Two’s a Crowd: Cotenancy in Texas - Part I
Welcome back for another edition of the OG Energy Blog presented by Childers Hewett Slagle PLLC! In this installment, we take our first look at one of the many joys of owning real property with other people: cotenancy. It’s said that “two’s company, three’s a crowd”, but two is more than enough for things to get crowded when it comes to real property ownership in Texas—especially when that ownership is among family members and the stakes are raised by the potential for oil and gas production.
If you weren’t already excited to continue on, the Pulp Fiction gif theme should seal the deal.
So, what is a cotenancy (also known as a tenancy in common)? Simple: it’s a type of concurrent estate, which is the nerd way of describing a piece of real property owned by two or more parties at the same time. The parties owning interests are called “tenants in common” or “cotenants”, and have the right to sell, encumber, lease, or otherwise dispose of the interest without the involvement of any other cotenant. If a cotenant dies, their interest passes through their estate. It’s the default concurrent estate in Texas and is by far the most common. Another type of concurrent estate would be a joint tenancy. I could explain what constitutes a joint tenancy, but then I'd be losing a potential future blog topic. So, for our purposes here, a joint tenancy can be defined as not a tenancy in common. I'll give you a moment to soak in how profound that statement is.
I know, I know. I even impress myself sometimes.
Even though individual cotenants own less than 100% of the interest in the property, their fractional interests are considered “undivided”, which means their interest applies to the entirety of the tract rather than a specific portion of the tract’s acreage that corresponds to their fractional interest. For example, if a cotenant owns an undivided 50% interest in a 100-acre tract of land, that applies to the entirety of the 100 acres rather than the north 50 acres or some other 50-acre portion of the overall tract. The cotenant with the 50% interest can use any amount of the 100 acres, including all of it. This holds true regardless of whether mineral interests are severed from the surface. Despite the energy industry's best efforts to tie mineral ownership back into surface acres by using net mineral acres (a valid and useful means of measuring ownership interests for oil and gas purposes at times … assuming your surveyor wasn't drunk when he calculated the acreages) and net royalty acres (KILL IT WITH FIRE. But not really. I benefit from bonus legal work when folks use “net royalty acres” because no one knows how to consistently define and use net royalty acres properly), fractional mineral ownership is still undivided and has nothing to do with specific acreage within the overall tract. Unless, of course, your acreage amount is wrong and your instrument conveying or reserving the mineral interests defines the amount of minerals only by net mineral acres.
Shown above: A surveyor looking for landmarks.
A cotenant may use part or all of the tract at his or her discretion, subject only to the same right in all of the other cotenants, and is not required to pay rent to the other cotenants unless the possession excludes the other cotenants from using the property. But, if a cotenant makes money off of the property, be it through renting it out or accruing profits directly attributable to the land (think growing crops and hunting leases), that cotenant must account for the share of the other cotenants less “reasonable” and “necessary” expenses. Note that this accounting only applies to the "common estate", which is a lawyer way of saying you gotta give your deadbeat cousins their share of the profits from the wheat harvest (j/k there's no profits to be had in farming), but you don't have to share the profits from your successful adult webcam "business" you operate from an "office" located on the property to make up for your farming losses. Nothing prevents you, however, from sharing a link to your webcam with your cousins. Nothing except common human decency, of course.
ROLL TITLE!
On that note, let’s talk about what cotenants can’t do. Obviously, one cotenant can’t encumber or sell another cotenant’s interest. This extends to the granting of easements—an easement is not valid unless it is granted or ratified by all cotenants. As anyone who has spent a chunk of their life with their nose shoved in a deed book can tell you, no one seemed to care about this requirement until recently (though it’s still not uncommon to see grants of easements today that aren’t joined by all necessary parties). Surface owners, telephone companies, power companies, pipeline companies, the state highway commission, and other governmental entities … the list goes on. Everyone acted as if it was time to rock and roll as long as at least one cotenant signed on the dotted line. Perhaps these parties drew a mistaken parallel between the grant of easements and the ability of oil and gas lessees to drill a well on a tract of land as long they hold a lease from at least one cotenant, no matter how small the cotenant’s interest. But this ability is actually an exception to a duty on cotenants to not commit something called “waste”. What constitutes waste besides virtually all commercially produced country music coming out of Nashville for the last 10 to 20 years? I'm so glad I'm pretending like you asked!
The truly terrible country music set up was included just so I can proclaim: Bob Wills is still the king!
Any activity on the property that diminishes its value or otherwise “uses up” the common estate to the detriment of the other cotenants is considered waste, and the cotenant committing the waste is liable to the other cotenants for any damages caused by the waste. So, while a cotenant can use the property as he or she sees fit, the cotenant can’t be a complete asshole and use up the property. At common law, extraction of minerals unilaterally by one cotenant would be considered waste. Logically, this makes sense: by removing valuable minerals from the property, the value of the property is necessarily diminished. But a long time ago, courts in Texas and elsewhere figured out that cotenants never seem to get along, so it would be idiotic to require all of them to agree before oil and gas could be extracted. No wells would be drilled, and no one would make any money. And, probably most important to the prevailing public policies in this regard, the government can’t tax those fat stacks of cash or the produced oil and gas if the Texas Tea is left in the ground. As a result, each mineral cotenant in Texas, regardless of how small their undivided interest, has the right to drill and produce oil and gas from the property without the joinder of any other cotenant. And because an oil and gas lease grants a fee simple determinable, the lessee of the lease steps into the shoes of the leasing cotenant. So, get cozy, producers. That oil and gas lease you just scored is the contractual manifestation of “it’s your problem now”.
Which is where we come in. The only appreciation I require is timely payment of legal fees. And maybe a hug now and then.
While the producing cotenant or its lessee must still account for the share of the profits due to the other cotenants, all “reasonable” and “necessary” costs of drilling and production can be deducted from those shares. BUT, the drilling cotenant bears all risk of the operation—oil and gas exploration in Texas is considered a “speculative” expense in cotenancy rather than a necessary expense, so if the well does not produce or does not produce enough to recoup those reasonable and necessary costs, the other cotenants have no obligation to reimburse the drilling cotenant or its lessee. In non-technical terms, this means that the cotenant or lessee who paid all of that money to drill a dry well is shit out of luck.
Too soon? As in, the proceedings haven’t been filed yet?
In what should be a surprise to no one, the inexact science of defining “reasonable” and “necessary” costs of drilling and production commonly results in a lot of pissed off people. Further, it’s not always clear if the costs are recouped on a tract basis or a well-by-well basis. Because of the wiggle room to argue these points either way and the amount of money involved (both in the cost of drilling and producing and the value of the oil and gas once produced and processed), there are several reported cases that can be used as a guide to crunching the numbers. Sounds like an excellent topic for a blog post!
It has nothing to do with my freakishly large head.
So, in the next installment of the OG Energy Blog, we will be digging into the details of those cases to take a look at the finer points of accounting for unleased cotenants. Thanks for reading!
