The Arkansas Leasing Manual

by

Charles A. Morgan

DUNN NUTTER & MORGAN, LLP
Attorneys at Law
3601 Richmond Road
Texarkana, TX 75503-0716
Phone (903) 793-5651
Fax (903) 794-5651
Email: camorgan@dnmlawfirm.com
www.dnmlawfirm.com

About the Author

Charles A. Morgan was born in Evansville, Indiana and graduated from Baylor University (B.B.A., 1973) and from Baylor Law School (J.D., 1973). Mr. Morgan has previously served as Chairman and Co-Chairman of the Arkansas Natural Resources Law Section of the Arkansas Bar Association in 1985, 1991, 2000. In 1988 Mr. Morgan served as Chair of the Economics of Law Practice Section of the Arkansas Bar Association. He has been licensed to practice in the State of Texas since 1973 and in the State of Arkansas since 1974. Mr. Morgan is also licensed to appear before the U.S. Supreme Court, U. S. Tax Court, and the U.S. District Courts for the Eastern District of Texas, and the Western District of Arkansas.

Mr. Morgan has been a frequent speaker at seminars sponsored by the American Bar Association, the Arkansas Bar Association, the State Bar of Texas, and the Ark-La-Tex Association of Petroleum Landmen. He received the 2001 The Arkansas Bar Association's Best of Arkansas CLE Award and in 2003 was awarded the Distinquished Service Award by the Arkansas Natural Resources Law Section of the Arkansas Bar Association. Some of the speech topics and papers written by Mr. Morgan include:

Recent Developments and Selected Topics on Arkansas Mineral Law,

Post-Production Costs: What Can Really Be Charged To The Royalty Owner?

Curing Title Defects

The ABC’s of Unitization in Arkansas

Easement Issues and Surface Access Problems Affecting the Oil & Gas Industry in Arkansas

What Constitutes "Production in Paying Quantities?

Mr. Morgan is a Certified Specialist in Residential Real Estate Law by the Texas Board of Legal Specialization, and the principal areas of law in which he practices are Oil & Gas Law, Real Estate Law, and Commercial Law. At present Mr. Morgan is a fellow of the American College of Mortgage Counsel and the Texas Bankers Association.

Mr. Morgan has practiced with the firm of Dunn Nutter & Morgan, LLP (or its predecessor) since 1973 and presently serves as a managing partner for the firm.

THE ARKANSAS LEASING MANUAL

by

CHARLES A. MORGAN

DUNN NUTTER & MORGAN, LLP

-- Attorneys at Law--
3601 Richmond Road
Texarkana, TX 75503-0716
Phone (903) 793-5651
Fax (903) 794-5651
e-Mail: camorgan@dnmlawfirm.com
www.dnmlawfirm.com

Engaged in the General Practice of Law in Texas and Arkansas

Original Claims to the State of Arkansas..................................1
The Nature of Ownership Interests..................................2
1. Rights and Interests in Land..................................2
2. Kinds of Estates in Land..................................3
3. Possessory Interests in Land..................................3
4. Easements, Rights-of-Way, and Licenses..................................4
5. Rights-of-Way v. Fee Estates..................................5
6. Profits, Mineral Severance and Emblements..................................6
7. Charges Against the Land..................................6
8. Mineral and Timber Severances..................................6
9. Air Space..................................6
10. Co-Ownership of Land..................................6
11. Loss of Rights to and Interests in Land..................................7
Surveying and Boundaries..................................7
1. Origin of Surveys..................................7
2. Metes and Bounds..................................7
3. The Rectangular System..................................8
4. Descriptions..................................10
The Nature of the Mineral Estate..................................11
1. Mineral Interests..................................11
2. Leasehold Interests..................................13
3. Royalty Interest..................................13
Methods of Acquiring Mineral Interests..................................14
1. Deeds..................................14
2. Testamentary Disposition - By Will..................................14
3. Intestate Succession..................................15
4. Adverse Possession..................................16
5. Tax Titles..................................16
6. Dower and Curtesy..................................17
7. Separate Property..................................18
8. Trusts..................................18
Types of Mineral Ownership..................................18
1. Cotenancy..................................18
2. Life Estates and Remaindermen..................................19
State Lands..................................20
1. Navigable Streams..................................20
2. Leases from the State..................................20
3. Forfeited Lands Sold by the State..................................21
Trespass..................................21
1. Good Faith or Bad Faith..................................21
2. Seismic Trespass..................................22
Damages..................................23
The Oil and Gas Lease Provisions..................................23
1. Habendum Clause..................................23
2. Statutory Pugh Clause..................................24
3. Paying Quantities..................................24
4. Leases Held by Production (HBP)..................................24
5. Top Leases..................................25
Execution and Recordation of the Lease..................................25
1. Execution..................................25
2. Recordation..................................26
Brine or Salt Water..................................26
1. Mineral or Not..................................26
2. Calculating Market Value..................................26
3. Rule of Capture..................................27
4. Production Units..................................27
Oil and Gas Exploratory Production Units..................................28
Guardianship and Receiver Leases..................................28
1. Guardianship Leases..................................28
2. Receiver Leases..................................29
The Arkansas Oil and Gas Commission..................................29
1. Field Rules..................................29
2. Integration of Unleased Interests..................................29
3. Wildcat Integration..................................31
4. Application to Drill..................................31
5. Severance Tax Credit..................................31
Powers of Attorney..................................32
1. General Rules Regarding Powers..................................32
2. Rule of Strict Construction..................................32
3. Execution of Instrument by Agent..................................32
4. Power to Sell and Convey..................................32
5. Revocation by Principal..................................33
6. Insanity or Death of Principal..................................33

Appendix "A" Forms of Acknowledgment..................................34

Short-form Single or Joint Acknowledgment..................................34
Long Form Single Acknowledgment..................................34
Long Form Joint Acknowledgment..................................34
Short-form Corporate (or Partnership) Acknowledgment..................................34
Corporate Acknowledgment - One Officer..................................35
Corporate Acknowledgment - Two Officers..................................35
Foreign Country Acknowledgment..................................35
Partnership Acknowledgment..................................35
Military Acknowledgment..................................36
Acknowledgment for Signature by "Mark"..................................36

Appendix "B" Sample Lease Clauses..................................37

Abstracts..................................37
Acceptance of Terms of Lessee’s Assigns..................................37
Assignment of the Lease..................................37
Breaches of Lease Terms..................................38
Conflicts between Printed Form and Typed Terms..................................38
Conversion of an Oil or Gas Well to an Injection or Water Well..................................38
Deductions from Royalty..................................38
Depth Limitation..................................39
Division Orders..................................39
Drilling Requirements..................................39
Execution of Lease by Less Than All Lessors..................................39
Option to Extend the Primary Term of the Lease..................................39
Fences, Gates, Cattle Guards, Roads, Bridges, and Culverts: Construction, Use and Maintenance..................................40
Fresh Water Protection..................................40
Fresh Water Use: Limitation..................................41
Gas Prices and Sales Contracts..................................41
Geophysical Operations..................................42
Indemnification of Lessor..................................42
Information: Drilling and Production; Documentation; Reports to be Furnished to Lessor..................................42
Access by Lessor to Operational Areas..................................43
Limitation on Substances Covered by Lease..................................43
Litigation Costs..................................43
Livestock Protection..................................43
Location of Wells, Lines, Roads, Tank Batteries, and Other Structures..................................43
Maintenance of Operational Areas and Control of Debris and Weeds..................................44
Royalty Payments: Minimum Payments..................................44
Offset Well Protection and Payment of Compensatory Royalty..................................45
Pipeline Easements..................................45
Pipelines: Laying and Burying..................................45
Plugging Requirements..................................45
Reservation of a Call on or Preferential Right to Purchase Production by Lessor..................................46
Pooling and Lease Termination on Lands and Depths not Included in Pooled Unit..................................46
Reasonable Development..................................46
Reentry of Wells..................................46
Release of Lease..................................47
Removal of Lessee’s Equipment and Personal Property..................................47
Reservation of Additional Interests in Production..................................47
Royalty Payments..................................48
Salt Water: Disposal, Storage, and Handling..................................48
Shut-in Gas Royalty..................................49
Surface Damages: Payments of Use of Surface Damage to Lessor’s Property..................................50
Surface Pits..................................50
Surface Restoration and Reparation..................................50
Surface Use by Lessee and Accommodation with Agricultural Use of the Surface..................................51
Surface: Unauthorized Use..................................51
Taking Lessor’s Oil and Gas Royalty in Kind..................................51
Top Leases..................................52
Top Leasing Prohibition..................................52
Use of Produced Oil or Gas by Lessor and Lessee..................................53
Warranty..................................53
Water Wells Drilled by Lessee..................................53

THE ARKANSAS LEASING MANUAL

I.
ORIGINAL CLAIMS TO THE STATE OF ARKANSAS

At least four Indian tribes are identified with the early history of Arkansas, the first being the Arkansas or -- more properly speaking -- the Quapaw. The state derived its name from this tribe or, according to some authorities, from the region's principal river. The second group were the Cherokee of Iroquoian stock. A considerable number of the more conservative members of the tribe relinquished claim to their lands and, by the First Cherokee Treaty, accepted a grant in Arkansas. The third group, the Choctaw, belonged to the Muskhogean family. By the Choctaw Treaty of 1820, the main body of the tribe ceded their lands east of the Mississippi River and received in return a large tract west of that river. This tract included Southwest Arkansas. The fourth were the Osage. Other than these tribes, the Caddo, Kichai and Wichita tribes of the Southern group of the Caddoan family were scattered throughout the region.

