Mineral Mayhem : Tierra Grande Article minerals in texas

A Reprint from Tierra Grande
Legal Issues
The recent lucrative discoveries
of gas in the Barnett, Eagle Ford
and Haynesville Shales sparked
several appellate cases from
disgruntled sellers. In these cases,
the sales contracts called for the
sellers to retain the minerals, but
the reservation was omitted in the
deeds. According to Texas law, the
deed conveys all rights owned by the
seller not reserved. Although these
cases involved rural property, the
issue is becoming more prevalent in
urban areas as well.
Generally, the parties to these transactions correct the mistakes
cordially by executing and filing correction deeds. What
happens, though, if a cordial resolution is impossible? Can the
courts order reformation of the deed? What is the statute of
limitations? Is the scrivener (the professional who drafted the
deeds) liable?
Governing Laws
Three rules of law answer these questions. First, the Statute of
Frauds (Sections 26.01 of the Texas Business and Commerce
Code and 5.021 of the Property Code) requires that agreements
for the sale of real estate be placed in writing and signed to
make the agreement enforceable. In this instance, the document
is the earnest money contract.
Second, Texas’ merger doctrine holds that at closing, all prior
agreements, including those depicted in the earnest money
contract, merge into the deed. The deed, not the sales contract,
represents the final expression of all prior agreements.
Consider this example. The buyer and seller enter an earnest
money contract for the sale of East Texas land. The seller reserves
all minerals in the contract. At closing, the seller delivers the deed
prepared by an attorney chosen by the title company. However,
the deed omits the mineral reservation, and the mistake goes
unnoticed by the seller. The deed in essence conveys the minerals
to the buyer in violation of the earnest money contract.
Later, the Haynesville Shale is discovered in the area. An oil
company approaches the purchaser, not the seller, to lease the
minerals. The error becomes obvious and the seller demands
correction.
By Judon Fambrough
In October 2006, Curtis contracted to sell Simpson eight
acres in Sabine County, Texas. The seller reserved all the minerals
in the contract. A month later, the transaction closed at
the Sabine Abstract and Title Company, the same title company
that prepared the deed. But the deed did not include the
mineral reservation.
Two years later, the error surfaces. Simpson refused to
execute a correction deed, so Curtis sued for deed reformation
based on a mutual mistake. The title company employee who
prepared the deed testified she did not see the mineral reservation
in the earnest money contract. The mistake was her fault.
The trial court ordered the deed reformed. Simpson appealed
on two grounds. First, the evidence was legally insufficient
to support a mutual mistake. To this end, the appellate court
responded that two elements are needed for reformation:
The title company pressures the parties to resolve the issue
by executing a correction deed. The buyer refuses, anticipating
a windfall from the mineral ownership.
This is where the third rule of law comes into play, the statute
of limitations. Has too much time elapsed for the seller to
sue for deed reformation? According to Section 16.051 of the Texas Civil Practices
and Remedies Code, a suit must be filed within four
years of the date the deed was delivered. If more than
four years have transpired, a suit to reform the deed is barred,
and the seller cannot recover the minerals.
There is an exception known as the discovery rule. The
four years is measured not from the delivery of the deed, but
from the time the seller should have discovered the mistake
in the exercise of reasonable diligence. This means the injury
must be inherently undiscoverable and
objectively verifiable when the transaction
occurred. The test is a question of
fact for the jury. In this case, the seller
would argue the discovery rule applies.
The statute starts to run when the oil
company approached the buyer for a
mineral lease, not at closing.
Assuming the statute of limitations
has not expired, how does the merger
doctrine affect the situation? Remember,
according to this rule, the deed is
the final expression of the agreement
between the parties. When a contradiction
exists between the earnest money
contract and the deed, the deed controls.
But, again, an exception exists. The
merger doctrine applies only in the absence
of fraud, accident or mistake.
Defining ‘Mistakes’
An allegation of fraud, accident or
mistake by either party opens the entire
transaction to scrutiny. Otherwise, the
merger doctrine prevents either party
from introducing evidence of prior agreements contradicting
the terms of the deed.
But not all mistakes are grounds for reformation. Broadly
speaking, reformation may be ordered for mutual mistakes,
not for unilateral mistakes unless induced by fraud, misrepresentation
or undue influence.
A mutual mistake means both parties labor under the same
misconception concerning a material fact to the transaction.
For instance, a mutual mistake occurs when a draftsman employed
by both parties chooses the wrong words to express the
agreement (Hale v. Corbin, 83 S.W. 2d 726) or fails to express
the real agreement of the parties (Hill v. Brockman, 351 S.W.
2d 934).
Texas Jurisprudence III, a legal treatise on Texas case law,
contains a section entitled “Scrivener’s Error” that is relevant
to mutual mistakes. It states, “If a mistake has been made by a
scrivener or typist, an instrument (the deed) may be reformed
and modified by a court to reflect the true agreement of the
parties when the mistake is mutual.”
Two recent appellate cases exemplify this rule. In September
2010, the Tyler Court of Appeals released its opinion in the
case of Simpson v. Curtis (No. 12-09-00292-CV).
(1) There was an agreement and (2) a mutual mistake occurred
when it was reduced to writing. Here, both parties were under
the mutual mistaken impression that the deed followed the
terms of the earnest money contract. Secondly, Simpson contended that the merger doctrine
precludes the introduction of prior agreements contradicting
the terms of the deed. The court responded that
the merger doctrine does not apply in the face of a mutual
mistake.
