do so using terminology such as “bonus,” “paid up lease,” and “lessor grants, leases, and lets unto Lessee.” Acquiring a term royalty deed with oil and gas terms of art is fraudulent on its face. It also creates an estoppel—by filling a document with oil and gas lease terminology, the scammers have inadvertently created an oil and gas lease, not a term royalty deed.

In one recent case, the scammers proudly admitted that the royalty lease was designed as a “marketing tool” to help royalty owners “monetize a stranded asset.” They admitted to using the lease terminology because people were “afraid” to sign deeds. The scammers threatened anyone who sought to file suit with a counterclaim under Duhig v. Peavy-Moore Lumber Co. (the royalty lease purports to lease all of the royalty while, like an oil and gas lease, reserving a quarter royalty).

Recognizing this predatory scam, the Texas Legislature recently passed HB 3838, “An Act Relating to a Disclosure in Certain Offers to Purchase a Mineral or Royalty Interest.” It was signed by Governor Abbot June 10, 2019 to be effective September 19, 2019. The bill adds Section 5.152 to the Texas Property Code. This new law requires any so-called oil and gas royalty lease to disseminate the following language:

“THIS IS NOT AN OIL AND GAS LEASE. YOU ARE SELLING ALL OR A PORTION OF YOUR MINERAL OR ROYALTY INTERESTS IN (DESCRIPTION OF PROPERTY BEING CONVEYED)”

Without the above-language, the instrument is void ab initio; no statute of limitations will revive it. The bill does not apply to oil and gas leases, term conveyances of mineral or royalty interests, or to top leases. It includes provisions for attorney’s fees, court costs, and recovery of all royalties. However, this remedy only applies prospectively, and disputes over instruments executed before September 19, 2019 are governed by prior law.

Attorneys representing scam victims from before September 19, 2019 need not worry. They have powerful causes of action under the Texas Securities Act and the Declaratory Judgment Act. Attorneys representing operators also have options. They can help scam victims by issuing transfer orders before paying the fraudsters. Doing so will alert the victims without giving the fraudsters a cause of action for tortuous interference.

While the days of the royalty lease scam may be numbered—there are currently dozens of attorneys litigating royalty lease cases—it is a potent reminder that everyone in the oilfield should be remain vigilant.

 

Written with the assistance of Josh Stein, esq.

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