Lands north of the Arkansas River were ceded to the United States by the Arkansas tribe under the Treaty of 1818; by the Cherokee under the Treaty of 1828; and, by the Osage under the Treaties of 1809,1818 and 1825. Lands south of the Arkansas River were ceded to the United States by the Arkansas tribe under Treaties of 1818 and 1824, and what is now Miller County was ceded to the United States by the Caddo under the Treaty of 1835.

The United States held the fee simple title to the lands occupied by the Indians and could have disregarded their right of occupancy and, before a cession by the Indians, had the power to convey an unencumbered title in fee simple, to take effect immediately, or a title subject to their right of possession and to take effect only when they, by voluntary cession, yielded their title. The policy of the government was to protect the lands occupied by the Indians from settlement and not to convey the title until the possessory rights of the Indians had been extinguished. The Indians themselves were without power to dispose of the fee in lands occupied by them even though such lands had been allotted to them by another sovereignty from whom the United States had acquired title.

Robert Cavelier, Sieur de la Salle, a native of Rouen, France, received letters patent from Louis XIV authorizing him to continue the explorations of Marquette and Joliet to "find a port for the king's ships in the Gulf of Mexico, discover the western parts of New France, and find a way to penetrate Mexico."

La Salle's expedition arrived at the mouth of the Arkansas River and, on April 9, 1682, La Salle ascended the river until high ground was reached and, erecting a cross bearing the arms of France, formally took possession of "all the country drained by the great river and its tributaries" and conferred upon the territory thus claimed the name of Louisiana, in honor of the French king.

After several unsuccessful attempts to plant colonies in the new province of Louisiana, the Duke d'Orleans, regent for Louis XI, issued a royal grant giving the "Western Company" which had been organized by a Scotch man named John Law, authority to make permanent settlements, appoint governors and judges, and to receive "in perpetuity all of the lands, harbors and islands which compose our province of Louisiana." In 1718 John Law received a personal grant of 82,160 acres on the Arkansas River. Further attempts at colonization failed; the settlers grew discouraged, and the Indians became troublesome; and, on April 10, 1732, the company surrendered its charter to France.

The Treaty of Fontainebleu ceded to England the Dominion of Canada, the country around the Great Lakes and that part of Louisiana lying east of the Mississippi River. On the same date and at the same place, a secret treaty was negotiated by which France ceded all her possessions west of the Mississippi River to Spain. The provisions of the above treaties were reasserted by the Treaty of Paris (February 10, 1763), whereby England and Spain were confirmed in their new possessions.

On October 1, 1800, Spain, by the Treaty of St. Ildefonso, ceded Louisiana back to France because of the influence of Napoleon. This treaty was not made public until November 30, 1803. It was confirmed by the Treaty of Madrid, March 21, 1801. All grants by Spain after 1800 were void. Jefferson wrote to Robert L. Livingston, the Minister to France, directing him to open negotiations with Napoleon and Talleyrand for cession of the island of Orleans, or, if refused, the right of deposit at New Orleans and the free navigation of the river. Talleyrand startled Mr. Livingston by a counter offer to sell the whole of Louisiana. James Monroe, arriving in France as Minister with $2,000,000.00 to pay for the island, conferred with Livingston or her agent or who, a few days later, reached an agreement with Marbois to purchase the whole of Louisiana, a territory of 900,000 square miles in which was included the present State of Arkansas, for 80,000 francs. This agreement was embodied in the Treaty of Paris on April 30, 1803.

By the Act of March 26, 1804, the Province of Louisiana was divided. All that portion lying South of 33° North Latitude was designated as the Territory of Orleans, and the remainder of the purchase as the District of Louisiana, with the capital at St. Louis. Arkansas was, therefore, in the District of Louisiana. However, soon thereafter, this district was divided into the districts of St. Louis, St. Charles, Cape Girardeau, St. Genevieve, and New Madrid. On June 27, 1806, the legislature of the Louisiana Territory passed an act creating the District of Arkansas out of the southern part of the New Madrid District.

Residents of Missouri Territory living north of the present northern boundary line of Arkansas, presented a memorial to Congress in 1818 petitioning for statehood. Fearing to be left without any form of civil government, preemptors then living in what is now the State of Arkansas under the Squatter's Land law of 1814, and other honest settlers residing south of the proposed line, although opposed by a strong lawless element, petitioned Congress on January 30, 1819, for the creation of the Arkansas Territory. This territory was created by the Organic Act approved March 2, 1819.

The Act of Admission was approved June 16, 1836. Among other things, it set forth the boundaries of the State of Arkansas and provided that the people of Arkansas should never interfere with the Federal Government's primary right of disposal of the public lands nor tax such lands. The Compact was accepted by the State by an Ordinance approved October 18, 1836.

Although the ordinary legislation with respect to the public domain contemplates the retention by the United States of the entire power over land until a patent is issued, the United States may, by act of Congress, at once divest itself of all property in any portion of the public lands and may transfer it to a State or to an individual without any patent. A patent subsequently issued for land so granted is merely documentary evidence of such title.

The term entry in the technical sense means the act by which an individual acquires an inceptive right to a portion of the unappropriated soil of the country by filing his claim. The term is also used to connote the filing at the land office or inscription upon its records of the documents required to file a claim for a homestead or preemption rights, and as a preliminary requirement to the issuance of a patent for the land. A certificate of entry has the effect of investing entrymen with the equitable title to the new land. The legal title remains in the United States until a patent is issued, but the land ceases to be a part of public domain and belongs to the purchaser.

A patent is a conveyance of title by the United States or by a State. The legal title passes with the issuance of the patent and not before, but the equitable title passes upon final entry. Until issuance of a patent, the legal title remains in the United States.

II.
THE NATURE OF OWNERSHIP INTERESTS

A. RIGHTS AND INTERESTS IN LAND

Legally, land may be separated in different ways: the division may be horizontal -- that is, the surface of the land may be owned by one person and the various underlying strata beneath the surface may be owned by the same person, another person, or various other persons, or the ownership may be by several different persons at one time, all of whose interests are undivided. There are different types of such undivided interests which the law recognizes. These are joint tenancies, tenancies in common, tenancies by the entirety, and community property interests.

In reading instruments affecting boundary lines, one must distinguish between the different possible legal effects of language used in determining the rights of the parties. This is necessary because the law quite frequently interprets questions, such as boundary disputes, differently according to the type of legal interests created by the instrument.

Such language may result in the creation of different classifications of legal interests as follows:

Interest in land;
Rights to land;
Charges against land;
Mineral severances; and,
Air rights.

Each of these classifications is subdivided into different interests. The difference in the language may be minute, but in every instance, the gulf between the different types is deep and wide. Every instrument must result in one of the several interests set forth hereinabove. The courts, once the nature of the interest is established, then attach definite and certain legal consequences to the interest.

The law divides estates in land into those which give the owner immediate rights of possession and future interests which may or may not give a future right to possession.

B. KINDS OF ESTATES IN LAND

The highest type of interest in land that a person can hold in the United States is a fee simple absolute. Other estates which can arise are:

determinable fee simple;
fee simple upon condition subsequent;
fee simple subject to conditional limitation;
conditional fee -- in a few states;
the fee tail -- in a few states;
life estates; and,
leases.

Parties also may have rights to land, such as easements, rights-of-way, or licenses, which must be distinguished from estates in land. It is also possible for a third party or person to own a profit in land or to prove emblements with respect to the land. The facts which give rise to each one of these types of situations often differ very slightly from those which would give rise to another.

C. POSSESSORY INTERESTS IN LAND

The law has traditionally recognized the following types of possessory interests in land:

fee simple absolute;
determinable fee simple;
fee simple upon condition subsequent;
fee simple subject to conditional limitation; and,
life estate.

The Fee Simple Absolute is the highest type of ownership known to the law. No other person can hold an interest therein. It may, however, be subject to a right-of-way, easement, license, or equitable servitude. In most states, it is created by a Deed or Will to one or more persons without further words.

The Fee Simple Determinable is a fee simple, i.e., absolute ownership like a fee simple absolute, but the ownership continues only as long as a situation continues to exist or until an event happens. It is created by the words of grant or devise to the grantee or devisee as long as or to the grantee or devisee until. An example would be for so long as the property continues to be used as a church. This leaves a possibility of reverter in the grantor or devisor so that whenever the event happens, the title automatically returns to the grantor or to those who are his then legal representatives.

The Fee Simple Upon Condition Subsequent is a fee simple giving title to the grantee or devisee but subject to the condition that if something comes to pass, the original grantor or devisor or, in some states, the grantor's or devisor's then legal representatives, may re-enter and retake title. It is said to retain a right of re-entry or a power of termination in the grantor or devisor. This differs from the fee simple determinable in that the fee simple upon condition subsequent does not automatically revert. Instead, when the condition happens, the creator of the fee has the right to terminate it. Language creating it would be to grantee, but if grantee dies childless, then to revert. The property would pass to the grantee's heirs on the grantee's death unless the grantor retook possession.

The Fee Tail was created by the words to grantee and the heirs of his body. In such a case, the grantee held a fee for his lifetime, but on his death it passed to his descendants. The grantee could not sell it or devise it by Will. If the grantee died without descendants, it reverted to the original grantor as a reversion unless at the time of its creation the grantor had given it over to someone else by way of remainder. The fee tail has been abolished in nearly all states, including Texas and Arkansas.