A similar case was decided by the Eastland Court of Civil
Appeals in April 2011 (Gail v. Berry [11-09-00299-CV]). The
sale involved 176 acres in Scurry County, Texas. Again, the
earnest money contract stated the minerals were to be reserved
and the deed failed to reflect the reservation. The attorney who
drafted the deed admitted making the error.
The buyer refused to sign a correction deed. The seller sued
for deed reformation and won. The buyer appealed, raising the
same arguments as in the previous case with a couple of exceptions.
First, the buyer argued it was a unilateral mistake, not a
mutual mistake.
The buyer testified she noticed the deed did not contain a
mineral reservation at closing, but said, “I was satisfied that
A suit must be filed within
four years of the date the
deed was delivered. If more
than four years have passed,
a suit to reform the deed is
barred, and the seller cannot
recover the minerals.
THE TAKEAWAY
Things get complicated when mineral reservations spelled
out in earnest money contracts are mistakenly omitted
from deeds. If such errors cannot be resolved cordially, sellers
and buyers are at the mercy of the statute of frauds, the
merger doctrine and the statute of limitations.
they had agreed to let me have the mineral interest . . .” From
her perspective, there was no mutual mistake. It was a unilateral
mistake.
The court ruled to the contrary. If the buyer knew of the
mistake at the time the deed was signed, the judge said, a unilateral
mistake by the seller equates to a mutual mistake.
Finally, the buyer argued the mistake was the fault of the
attorney who drafted the deed, so the seller should sue the
attorney for damages. This follows the canons of construction,
which hold that deeds should be construed to convey the greatest
estate possible to the buyer and reserve the least possible
estate to the seller.
But the court responded that the canons of construction
apply only when the deed is ambiguous. The buyer raised no
allegation of ambiguity at trial. However, the buyer’s argument for suing the attorney
is not without merit. The case of Bryan v. Dallas National
Bank (135 S.W. 2d 249) supports her contention
even though it did not involve a mineral reservation. In that
case, the scrivener of a deed of trust (a mortgage instrument)
incorrectly stated the sale was subject to a $781 promissory
note. The buyers wanted the deed of trust corrected (reformed)
based on a mutual mistake (a scrivener’s error).
The scrivener testified that he prepared two deeds: one referenced
the $781 promissory note and other did not. He picked
up the wrong document when he went to closing “. . . through
mistake. I did not notice that this (the reference to the $781)
was in there (in the deed of trust).”
The appellate court ruled no mutual mistake occurred. The
court stated that according to his own admissions, Bryan (the
preparer) alone committed the error. It was a unilateral mistake.
The evidence failed to raise an issue of an alleged mutual
mistake.
Finally, when does the corrected or reformed deed become
effective? Is it the date the correction occurs or does it relate
back to the date of the original transaction? Case law holds
that the mistake, once corrected, refers back to when the
deed was delivered to and accepted by the buyer. (For more
about this topic, see Deed Reformation: Relation Back Doctrine
at http://recenter.tamu.edu/pdf/1191.pdf.)
This rule works well as long as the
buyer has not conveyed the property
to a third party. What would happen
if the error was discovered after, not
before, the buyer signs the oil and gas
lease and the oil company records it?
Can the courts effectively void the
mineral lease in this instance? Remember,
an oil and gas lease in Texas
is a deed, not a rental or lease agreement,
despite the label. Probably not. If the oil company
pays good and valuable consideration
for the lease and takes
it without any actual or constructive
knowledge of the prior mistake, the
oil company becomes what is known
as a bona fide purchaser (sometimes
called an innocent purchaser). Case law holds that reformation
(of the prior deed) will not be granted when it disturbs the
rights of a bona fide (innocent) purchaser.
Actual notice means that no one told the oil company, prior
to taking the lease, that there was a mistake in the prior deed.
Constructive notice means that the oil company could not
have discovered the mistake by examining the deed records
or physically visiting the property. (For more about bona fide
purchasers see Deeds and the Texas Recording Statutes, http://
recenter.tamu.edu/pdf/1267.pdf).
Seller Responsible
The doctrine regarding a bona fide purchaser stems from the
principle that equity will not grant relief when the person asking
for the resolution was responsible for creating the problem.
That is, when one of two innocent parties must suffer (the
seller or the oil company), the one responsible for creating the
problem is liable. Here, the seller is responsible for not examining
the deed before signing it.
Does this mean the seller is without legal recourse? If the
deed cannot be reformed, the seller may sue the parties responsible
for damages. In this case, the seller would probably
sue both the title company and the attorney who prepared the
deed. The controversy would focus on whether the title company
gave the attorney correct instructions for preparing the
deed and whether the attorney failed to follow those instructions.
Of course, the defendants would argue the seller was at
fault for failing to examine the deed before signing it.
Fambrough (judon@tamu.edu) is a member of the State Bar of Texas and a
lawyer with the Real Estate Center at Texas A&M University.
When one of two innocent
parties must suffer (the seller
or the oil company), the one
responsible for creating the
problem is liable.
MAYS BUSINESS SCHOOL
Texas A&M University
2115 TAMU
College Station, TX 77843-2115

http://recenter.tamu.edu

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and Avis Wukasch, Georgetown, ex-officio representing the Texas Real Estate Commission.
Tierra Grande (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115. Subscriptions
are free to Texas real estate licensees. Other subscribers, $20 per year. Views expressed are those of the authors and do not imply endorsement by the
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