Oil And Gas
Under Texas law, ownership of land includes ownership of minerals under the surface of the land. The ownership of the minerals can be “severed” from the land, in which event they are called mineral rights. There are five components to ownership of mineral rights: (1) the right to have access to the property to exploit the minerals, (2) the right to execute a mineral lease (called the executive right), (3) the right to receive a bonus payment for signing a lease, (4) the right to receive delay rentals when drilling does not commence by a specified deadline, and (5) the right to receive royalty payments for minerals removed.
Mineral rights are a form of real property, and they are governed by the same principles of marital property law as other real estate. If the mineral rights were owned before marriage, they are separate property. If the mineral rights were acquired during marriage by gift or inheritance, they are separate property. If the mineral rights were acquired during marriage in exchange for separate property (such as separate property cash), the mineral rights are separate property. If the mineral rights were acquired during marriage in any other way, they are community property.
In Texas divorces, the dispute can involve the separate or community property character of the mineral rights themselves, or the separate or community property character of bonus money, delay rentals, or royalties received during marriage. Under Texas law, if the mineral rights are separate property, then the bonus payments and royalty payments are separate property. If the mineral rights are community property, then the bonus money and royalties are community property. Delay rentals are considered to be community property, regardless of whether the mineral rights are separate or community property.
Mineral rights in Texas can also be viewed from the perspective of the lessee. In a typical mineral lease, the owner of the mineral rights gives the lessee the right to enter the property and remove the minerals. For this right, the owner of the mineral rights receives royalty payments from the lessee. The lessee’s leasehold interest is separate property if the lessee paid separate property to acquire it. The lessee’s leasehold interest is community property if the lessee used community property cash or community credit to acquire the lease rights.
The lease interest in minerals can be divided up into different parts. The owner of the working interest has the right to enter the land and develop the minerals, such as by drilling. The owner of the working interest is liable for the costs of developing the minerals. Therefore, working interests either bring money to or take money from the owner of the working interest. The owner of an overriding royalty interest has the right to receive part of the money that the lessee receives from the sale of minerals, but has no liability for costs, unlike the working interest which is subject to liability from operations.
If one spouse in a divorce is in the oil business, it is risky for the other spouse to take a working interest because the owner of the working interest is liable for operations. An overriding royalty interest is safer because it participates in proceeds from sales with no obligations to pay expenses.
In a Texas divorce, if the mineral rights are all community property, then the issue is how to divide the interests. But if some or all of the mineral rights are separate property, proving what is separate property, and what is not, can be a complicated task that requires getting the assistance of witnesses from the oil business, like a landman or an oil and gas lawyer or a CPA. And in those cases, complete documentation is essential.