Life Estates are exactly what they seem: the right to the possession, use, rents, and issues of the property for the party's lifetime. They are of two types: (a) legal life estates, and (b) life estates by deed or will. Since 1981, the legal life estates of curtesy (a husband's rights in lands owned by a deceased wife) and dower (a wife's rights in lands owned by a deceased husband) grant to the surviving spouse a right to possession of one-third of the deceased spouse's lands for his/her lifetime. Life estates may also be created by Deed or Will.

D. EASEMENTS, RIGHTS-OF-WAY, AND LICENSES

Rights to Land are: (a) leases; (b) easements; (c) rights-of-way; and (d) licenses.

Leases are the right to possession and use of the land for a limited period of time. Leases may be: (a) at sufferance, where the tenant holds over after his term has expired, and the landlord may evict him at any time; (b) at will, where the tenant holds possession during the pleasure of himself and the landlord; and, (c) periodic, month to month, year to year, or for a specified term, such as one year, ten years, etc. In many states, attempted leases of indefinite duration are, in fact, fee simple estates.

An easement is a right to make a specific use of a definite portion of land owned by another. The owner of the underlying ground has the right to make use of it to the extent that it does not interfere with the exercise of the easement. The owner of the easement cannot use the property for purposes not intended by the easement. An easement is a property right which the fee owner cannot revoke.

An easement may be acquired by:

(a) grant through giving a deed;
by prescription, i.e. through adverse use under a claim of right for a period of time;
by dedication, where the owner of the land expressly or impliedly gives the state or a municipality the right of use; or
by eminent domain, condemnation proceedings by the state or a subdivision thereof, or by a public utility having, by statute, the right to condemn land.

An easement is lost by abandonment or by surrender. Mere non-use, however long the duration, does not in and of itself abandon the easement. Instead, there must also be an intent of the holder of the easement to abandon it. Surrender may be by deed or acts amounting to an estoppel. In the case of public easements, surrender must be by an official act.

Upon abandonment or surrender of an easement, the owners of the underlying fee at the time of abandonment or surrender simply take the area of the easement free from the restrictions thereof. If the easement, as a road, separates two tracts of land, each owner takes their share of the easement area. If it was cut out of one side only, it all returns to that side. So, if a lot is bounded by a street, and on the other side of the street there is a railroad right-of-way, and the right-of-way is abandoned, the owner of the lot, not the municipality, takes the abandoned right-of-way, unless the municipality had a fee in the street instead of a mere easement.

Easements are spoken of as appurtenant or in gross. An easement in gross is personal to the owners and cannot be transferred to another except sometimes in the case of commercial easements. Easements appurtenant benefit adjoining land and follow the land benefited when it is transferred. The land burdened with the easement is the servient tenement. The land benefited is the dominant tenement.

An easement is to be distinguished from a fee in that the grantee of the easement has no right in the land but merely a right of use thereof for a designated purpose. When such a use ceases for any reason, the owner of the land holds the land free from the burden. The owner of the land may also use it meanwhile for any purpose which does not disturb the holder of the easement in his particular use thereof. The owner of the easement has no right to make use of the property except for the purpose of the particular easement. Easements may be destroyed by overburdening, that is, if the grantee makes use of the easement for an improper purpose, he may lose the easement. Easements may also be destroyed by termination of the particular use for which the easement was granted, that is, by abandonment by the holder of the easement. In other states easements can only be created in writing unless the party claiming the easement has used it for a number of years adversely to the owner of the land and has created an easement by prescription.

A right-of-way is a particular type of easement which is limited to use for passage only.

A license is not a right in land. It is a mere privilege to enter upon land without being subject to an action in trespass, either civil or criminal. It is mere immunity from liability for trespass. A license may be revoked by the owner of the land at anytime unless it is coupled with an interest, such as the right to remove a profit. It is revocable at will by the licensor. Sometimes, however, a license can become irrevocable if it is coupled with an interest, i.e., if the licensee makes improvements, or for other such reasons.

E. RIGHTS-OF-WAY v. FEE ESTATES

The title examiner or landman is frequently called up to distinguish between deeds which convey fee title or only a right-of-way. In Coleman v. Missouri Pacific Railroad Company, 294 Ark. 633, 745 S.W.2d 622 (1988), the Arkansas Supreme Court reviewed deeds which conveyed "a strip of land one hundred feet wide," "a strip of land 100 feet wide for right-of-way also an additional strip of land 250 feet wide lying on the south side of the said right-of-way and adjacent thereto," and a third deed which conveyed "a strip of land 100 feet wide for right-of-way . . . . also extra for depot grounds a strip of land 250 feet wide lying south of and adjoining said right-of-way." The trial court found that these deeds conveyed the fee simple title, and the Arkansas Supreme Court affirmed. One year later, in Wylie v. Tull, 298 Ark. 511, 769 S.W.2d 409 (1989), the court reviewed 50 deeds which generally conveyed a strip 100 feet wide or a strip 200 feet wide "for right-of-way." The trial court found all of these deeds to convey rights-of-way only, and the Arkansas Supreme Court affirmed.

Finally, in Brewer & Taylor Company v. Wall, 299 Ark. 18, 769 S.W.2d 753 (1989), the Supreme Court offered several guidelines or factors to be considered in determining whether it was the intent to convey a fee title or a right-of-way. The following are the factors that tend to indicate that it was the intention to convey an easement or right-of-way:

The deed specifies that the land conveyed is for a right-of-way;
Only nominal consideration is stated;
The shape of the tract makes other uses unlikely; and
The railroad is given the specific right to take stone, gravel, timber and earth from the strip itself.

In Brewer the Court indicated that the following factors are indications of an intent to convey a fee simple interest:

The right of increasing the width of the strip of land for necessary slopes, embankments, turnouts and with the right of changing water courses, and of taking a supply of water and of borrowing or wasting earth, stone or gravel outside of the strip;
The existence of additional land besides the strip; and
The relinquishment of dower rights.

When a right-of-way is utilized as a road, a conveyance which states that is bounded by the road extends, nevertheless, to the center of the right-of-way, or road bed, unless a contrary intention is clearly stated. The principle applies to private as well as public roads and is in conformity with the public policy of discouraging separate ownership of narrow strips of land. Wallner v. Johnson, 21 Ark. App. 124, 730 S.W.2d 253 (1987). Wallner is helpful in that it offers definitions and rules pertaining to reservations, easements appurtenant, of necessity and by prescription, and covenants that run with the land.

F. PROFITS, MINERAL SEVERANCE AND EMBLEMENTS

A profit is a part of the soil or subsoil, such as dirt, stone, minerals, or trees. It is possible to make a grant of a profit, thus enabling the grantee to remove the particular substance granted. A grant of a profit is ordinarily accompanied by a license or an easement to enter upon the land and remove the profit. The ordinary, so-called Mineral Lease of oil or gas is not a lease at all but actually an option to purchase a profit with an easement to enter and remove the profit within a stated time and under stated conditions.

However, a sale of a profit is to be distinguished from a mineral severance. In the case of a mineral severance, the grantee purchases the entire strata underneath the land as, for instance, a particular seam of coal or all of the minerals underneath the soil. In the case of the sale of the profit, the grant is a permanent one, and does not terminate upon failure to remove the profit within a stated time nor is the owner of the profit required to pay an annual rental for the property or the profit sold. Whether a particular deed creates a mere option for removal of a profit or a mineral severance depends upon the language of the parties. Mineral severances may have, in some instances, occurred many years before, and deeds and abstracts of title are therefore to be carefully scrutinized to see whether an old, so-called Mineral Lease may not have actually been an option to remove a profit and, thus, may have been a permanent severance of the profit from the soil with the right to remove it within a stated period.

An emblement is an annual crop. In most states, it is regarded as personal property even while growing. It may be sold and is always considered personalty after severance from the soil.

G. CHARGES AGAINST THE LAND

The law recognizes various types of charges against land. These are rights to have the land sold to pay a particular debt. These charges are often called liens or encumbrances, and include: (a) mortgages; (b) tax liens; (c) mechanic's liens; (d) landlord's liens; and (e) statutory liens.

Taxes are a lien against the land, and the land can be sold to pay the taxes, if delinquent. What taxes are liens and how they may be collected is a matter of statute.

In Arkansas, like most states, those furnishing labor or materials for the repair or improvement of realty are given various types of mechanic's liens on the real estate so repaired or improved for the various services and materials furnished. These liens can be foreclosed and the property sold in the manner provided by statute to satisfy the debt. By statute, mechanic's liens, also known as miner's liens, are extended to the development of the mineral estate.

H. MINERAL AND TIMBER SEVERANCES

Frequently, minerals, timber, or soil is sold separately from the land. There are three basic types of these transfers:

So-called leases. These are actually a right to remove the minerals or timber and pay for it upon removal, together with a right of ingress and egress. These may be either an easement or a license to cut and remove. These are terminable upon cessation of the operations or after a stated period of time.
Mineral Severances. These are actually an outright sale of the minerals in place. It does not cease by lapse of time. It is accompanied by an irrevocable easement to remove.
Space Severance. It is possible to make an outright sale of a definite area of space underneath the surface. The owner of this space has the right to continue to use it for storage after the minerals have been removed.

I. AIR SPACE

In recent years, outright sales of space above the surface of the earth have been recognized. This is quite common through the medium of "condominiums," which is actually the sale of certain designated space in buildings. Also coming into vogue is the sale of air space together with the right to erect structures in such space with footings on the ground.

