The doctrine of after-acquired title states that if a person conveys real property to a grantee by warranty of title, but does not actually have full legal title, and that person later obtains more interest in the same property, then the interest needed to satisfy the original conveyance automatically passes to the original grantee.[1] Although the after-acquired title seems confusing, the concept is fairly straightforward: a grantor of a warranty deed cannot dispute the grantee’s superior title, even if they later obtain an interest.[2] So how does after-acquired title play out in oil and gas leases?
Example
Adam owns 1/2 of the minerals in the Property, and Brian owns the other 1/2. Adam executes an oil and gas lease with Texas-Oil Co., purporting to lease 100% of the minerals underlying the Property. After the Lease is executed, Brian conveys his 1/2 interest to Adam, vesting Adam with all of the minerals in the Property.
Issue
Is the 1/2 interest later received from Brian subject to the oil and gas lease Adam executed to Texas-Oil Co. through after-acquired title?
While Texas courts have not directly answered the question of whether after-acquired title applies to oil and gas leases, some case law suggests that after-acquired title is not applicable when it comes to later-acquired interests by a lessor. In McMahon v. Christmann, the Texas Supreme Court declined to extend the “Duhig rule” to oil, gas, and mineral leases.[3] The Duhig rule is a legal concept similar to the doctrine of after-acquired title that operates to automatically pass title to a grantor’s reserved interest from the grantor to the grantee as a remedy for the grantor’s breach of warranty, prohibiting the grantor from asserting title to the reserved interest in contradiction of the warranty.[4] For Example, if a Grantor conveys 100% of a property, reserving 1/2 of the minerals, but only owns 1/2 of the minerals at the time of the conveyance, then all minerals will pass to the grantee automatically to satisfy the warranty of the grant.
In declining to apply the Duhig rule, the McMahon court reasoned that, to ensure no fractional interest is left outstanding, mineral leases are often prepared by the lessee and usually purport to convey the entire fee, even when parties know a lessor owns less than the full fee title to the leased premises. In instances where a lessor owns less than the full fee title, application of the Duhig rule could prevent the lessor from asserting their royalty, allowing a lessee to take minerals without paying any royalties.
The Duhig and Dragon Distinction
The McMahon court’s reasoning for declining to apply the Duhig rule to mineral leases may imply that the doctrine of after-acquired title would also not apply to mineral leases. However, it is important to note the Texas Supreme Court’s clear distinction between the Duhig rule and the broader after-acquired title rule. In Trial v. Dragon, the court focused on the particular fact pattern leading to the Duhig rule, noting that the Duhig court did not hold that any after-acquired title passed. The grantor in Duhig, at the very time of execution and breach, owned the exact mineral interest required to remedy that breach and was thus subject to an instant transfer based on equitable principles.[5] With that distinction, the Dragon court limited the application of the Duhig rule to a very distinct fact pattern where the grantor owns the required remedy at the time of the breach and stated the Duhig holding is narrow and confined to those specific facts.
Warranty Language Considerations
With the above in mind, to determine how a Court may apply after-acquired title to our Example above, it is important to consider the language used by the Grantor when leasing the Property:
- Propose Adam’s Lease includes a warranty provision that provides: “Lessor hereby warrants and agrees to defend the title to said land”. In this case, a Court would likely hold that Adam’s newly acquired 1/2 interest from Brian is subject to Adam’s Lease under the doctrine of after-acquired title.
- Propose Adam’s Lease instead includes a warranty provision that provides: “Lessor does not expressly or impliedly warrant title to the leased premises”. In this case, a Court would likely hold that Adam’s newly acquired 1/2 interest from Brian is not subject to Adam’s Lease under the doctrine of after-acquired title.
Drafting Recommendation
Since the question of whether or not after-acquired title applies to mineral leases has not been directly answered by Texas courts, it is important to ensure mineral leases are drafted shrewdly and include language that clearly expresses the intentions of the parties. If a Lessor does not intend to subject all future fractional interests to an oil and gas lease, the warranty provision should reflect that intention.
Footnotes
[1] Bradley v. Shaffer, 535 S.W.3d 242 (Tex. App.—Eastland 2017, no pet.).
[2] Duhig v. Peavy–Moore Lumber Co., 144 S.W.2d 878 (Tex. 1940).
[3] McMahon v. Christmann, 303 S.W.2d 341 (Tex. 1957).
[4] Duhig, 144 S.W.2d at 880.
[5] Trial v. Dragon, 593 S.W.3d 313 (Tex. 2019).
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