CMM Title Research & Due Diligence 4 — Questions and Answers
Question 1: Which instrument is most commonly used to establish that an oil and gas lease is still in force after the primary term has expired?
- Division order
- Ratification agreement
- Affidavit of production or certificate of production (Correct answer)
- Letter of intent
Correct answer: Affidavit of production or certificate of production
An affidavit or certificate of production (or producing operations) filed in the county records gives constructive notice that a lease is being maintained by production or operations beyond the primary term.
Question 2: A 'top lease' is executed when:
- A lessee acquires additional depth rights below the currently producing formation
- A new lease is executed on the same land before the existing lease expires, to take effect upon expiration (Correct answer)
- Two competing mineral owners agree to pool their interests
- A surface owner grants a new right-of-way over previously leased land
Correct answer: A new lease is executed on the same land before the existing lease expires, to take effect upon expiration
A top lease is a lease taken on land already covered by an existing lease, designed to become effective when and if the underlying lease expires or terminates.
Question 3: During title due diligence, which factor most directly determines whether a recorded instrument provides constructive notice to a subsequent purchaser?
- Whether the instrument was prepared by a licensed attorney
- Whether the instrument is properly indexed in the county records so it can be found by a reasonable search (Correct answer)
- Whether the instrument contains a legal description prepared by a surveyor
- Whether the instrument was signed by both parties to the transaction
Correct answer: Whether the instrument is properly indexed in the county records so it can be found by a reasonable search
Constructive notice depends on proper recordation and indexing; an instrument recorded but not findable in a reasonable search (a 'wild deed') generally does not impart constructive notice.
Question 4: A 'shut-in royalty' clause in an oil and gas lease allows the lessee to:
- Reduce the royalty rate during periods of low commodity prices
- Maintain the lease in force by paying a flat fee when a well capable of production cannot market its gas (Correct answer)
- Suspend delay rental obligations during force majeure events
- Pool acreage from multiple tracts without lessor consent
Correct answer: Maintain the lease in force by paying a flat fee when a well capable of production cannot market its gas
A shut-in royalty clause permits the lessee to keep the lease alive by paying a specified shut-in royalty when a gas well capable of production cannot sell gas due to market or pipeline issues.
Question 5: In the context of mineral title research, 'adverse possession' of a mineral interest requires which additional element compared to surface adverse possession in most jurisdictions?
- Filing a lis pendens in the county where the minerals are located
- Actual extraction or drilling activity on the mineral estate, not merely surface use (Correct answer)
- Recording a mineral claim notice with the state land office
- Obtaining a court order before any possession period begins
Correct answer: Actual extraction or drilling activity on the mineral estate, not merely surface use
Most courts require actual use of the mineral estate—such as drilling or extracting minerals—for adverse possession of severed mineral rights because surface occupation alone does not constitute possession of the mineral estate.
Question 6: A 'habendum clause' in a mineral deed or oil and gas lease defines:
- The geographic boundaries of the property being conveyed
- The duration and conditions under which the grantee holds the granted interest (Correct answer)
- The royalty rate payable to the lessor from production
- The remedies available for breach of the instrument's covenants
Correct answer: The duration and conditions under which the grantee holds the granted interest
The habendum clause (the 'to have and to hold' clause) specifies the nature and duration of the estate granted—for example, 'for so long as oil or gas is produced in paying quantities.'
Question 7: When a mineral deed contains a warranty clause and the grantor's title later fails, the grantee's remedy under the warranty is typically limited to:
- Recovery of the full current market value of the mineral interest
- Recovery up to the amount of consideration paid plus interest (Correct answer)
- Restitution of any royalties already paid to the grantor
- Cancellation of all leases executed by the grantor on the subject minerals
Correct answer: Recovery up to the amount of consideration paid plus interest
A warranty of title obligates the grantor to compensate the grantee up to the amount of consideration received if the title fails, not the current market value or subsequent appreciation.
CMM Title Research & Due Diligence 4
Which instrument is most commonly used to establish that an oil and gas lease is still in force after the primary term has expired?