J. CO-OWNERSHIP OF LAND

At common law, whenever there was a grant to several named individuals, they took as joint tenants with right of survivorship. Any one joint tenant could, in his lifetime, sell his undivided share and convert the joint tenancy into a tenancy in common, but if a joint tenant died still owning his undivided share, then his share passed by right of survivorship to the other joint tenants, and he could not devise it by Will to a third party, nor would it pass to his heirs. Under Arkansas law a joint tenancy with right of survivorship is not presumed unless the document states that it is the intention to create such a tenancy.

A grant to several persons creates a tenancy in common, which also existed at common law. In a tenancy in common, the ownership, while held by several persons, is not held jointly. Any tenant can sell his undivided interest and, upon the death of any one tenant in common, his share passes to his heirs or to his devisees and not to the other joint tenants. Under Arkansas law, except as to a conveyance to husband and wife, a tenancy in common is to be presumed unless the conveyance states otherwise.

In a third type of tenancy where property was conveyed or devised to a husband and wife, they held as tenants by the entirety. Following the common law, neither of the tenants can devise their interest. The husband and wife are treated as one and, when one dies, the other survives as the sole owner. A tenancy by the entirety could only be conveyed by joint action of the parties in granting a deed, or by divorce. Neither party could Will away his share. Divorce destroys a tenancy by the entirety, and the former spouse becomes a tenant in common.

K. LOSS OF RIGHTS TO AND INTERESTS IN LAND

Both rights to land and interests in land may be lost in a variety of ways. Actual ownership may terminate through the ending of the estate if it is a defeasible fee or a life estate. A fee or a life estate may also be lost through adverse possession, prescription, or by a taking by eminent domain.

Leaseholds may be lost by abandonment or through default by the lessee of the conditions of the Lease.

Rights to land, such as easements, licenses, or equitable servitudes, may be lost through abandonment, prescription by the owner, or sometimes by changes in conditions that no longer warrant the conditions imposed. Sometimes these conditions may terminate through partial performance over a long period of years.

III.
SURVEYING AND BOUNDARIES

A. ORIGIN OF SURVEYS

By adoption of the Constitution of the United States, all property located within the original colonies became the property of each state, therefore, there was no public land within the boundaries of the thirteen original colonies.

All property of the thirteen colonies was described by "metes and bounds." The description usually ran from the foot of some mountain or the mouth of some stream or a river bank and, in many cases, commencing at a tree or a stump.

B. METES AND BOUNDS

A survey of a tract by metes and bounds is the oldest known manner of describing land and is the outgrowth of the art of surveying as practiced in olden times. It consists of running out tracts of land by courses and distances and planting monuments at the several corners or angles. The planting of permanent monuments at each angle is of paramount importance. The description of property by "metes and bounds" means little to the layman, is difficult to verify and prone to error. For this reason, doubtless surveyors inaugurated the rectangular system which is in force largely in those States lying west of Pennsylvania and in western Canada.

Owing to the variation of the magnet needle, the stretching of chains and tapes used in making surveys, the condition of the weather, and the difference in chainmen, it is exceedingly difficult to retrace obliterated or lost lines of such boundaries unless at least one of the lines can be identified. If the surveyor can find one of the sides of the tract, he can adjust his instrument and chain or tape to correspond with those used in the prior survey or he can locate the other lines and corners by proportional measurements.

The surveyor, in retracing a former metes and bounds survey, often faces a difficult task. In the early days, beginning points as well as corners were usually artificial landmarks not always of a permanent character. Trees, posts, stumps, bends in rivers, etc., are likely to disappear over the years, and seldom were live monuments or witness monuments used. The surveyor's notes were also often faulty or nonexistent, and the chains were worn or inaccurate.

Later, as additional lands were acquired, the government found it necessary to prepare for sale or settlement of various tracts known as public lands. These public lands had to be surveyed into smaller tracts suitable for sale or allotment as homestead. In 1785, at the suggestion of Thomas Jefferson, the Continental Congress established the unit of measurement to six square miles. These new units were called Townships, and the sections were numbered from 1 to 36, commencing at the southeast corner, numbering to the west and then back to the east.

C. THE RECTANGULAR SYSTEM

In 1805, the present system, known as the Rectangular System, was adopted. This system was first used in the Northwest Territory and most of the territory west of the Mississippi River, except Texas, was surveyed in this manner. The surveying of all public lands was done by the General Land Office of the government. Since 1946, this has been known as the Bureau of Land Management.

The descriptions of land and plats of the original surveys filed in the General Land Office, as made from the field notes by the Surveyor General, now the Chief Cadastral Engineer, are conclusive, and the section lines and corners as laid down in the descriptions and plats are binding upon the government and upon all parties concerned.

Before the United States conveys lands, it may make as many surveys of a tract of public land as it desires and the last accepted survey will control. Where the government has made more than one survey, it may use either survey in the patent.

A private individual cannot correct an erroneous federal survey. Official government surveys cannot be subject to question in a suit brought between private parties. Errors in the location of corners of governmental subdivisions cannot be corrected by the Court. The location of corners and lines by government survey is conclusive.

The Congress of the United States, by Federal statute, established a system for the surveying of public lands and the boundaries and limits of the sections and subdivisions thereof must be determined in conformity with those guidelines. Errors of location, once established, cannot be corrected by the courts or by a surveyor who is employed by the court to locate government corners or lines.

Private individuals in a suit between themselves may not question the accuracy of a confirmed federal survey. A government survey creates, not merely identifies, sections and boundaries of land. When lands have been disposed of by the government according to a line appearing on an official plat of a government survey approved by the Surveyor General, the location of the line shown on the official plat is controlling. Government corners mark the true boundaries of a party holding under a government patent based on a government survey.

In making a survey by the Rectangular System, it is necessary to have a starting point and from such point, a line is run due North to the North boundary line of the State, District, or Territory to be surveyed. This North and South line is known as the Prime or Principal Meridian. There is likewise established a Base line running East and West at approximately right angles to the Prime or Principal Meridian line.

Lines are next run North and South parallel with the Prime Meridian. Beginning at the Principal Meridian, these lines mark the country off into strips of land six miles wide. Each strip is known as a Range. Ranges, either East or West, are numbered from the Principal Meridian.

After the Range lines are run, the East and West lines are established. The first line so run is called the Base line. All East and West lines cross the Meridian at right angles. Every six miles contains East and West lines which run parallel with the Base line, cutting the Ranges into Sections known as Congressional Townships, but referred to simply as Townships. All Townships are numbered commencing with the number 1, both North and South of the Base line.

Owing to the curvature of the Earth's surface, lines extending toward the magnetic pole become closer together. All Townships are narrower at the North side than on the South side, the North end being approximately three rods or 49.5 feet narrower than the South end.

In order to keep these lines as near six miles apart as possible, usually every 24 miles North from the Base line a stop or correction line is established, known as a Standard Parallel (or Correction Line). Guide meridians are likewise established at intervals of usually 24 miles. The survey is again moved over so that the North and South lines will be six miles apart.

After the establishment of a Meridian and a Base line, and after Townships have been formed, it is then necessary to survey and number each Township into 36 Sections, containing approximately 640 acres each. These Sections are numbered from 1 to 36 commencing with number 1 at the Northeast corner of the Township and numbered to the West and then back East.

All Sections cannot contain 640 acres because of the Earth's curvature hereinbefore mentioned, because of the impossibility of absolute accuracy in surveying, and because the lines surveyed are not always parallel. Accordingly, a Township of more or less than 36 exact Sections containing 640 acres each is produced. To take care of this discrepancy, the Sections on the North and West side of the Township contain an irregular number of acres and are known as Fractional Sections. Therefore, we usually have a Township with 25 full sections and 11 Fractional Sections.

The 11 Fractional Sections of a Township, where Fractional Sections are caused by the curvature of the Earth's surface and inaccurate surveys, are Sections 1 through 6 along the North side of the Township, and Sections 7, 18, 19, 30 and 31 along the West side of the Township. There is never a Fractional Section caused by the curvature or inaccurate survey any place except along a Township or Range line. In very few exceptional cases, it may happen that Fractional Sections will border on the South or East side of a Township -- this, however, is extremely rare.

As Sections 1 through 6 contain more or less than 640 acres, they are surveyed to make 320 acres in the South half. The North half is then divided so that the South half of the Northeast Quarter and the South half of the Northwest Quarter of those sections will each contain 80 acres. The remaining strip of land along the North side of the Section is then divided into four lots, each given a number; the acreage of each lot always being 40 acres, more or less, and ascertained by the Land Office. The Northeast lot is numbered 1 and the remaining lots are numbered 2, 3, and 4, running to the West.

In Sections 6, 7, 18, 19, 30, and 31, the surplus or deficit acreage is placed in the West half of the Section along the West line of the Township, and divided in the same manner as though it were along the North line of the Township, except the Northwest lot is numbered 1, and the remaining lots are numbered running to the South. Section 6, lying in the extreme Northwest corner of the Township, would, therefore, contain lots both along the North side and the West side.

It has always been the rule of the surveyor to survey and establish as many 80 acre tracts as possible or practical in each Section. Generally, a section is the smallest subdivision actually surveyed by the government surveyors, and at each Section corner is a marker known as a Monument of Survey. Sections, however, are divided into Quarter Sections containing 160 acres, etc., which will be discussed later under Descriptions.

Fractional Sections cannot be described in the same manner as a Full Section. Townships bordering on or containing Indian or Timber Reservations, National Parks, Townships, Lakes, or Rivers, may contain Fractional Sections caused by such reservation, lake or river taking out of the Public Lands irregular tracts and uneven acreage.

Perhaps the most pronounced or noticeable number of Government Lots occur along a river -- many times a quarter section will contain as many as 12 or 18 lots -- varying in size from a fraction of an acre to 40 acres, more or less.

Where lots occur along a river, occasionally such lots have been surveyed and designated as Lot No. __ on the North Bank, the South Bank, the East Bank, or the West Bank of such river. This is caused by two different groups of surveyors working on the Survey -- one group at one time on one side of the river, and the other group later on the other side of the river.

The Meander Line: A meander line is a guide line which runs along a stream or body of water for the purpose of establishing the course of the bank of such stream or body of water, to procure data with which to plat fractional sections (Government Lots), and to compute the area thereof.

The acreage of Government Lots is not computed by the surveyor on the ground and such guide line is very essential and necessary for this purpose.

Quite often you encounter a description which follows the Meander of a stream, merely meaning a general direction along a meander line. A Meander line has been held not to be a boundary line but merely a guide line.

The general rule of the Land Department is to establish this Meander line at Mean High Water Mark, meaning, according to some Court decisions, to be a line which lies beyond the part washed free from vegetation.

The river bed of a non-navigable stream is presumed to belong to the adjacent property owners (called a riparian owners), and if the course of the river changes and the change is gradual, the riparian owner follows the stream in its change. In other cases, where a water line is a boundary of a tract of land, that water line remains the boundary no matter how it changes by accretion, and a deed describing the land as a certain lot by number conveys the land up to the ever-changing line of the stream or lake. The water line continues the boundary line and the deed carries the accretion. This is the general rule, but there are some apparent exceptions. One exception to this general rule is a change by way of an avulsion -- an avulsion being a sudden and perceptible change in the course of a river or stream.

D. DESCRIPTIONS

A description is a statement of the land involved in a real estate transaction. Every description should be definite enough to permit the surveyor to accurately locate the property described from the description itself without referring to the boundary line of any other piece of property and should be so clearly set out that there will be no doubt whatsoever as to the exact location of the property intended to be described.

The main object of a description is to furnish means of identification, and when the description is sufficient to enable the surveyor to locate the property with absolute certainty, it is a sufficient description.

A description of a tract or parcel of land included in a plat or a government or artificial survey, where possible, should always include the words according to the recorded plat thereof or according to the official Government survey thereof. When this is done, the plat or official survey actually becomes a part of the description, with reference to location, notes, lines, land marks, monuments, etc., as complete as if the plat, survey, field notes, etc., were actually incorporated into the deed itself. It sometimes happens that errors are made in plats, and when this happens, the actual survey takes precedence if there is a conflict between the plat and the survey.

The following table will be very helpful when checking or preparing descriptions:

1 Link = 7.92 inches
1 Rod = 16.5 feet
1 Chain = 66 feet or 4 rods or 100 links
1/2 Mile = 2,640 feet or 40 chains or 160 rods

1 acre contains 43,560 square feet
1 acre is approximately 208 3/4 feet square
The length and breadth of a 40 acre tract is 1,320 feet or 20 chains or 80 rods
The length and breadth of a 10 acre tract is 660 feet or 10 chains or 40 rods
The width of a 5 acre tract would be 330 feet or 5 chains or 20 rods

Generally, descriptions may be classified in the following four ways:

First: A Rectangular or Government Survey description being a subdivision of a section of a government lot located within a subdivision of a section and often referred to as a Farm Land description.

Second: Lot and Block descriptions which are according to a plat or map. The quantity or size of the tract conveyed is determinable only by reference to some map or plat which may or may not be recorded.

Third: Metes and Bounds descriptions -Metes are measures of length (inches, feet, yards, rods, chains, and/or links) and determine a certain quantity of land, such as square feet, square rods, acres, etc. Bounds are boundaries both natural and/or artificial, and confine that quantity of land within certain fixed limits. Hence, the use of the statement by metes and bounds has the meaning of limitation, that is, it fixes definitely the contents and the limits of a piece of land.

Angles: This is probably the most confusing part of descriptions as few persons clearly understand the angle or the direction of lines. Angles are used in descriptions where the lines do not run due North, South, East, or West. Such angles are measured by degrees, minutes and seconds, and are divisions of the circumference of a circle containing 360 degrees. Each degree contains 60 minutes and each minute contains 60 seconds. Even though we frequently encounter minutes and seconds in descriptions, they are of such small variance that they are of little importance to title men in the drawing of a metes and bounds description. Therefore, we shall deal only in degrees. By dividing a circle in four equal parts, by two lines running in opposite directions, we make four right angles.

Fourth: Description by Monument, which may also, at least partially, include a metes and bounds description. A monument may be defined as a "landmark which is used for the purpose of indicating a boundary of a parcel of land." It may be either natural or artificial. Natural Monuments are rivers, lakes, streams, trees, mountains, rocks, and/or springs. Artificial Monuments are landmarks or signs erected by human means, such as a fence, wall, house, street, alley, post, stakes, canal, or a drainage ditch.

IV.
THE NATURE OF THE MINERAL ESTATE

A. MINERAL INTERESTS

Minerals can be severed from the surface estate by either grant or reservation and when severed become subject to separate ownership. Segars v. Goodwin, 196 Ark. 221, 117 S.W.2d 43 (1938). A Mineral Deed placed of record constitutes a "constructive severance" of minerals from the surface and creates two (2) titles, one to the surface and the other to the minerals. Schnitt v. McKellar, 244 Ark. 377, 427 S.W.2d 202 (1968). Further, the sale of an undivided mineral interest operates as a severance, creating two (2) distinct estates.

Like most other undivided interests in real property, the owner of an undivided mineral interest is entitled to partition. Arkansas Code Section 15-73-404 to 409 (1987) (upheld by Overton v. Porterfield, 206 Ark. 784, 177 S.W.2d 735 (1944), when attacked as a denial of due process). A leasehold interest is not subject to partition under Section 15-73-401 through 409 of the Arkansas Code. Pastuer v. Niswanger, 226 Ark. 486, 290 S.W.2d 852 (1956).

The owner of the mineral interest has several important and distinct rights, to-wit: (1) the right to develop the minerals; (2) the executive right (right to lease the minerals); and (3) the right to convey an interest to others, either as an undivided mineral interest or as a royalty interest. See generally Wright, Arkansas Law of Oil and Gas, 9 UALR Law Journal 223 (1986-87) (hereinafter Wright). The executive rights can be severed from the mineral estate. This is usually done by a reservation of the right to execute leases and receive bonus and delay rentals.

The owner of the mineral estate has an easement of reasonable use of the surface for the purpose of developing the minerals. Diamond Shamrock Corp. v. Phillips, 256 Ark. 886, 511 S.W.2d 160 (1974). An owner of minerals has a right of ingress and egress to his wells "but in exercising that right 'it was his duty to do so in the manner least injurious to his grantor.'" Theoretically, there is no liability to the surface owner for reasonable use of the surface. However, the surface owner rarely concedes that the mineral owner's use is reasonable or that the surface owner is not entitled to be compensated for the drilling operations.

In Bond v. Sanchez-O'Brien Oil and Gas Company, 289 Ark. 582, 715 S.W.2d 444 (1986), the Arkansas Supreme Court held that the lessee of an oil and gas lease has an implied duty upon termination of production or upon drilling of a dry hole to restore the surface of the land as nearly as practicable to the same condition as it was prior to the drilling. In this particular case, the surface of the land had been sold to a subsequent purchaser whose predecessor in title had executed a release of all damages to the drilling contractor. The surface owner, after executing the release to the operator of all damages to the surface estate, sold his surface estate to a third party who recorded his deed before the operator recorded his release. The Court found the purchaser to be a purchaser for value without notice of the unrecorded release and was entitled to recover damages from the operator upon the latter's failure to restore the premises upon abandoning operations.

In Fox v. Nally, 34 Ark. App. 94, 805 S.W.,2d 661 (App. 1991), the Arkansas Court of Appeals permitted the landowner who had executed an oil and gas lease in favor of Diamond Shamrock to recover damages for the temporary injury to real property despite the fact that the lease express permitted the installation of pipelines and that the landowner had subsequently executed a "Surface Use Agreement and Damage Release." The evidence reflects that the landowner was paid $3,000 for the execution of the "Damage Release" but the trial court still awarded the landowner an additional $600 for temporary injury to the land because the operator breached his duty to restore the property to the same condition that it was in prior to the injury.

In light of the Fox and Bond decisions, it is our advice that every such release be in recordable form and be placed of record immediately in the County in which the lands are located. Such Release should expressly waive the necessity to restore the surface to the condition it was in immediately prior to the commencement of the drilling operations.

Two statutes, Section 15-72-213 and Section 15-72-214 of the Arkansas Code, grant the surface owner certain liens or claims against the operator for damages caused by the operator's neglect. This lien attaches to the fixtures, equipment, oil, gas, and production which may run to the credit of the operator to secure payment for all damages that can be lawfully recovered under the terms of the oil and gas lease(s) covering the particular property. Accordingly, it is suggested that any operator contemplating development document the condition of the surface location by photographs. Such photographs should be taken both before and after the drilling operations.

(a) The Strohacker Doctrine -Defining "Minerals"

The Strohacker Doctrine comes from a case decided by the Arkansas Supreme Court in 1941, Missouri Pacific Railroad Co. v. Strohacker, 202 Ark. 645, 152 S.W.2d 557 (1941). The Doctrine says that the term "minerals" in a grant or reservation will include only those substances "commonly recognized as minerals" at the time and location of the execution of the deed. A current example of Strohacker is whether or not the word "minerals" in an 1989 reservation in Scott County, Arkansas, would included oil and gas.

While the intent of the parties is the key in ascertaining the effect of a conveyance, the courts in Arkansas determine such intent by use of the Strohacker Doctrine. The actual subjective intent of the grantor will not be given effect and the court will look at "the general legal or commercial usage of the word at the time and place of its usage." Stegall v. Bugh, 228 Ark. 632, 310 S.W.2d 251 (1958). Strohacker is a rule of property law in Arkansas and the courts will not use a different approach in determining the meaning of the word "minerals."

(b) The Duhig Rule

Professor Richard W. Hemingway in his treatise, The Law of Oil & Gas, p. 116 (1983) defines the Duhig Rule as:

Where a grantor conveys an interest in the minerals and in the same instrument reserves a mineral interest, and where there is a prior interest outstanding that is not excepted from operation of the deed, so that effect may not be given to both the interest that grantor has purported to convey and the interest grantor has attempted to reserve . . . the grantee is not limited to a suit in damages for failure of title, but the attempted reservation will fail to the extent necessary to make the grantee whole.

The rule arose from Duhig v. Peavy-Moore Lumber Co., 144 S.W.2d 878 (Tex. 1940), a case involving a warranty deed. Simply put, the Duhig Rule prohibits a grantor from agreeing to warrant and defend title to a property interest and then in the same instrument reserve to himself some portion of that same property interest. For example, suppose A deeds land to B reserving a 1/2 interest in the oil, gas, and minerals. B then conveys the land to C by warranty deed which recites that B reserves a 1/2 mineral interest in himself but which does not except the 1/2 mineral interest outstanding in A. What does C have? Under Duhig, B cannot reserve to himself what he has granted to C, and C will get the surface plus 1/2 of the minerals while B retains no interest in the property.

Arkansas has two (2) recent decisions on the Duhig problem. The first, Hill v. Gilliam, 284 Ark. 383, 682 S.W.2d 737 (1985), states that Arkansas will not apply the Duhig rule to quitclaim deeds. A few months later, in Peterson v. Simpson, 286 Ark. 177, 690 S.W.2d 720 (1985), the Arkansas Supreme Court held that Duhig would apply only to warranty deeds and then only where the parties were not parties to the original deed.

In view of Hill and Peterson, the status of the Duhig rule in Arkansas can be stated as follows: The Rule applies to warranty deeds when the immediate parties to the deed are not involved in the dispute.

B. LEASEHOLD INTERESTS

The rule in Arkansas, prior to 1982, was that a leasehold interest (that interest held by a lessee) was in the nature of an easement. The Arkansas Supreme Court held in 1965 that an "oil and gas lease does not of itself constitute constructive severance of the two estates (surface and mineral), but conveys only an interest and easement in the land itself and no title passes until the oil and gas are reduced to possession." Garvan v. Kimsey, 239 Ark. 295, 297, 389 S.W.2d 870 (1965). Thus, the lessee has no title to the minerals until they are actually in his possession.

The Arkansas court seems to have abandoned the view that leases grant only an easement. In Hillard v. Stephens, 276 Ark. 545, 637 S.W.2d 581 (1982), in discussing a gas lease the court stated "The gas lease constitutes a present sale of all the gas in place at the time such lease is executed; and as the gas leaves the well head, the entire ownership thereof is in the lessee . . . ."

Where the leasehold interest (working interest) in a common lease or mineral venture is owned by multiple parties under a joint operating agreement, the designated operator has a "fiduciary duty" to the non-operators. Texas Oil & Gas Corporation v. Hawkins Oil & Gas, Inc., 282 Ark. 268, 668 S.W.2d 16 (1984). A fiduciary is a person who undertakes to act in the interest of another person. As a fiduciary, the operator in an oil and gas prospect, has a duty of utmost fair dealing and good faith to the non-operators. The operator may not act selfishly or in his own best interest.

C. ROYALTY INTEREST

In Arkansas, as elsewhere, a royalty interest is a right to a share of the mineral produced accruing to the owner of the royalty. The royalty interest before production is part of the land and, therefore, subject to conveyance but becomes personal property when produced. Shreveport-EI Dorado Pipe Line Co. v. Bennett, 172 Ark. 804, 290 S.W. 929 (1927). The royalty owner typically has no right to explore or develop minerals, or to execute leases. A conveyance reserving to the grantor the right to execute oil and gas leases and receive a bonus for execution generally creates a non-participating royalty interest in the grantee. In most instruments, it is entitled "Non-Participating Royalty Deed."

Frequently, conveyances in Arkansas are entitled "Warranty Deed -- Royalty," "Sale of Royalty in Oil and Gas Lease," "Royalty Deed," "Mineral Deed-Royalty," and many, many others. Most such instruments contain a granting clause similar to the following:

grant, bargain and sell to grantee, his heirs and assigns [some fractional interest] of all minerals in and under the described tract of land.

The instrument then contains further language indicating that the grantee is entitled to royalty under the deed, or will refer to a certain number of "royalty acres." The Arkansas courts look to the four corners of the instrument to determine what was intended by the parties but, generally, the granting clause prevails, and if there is no mention of royalty in the granting clause, it should be treated as a conveyance of minerals.

The words "in and under" the described lands will usually be construed to refer to minerals in place rather than royalty interests. Consider the following granting clause:

"one-eighth [sic] (being all the Royalty retained by us) undivided interest of, in, and to all the oil, gas, and minerals on, in and under the . . . lands . . . granting to said [grantee] . . . the right of ingress to and upon said lands for the purposes of securing, storing, and removing oil and gas."

In Wynn v. Sklar & Phillips Oil Co., 254 Ark. 332, 493 S.W.2d 439 (1973), the Arkansas court held that the above was a grant of minerals not royalty. Despite the language mentioning "Royalty", the court held that "in and under" generally refers to minerals in place. Care should be taken in interpretation of the granting clause in that many variations exist. If the granting clause recites "royalty acres", "royalty interest", "R.A.", or "R.I.", the estate granted is generally interpreted as a conveyance of royalty as opposed to minerals, even though the instrument is silent as to the right to lease and receive a bonus.

V.
METHODS OF ACQUIRING MINERAL INTERESTS

A. DEEDS

As stated previously, the mineral estate can be severed and conveyed or reserved separate and apart from the surface estate. The transfer of a mineral interest can be by conveyance in a deed, or the mineral interest can be created by reservation or exception in a deed.

B. TESTAMENTARY DISPOSITION - BY WILL

Real property, including interests in oil, gas, and minerals, may be devised by Will in Arkansas. There are several pertinent things to look for in examining a testamentary disposition.

(a) Formalities of the Will:

Generally, a person must be 18 years of age to make a Will. Arkansas Code Section 28-25-101 (1987). The Will must be signed by the testator and at least two witnesses. Id. at Section 28-25-103. If a witness has an interest in the Will then there must be two disinterested witnesses as well, otherwise the interested witness forfeits the provisions of the Will in his favor. Id. at Section 28-25-102. The testator must declare to the attesting witnesses that the Will is his and must sign the Will in their presence or acknowledge his signature. Id. at Section 28-25-103.

A person can execute a holographic Will, one written solely in the testator's handwriting, and such can be established by testimony of three disinterested witnesses who can identify the handwriting and signature of the testator. Id. at Section 28-25-104.

(b) Will Contests:

A contest of a Will offered for probate is subject to time limitations. For a contest based on the existence of a valid, more recent Will, the contest must be brought before final distribution and within five (5) years of the testator's death. A contest based on any other grounds must be brought at or before the hearing of a petition for probate if the contestant has been given notice other than by publication. Ark. Code. Ann. Section 28-40-113. In other instances where the contestant has not received notice of hearings, he has three (3) months after admission of the Will to probate in which to file his contest. In any case, the contest must occur within three (3) years of admission to probate.

When an oil or gas interest is acquired from the personal representative of the estate or of a distributee prior to the filing of a Will contest, the purchaser shall take such interest free and clear of any rights of a person interested in the estate. Id. at Arkansas Code Section 28-40-115. So long as the purchase occurred prior to a contest and was made for value, the purchaser is protected under Arkansas Code Section 28-40-115.

The Will of a non-resident is not made effective simply by filing for record in Arkansas. It is necessary that the Will of a non-resident be admitted to probate in Arkansas by filing a Petition with an authenticated copy of the Will and the entry of an Order Admitting Will to Probate entered by a Court of competent jurisdiction. Notice of such filing is required. Arkansas Code Section 28-40-102.

C. INTESTATE SUCCESSION

The estate of a person who dies on or after January 1, 1970, without a Will or with an invalid Will will be distributed under Section 28-9-214 of the Arkansas Probate Code as follows:

To the children of the intestate or the descendants of the children who predecease the intestate. They take subject to the dower or curtesy of a surviving spouse (discussed infra). All members of a class of equal degree of relation take per capita (i.e., all children get an equal share) while grandchildren or great grandchildren will take per stirpes (by representation).
(only as to intestate successions occurring on or after January 1, 1970) To the surviving spouse where the intestate died without descendants. If the marriage was for more than three years or longer, the survivor would inherit the entire estate. If for less than three years, the spouse's share is one-half of the intestate estate. In either situation, the surviving spouse's dower or curtesy and homestead claims are superior to the claims of creditors.
(only as to intestate successions occurring on or after January 1, 1970) If the intestate left no descendants or surviving spouse, or where the survivor had been married to the intestate for less than three years, the remainder of the estate would pass as follows:

(a) To the intestate's parents equally, or to the surviving parent;

(b) If neither parent survives, to the intestate's surviving brothers and sisters, and to the descendants of the deceased brothers and sisters, taking per capita or per stirpes according to Sections 28-9-204 and 205 of the Arkansas Code;

(c) To surviving grandparents, uncles, and aunts equally, and to the descendants of any uncle or aunt predeceasing the intestate;

(d) To surviving great-grandparents and great-aunts and great-uncles, and to the descendants of any great-aunt or great-uncle predeceasing the intestate;

(e) To surviving spouse if the marriage was for less than three years;

(f) If there is no surviving spouse, then to the heirs of the deceased spouse of the intestate (meaning the spouse to whom the intestate was last married); but the heirs of a divorced spouse may not inherit; and,

(g) If none of the above is applicable, the estate shall escheat to the County where the intestate resided at death.

For the purpose of intestate succession, on or after January 1, 1970, the distinction between real estate acquired by purchase and that acquired by gift or inheritance from some ancestor is abolished by Arkansas Code Section 28-9-219; all real estate of an intestate is treated the same whether acquired by gift, devise, or descent from an ancestor, or by some other means (except for the purposes of dower and curtesy).

Prior to January 1, 1970, intestate succession was:

To the children of the intestate or the descendants of the children who predeceased the intestate.
To the intestate's parents equally for life or to the parent from which the estate derived;
To the intestate's brothers and sisters or the descendants of brothers and sisters who predecease the intestate; and,
To the surviving grandparents, uncles, and aunts, and to their descendants per capita or per stirpes.

D. ADVERSE POSSESSION

Prior to 1983 adverse possession in Arkansas required possession which is open, notorious, peaceful, continuous, adverse, and hostile to the record owner for more than the statutory period. Jeffery v. Jeffery, 87 Ark. 496, 113 S.W. 27 (1908). The general period of limitations in Arkansas for adverse possession is seven years. Arkansas Code Section 18-61-101. If the claim of ownership is made under a tax deed, Ark Code Ann. Section 18-61-106 provides a two year period in which the owner must initiate a cause of action to obtain possession of the lands sold under a donation deed from the State. Effective as of 1983, A.C.A. 18-11-106, requires the payment of ad valorem taxes in addition to the seven years of adverse possession.

As to the adverse possession of the mineral estate, there are no Arkansas decisions directly on point. The rule appears to be that adverse possession of the surface estate will constitute adverse possession of the minerals where the mineral estate has not been severed. See, e.g., Buckner v. Wright, 218 Ark. 448, 236 S.W.2d 720 (1951). Where the minerals are severed from the surface estate, the adverse possession claim can only result from the opening and operating of mines; if mining continues for the statutory period, title may ripen therefrom. See Taylor v. Scott, 285 Ark. 102, 685 S.W.2d 160 (1985); Bodcaw Lumber Co. v. Goode, 160 Ark. 48, 254 S.W. 345 (1923). The leasing of minerals without actual drilling or mining activity does not constitute adverse possession. Adams v. Bruder, 275 Ark. 19, 627 S.W.2d 12 (1982). Further, the drilling of a well on one tract of land within a lease does not constitute constructive possession of mineral rights in other tracts within the same lease.

One unanswered question in Arkansas is whether an adverse claimant of one mineral has adverse possession of all minerals. In Hurst v. Rice, 278 Ark. 94, 643 S.W.2d 563 (1982), the court held that an adverse possessor of gas, though receiving fifteen years of gas royalties, could not also claim to be the adverse possessor of all coal rights. Hurst carefully pointed out, however, that it was not intended to decide that adverse drilling or producing of one mineral could never be adverse as to other minerals.

To ripen title to royalty, an adverse claimant must openly, notoriously, and adversely claim and receive payments accruing to the royalty interest adversely claimed. Warmack v. Henry H. Cross Co., 237 Ark. 869, 377 S.W.2d 47 (1964).

The case of Taylor v. Scott, 285 Ark. 102, 685 S.W.2d 160 (1985), held that when mineral ownership has been severed by deed from the surface ownership, adverse possession of the surface is ineffective against the owner of the minerals unless the possessor actually invades the minerals by opening mines or drilling wells and continues that action for the necessary period. In Taylor, the deed from the owner of record title conveying an undivided interest in the minerals was not recorded until almost twenty years had passed. In the period between the execution of the mineral deed and the recordation of the mineral deed, a third party went into adverse possession of the land and claimed that he had acquired a limitation title to the land, both surface and minerals. In Taylor, the court gave effect to the prior mineral deed even though it was not recorded until many years after limitation title to the surface had been perfected.

When a break in the title is evident due to a failure of a party to record a deed, or by title that has been created or claimed through adverse possession, it is possible that a subsequent filing of a mineral deed, as in the Taylor case, could change the mineral ownership at a time subsequent to the time of a title check. In 1990, the Arkansas Supreme Court extended the ruling in the Taylor case in Witt v. Graves, 302 Ark. 160, 787 S.W.2d 681 (1990), when it affirmed the findings of the trial court which found the execution of "lost deed" which contained a mineral severance It is virtually impossible to foreclose the risk of a Taylor or Witt late filer. The only "solution" to this problem is to put one on notice that such may occur wherein there is a break in the chain of title.

E. TAX TITLES

Where land is unimproved and unenclosed, the person who pays taxes thereon and has color of title is held to be in possession thereof if he timely pays the taxes for seven consecutive years. Arkansas Code Section 18-11-102. Payment of taxes on wild and unimproved land for a period of fifteen consecutive years creates a presumption of law that the person, or his predecessor in title, held color of title to the land prior to the first payment of taxes and that all tax payments were made under color of title. Arkansas Code Section 18-11-103. If the title to the minerals is severed, then the payment of the taxes by the owner of the surface estate does not amount to possession of the minerals. Claybrooke v. Barnes, 180 Ark. 678, 22 S.W.2d 390 (1929). Even where a claimant buys a tax deed to a mineral estate and pays taxes on that estate, that claimant does not gain color of title because there was never actual possession of mineral rights. Garvan v. Potlatch Co., 278 Ark. 414, 645 S.W.2d 957 (1983). The presumption of color of title where the claimant has timely paid taxes for fifteen consecutive years does not apply to minerals, as the statute states, "wild and unimproved land." "Minerals within the earth are not susceptible of enclosure." Burbridge v. Rosen, 240 Ark. 500, 400 S.W.2d 502 (1966).

Care should be taken when ascertaining the validity of a tax title, particularly of a tax title to a mineral interest. It is a common practice in Arkansas that invalid descriptions are generally used by the tax assessor. If such descriptions are not sufficient to clearly describe and identify the lands, then such description is fatal to any tax title. Generally, the invalid description is a "part" description reading "part of a governmental quarter-quarter section, 8 acres", or the abbreviation for part, such as "pt."

A mineral interest that has been severed is subject to separate assessment. The decisions of the Arkansas Supreme Court indicate that for a separate assessment of the minerals to be valid it must be "subjoined" to the surface assessment. The definition of "subjoined" has been defined in recent decisions in Arkansas, and it is defined as being attached immediately to the surface assessment. An example of such assessment would be a surface assessment of a governmental quarter-quarter section and a one-half (1/2) mineral interest and immediately following that particular assessment would be an assessment of the remaining one-half (1/2) mineral interest. It was the practice of assessors in the various counties wherein severed mineral interests were assessed to not "subjoin" the mineral assessment. They were generally contained in a separate book, or if not in a separate book, the mineral assessments followed the complete assessment of all surface assessments. To determine the validity of a tax title it must be determined that the assessment met the legal requirements for assessing severed mineral interests at the time of the assessment. This requires an actual review of the assessment records of the county for the year or years in which the forfeiture of the severed mineral interest occurred.

A lien of a tax forfeiture for properly assessed minerals can preempt a subsequent conveyance to the surface and minerals or the minerals alone. If a tax delinquency occurs in a certain year and subsequent thereto the surface interest owner conveys an undivided mineral interest to the third party, the conveyance is subject to the lien created by the tax delinquency. Thereafter, the land is forfeited to the State for taxes, and a third party purchases such interest at a tax sale. The lien attached prior to the conveyance of the undivided mineral interest and, therefore, could divest the ownership of the grantee of the undivided mineral interest.

Effective July 16, 2003, Act 1279 of the 2003 Acts, now codified at A.C.A. § 26-37-314 entitled "Sale of tax delinquent severed mineral interests prohibited" now provides that only the owner of the surface shall be permitted to purchase the tax delinquent severed mineral interests. The surface owner purchasing mineral interests under this section shall be allowed to purchase the mineral interests for an amount equal to the delinquent taxes and shall not be required to pay any interest or penalties if the surface owner was not the owner of the mineral interests at the time the taxes became delinquent. The new legislation specifically provides that no deed issued under this Act shall be void or voidable on the ground that the assessment of the property taxes on the severed mineral interest was not subjoined to the assessment of the property taxes on the surface realty.

F. DOWER AND CURTESY

Generally in Arkansas a surviving spouse is entitled to a dower or curtesy (hereinafter "dower") interest of a 1/3 life estate in all realty if the deceased spouse left descendants. Arkansas Code Section 28-11-301. Arkansas also has specific statutes dealing with dower rights as they relate to oil and gas leases. Arkansas Code Section 28-11-304 states:

. . . the surviving spouse shall be entitled, absolutely and in his or her own right, to one-third (1/3) of all money received from the sale of timber, oil and gas or other mineral leases, oil and gas or other mineral royalty or mineral sales, and one-third (1/3) of the money derived from any and all royalty . . . in lands in which he or she has a dower, curtesy, or homestead interest, unless said surviving spouse shall have relinquished same in legal form.

Because the dower laws create a life estate with remaindermen at common law, the party seeking a lease of mineral interests should obtain execution by both the surviving spouse and the remaindermen, usually descendants of the decedent. The lessee of a life estate constituting dower does not acquire any working interest in the leasehold estate unless such dower interest has been assigned to a particular tract of land.

Dower is assigned by a statutory procedure. If the dower is not assigned to the surviving spouse within one year from the death of the decedent, or within three months after demand, the surviving spouse may petition the Probate Court listing the lands in which dower is claimed. If the proper procedure is followed, the surviving spouse can have dower allotted. The lessee of such a person obtains a working interest for the life of the lessor.

Allocation of Bonus and Rentals:

In instances of dower, it is the general practice in Arkansas to allocate one-third of the bonus and rentals to the surviving spouse. The statutory provision set forth herein for the payment of a one-third dower interest in royalty is the guiding force in making such determination, but it is only a guideline. In the event of a life estate other than dower, the bonus and rentals to be paid to the life tenant are negotiated with the tenant; if not approved by the remaindermen, a full bonus may be necessary for the remaindermen. Prudent practice would dictate that a rental division order be executed by the life tenant and the remaindermen.

G. SEPARATE PROPERTY

Separate property ownership is the rule and not the exception in Arkansas. Separate property ownership is subject to the dower or curtesy interest of the spouse. The signature of the non-owning spouse is required to release his or her right of dower or curtesy, if the lease is to be free of the claim of the non-owning spouse's interest of dower or curtesy.

H. TRUSTS

Trusts should be of particular concern to the attorney or landman concerned with acquiring leasehold interests or developing mineral interests in the State of Arkansas. Real estate or mineral interests owned by a trust requires the landman or title examiner to review the trust instrument. Frequently, the documents necessary to show the authority of the trustee to own, convey, lease, ratify, or mortgage real estate or mineral interests are not set forth in the deed records. These documents must be reviewed in order to determine the authority of the trustee to deal with the property. If minerals are owned by a trust, the landman or title examiner must determine the (1) present trustee, (2) the authority of the trustee to deal with the property owned by the trust, and (3) the current status of the trust as it relates to the beneficiaries. If the trust has terminated, the trustee has no authority to deal with the property that was previously owned by the trust, even if record title does not reflect any conveyances out of the trust to the trust beneficiaries.

VI.
TYPES OF MINERAL OWNERSHIP

A. COTENANCY

The mineral interest in land, including the leasehold interest, can be held either as tenants in common, joint tenants with right of survivorship, or tenants by the entirety.

(a) Development by Co-tenants:

Arkansas follows the majority rule that a co-tenant, or his lessee, does not trespass or commit waste when he produces minerals without the other co-tenant's consent. Fife v. Thompson, 288 Ark. 620, 708 S.W.2d 611 (1986). The producing co-tenant or his lessee must account to his co-tenant for their proportionate share of production less costs. In Budd v. Ethyl Corp., 251 Ark. 639, 474 S.W.2d 411 (1971), the court pointed out that the lessee of one co-tenant has no rights against the lessee of a second co-tenant as both have an equal right to develop the leasehold.

(b) Partition:

The owner of a mineral interest has a specific right to partition that interest where there is no outstanding oil and gas lease thereon. Arkansas Code Section 15-73-401 through 409. An owner wishing to partition his interest shall petition the chancery court and shall include all other owners as defendants. Arkansas Code Section 15-73-402.

The leasehold interest is not partitionable as it is an easement and not a corporeal interest in land. However, Hilliard v. Stevens, 276 Ark. 545, 637 S.W.2d 581 (1982), may now make this untrue as to leaseholds. There are no Arkansas decisions on the right to partition a royalty interest.

B. LIFE ESTATES AND REMAINDERMEN

The life estate can arise by grant, reservation, or through the operation of the dower and curtesy statutes. The lessee is presented with the problem of having to obtain execution from all interested parties, the life tenant as well as the remaindermen, in most instances.

(a) Conventional Life Estate:

This estate usually arises when a grant contains language similar to the following: "to A for life then to . . ." or "to A for so long as he is alive, then to . . . ." A life estate created by the dower and curtesy laws is called a "life estate by operation of law" not a "conventional life estate."

Once the leases are obtained from both the life tenant and the remaindermen, the lessee still must divide the proceeds from the lease. Generally, the life tenant is entitled to any interest on the royalty as the interest represents income, while the remainderman receives the royalty itself representing the property. Wright, 9 UALR Law Journal at 247. While Arkansas has not held this, the premise was mentioned in Dickson v. Renfro, 276 Ark. 223, 634 S.W.2d 104 (1982).

The allocation of bonus is generally made to the remaindermen as it is considered royalty paid in advance. Wright, 9 UALR Law Journal at 247. However, in Love v. McDonald, 201 Ark. 882, 148 S.W.2d 170 (1941), the Arkansas Supreme Court awarded bonus to the life tenant. Love involved what at common law would be a fee tail (a grant to "A and the heirs of his body") and not a conventional life estate. As to conventional life estates, Arkansas has no rule regarding allocation of bonus, nor is there a rule, in Arkansas, governing allocation of delay rentals. The general rule is that delay rentals are allocated to the life tenant because they are not a substitute for the depletion of the minerals. Wright, 9 UALR Law Journal at 247.

(b) Common Law Fee Tail:

A grant or devise using the words "to A and the heirs of his body" or "to A for life, remainder to the heirs of his body" creates, at common law, a fee tail estate which has now been abolished by statute in Arkansas Code Sections 18-12-301 and 302.

(c) "Open Mine" Doctrine:

This doctrine in effect says that if the life estate is created when an "open mine" is in existence, then the grantor or testator intended the life tenant to have all revenue accruing to the interest of the life tenant. An "open mine" exists if there is a producing oil and gas well. A valid lease, even without any production or actual operations thereunder, constitutes an "open mine" calling for application of the doctrine. Warren v. Martin, 168 Ark. 682, 272 S.W.2d 367 (1925).

There is no Arkansas decision involving an existing lease which thereafter expires, and the life tenant and remaindermen thereafter execute a second lease. The open mine doctrine does not apply under Oklahoma or Texas case law. Wright, 9 UALR Law Journal at 244.

If the "mine was not opened" (leases were not outstanding) when the life estate was created, the life tenant is entitled to receive the income from the royalty interest, i.e., interest from investment of royalty proceeds.

(d) Leasing the Life Estate

Arkansas Code Section 15-73-301 converts what would have been a fee tail at common law to a life estate and allows one who owns such an estate to petition the Chancery Court for authority to execute oil and gas leases. Arkansas Code Section 15-73-302 et seq set forth the procedure for leasing the interest of a life tenant. The petition must:

name all parties, then in being, who would become vested with title to the lands should the death of the life tenant occur on the date of the petition;
describe the land;
name the life tenant's predecessor in title;
name proposed lessee and consideration; and
have a prayer for authority to execute lease and for an order awarding the life tenant absolute title to apportionment of the oil and gas, not to exceed one-sixteenth interest.

VII.
STATE LANDS

A. NAVIGABLE STREAMS

The State of Arkansas owns the land constituting the beds of navigable streams. State v. Southern Sand & Material, 113 Ark. 149, 167 S.W. 854 (1914). This rule raises two questions: First, what is the "bed" of a stream, and second, when is a stream "navigable"? If a stream is non-navigable, then the owner of the land adjoining the stream, the riparian owner, owns the land beneath the water as well.

The old rule in Arkansas was that a stream was "navigable" if it were commercially navigable. Lutesville Sand & Gravel Co. v. McLaughlin, 181 Ark. 574, 26 S.W.2d 892 (1930). However, in 1980, the rule dramatically changed. In State v. McElroy, 268 Ark. 227, 595 S.W.2d 659 (1980), the Arkansas Supreme Court held that the Mulberry River in North Arkansas was a navigable stream. The Mulberry is used recreationally for about six months a year; it is dry at times during the summer. Arkansas now has the rule that almost any type of use, whether commercial or recreational, will render a body of water navigable. Once such a determination is made, the bed of a body of water belongs to the State.

The "bed" of a stream is that soil so usually covered by water as to be distinguishable from the bank by the character of the soil or vegetation produced by the presence and action of flowing water. Hayes v. State, 254 Ark. 680, 496 S.W.2d 372 (1973). The bank of a river is marked by such vegetation as is appropriate to the locality wherever the bank is not too steep to permit such growth.

B. LEASES FROM THE STATE

The office of the Commissioner of State Lands has the authority and responsibility to consider applications and grant leases of oil and gas interests from the bed and bars of navigable rivers and lakes or on any other lands held in the name of the State of Arkansas. Arkansas Code Section 22-5-801.

(a) Streambeds:

In naturally occurring waterways, the State owns the lands covered by navigable water. State v. McElroy, supra. However, by statute, the land under the artificially created navigable body of water remains in the ownership of the private parties who owned them prior to the land being covered by water. Arkansas Code Section 22-5-815. Such private ownership becomes subservient to the use of the artificial body of water by the public. The owner may not interfere or impair public navigation, transportation, fishing, or recreation on such navigable waters.

(b) Highway Right-of-Ways:

Right-of-ways for public roads have been acquired in Arkansas by easement for roadway purposes or by fee title to the entire surface and mineral estate. If the instrument creating the highway right-of-way is an easement, there is no conveyance of the mineral estate under the affected land, and the owner whose land is subject to the easement remains the owner of the minerals. In the event the land in the right-of-way was granted to the State of Arkansas by deed in fee simple, title to the land, including minerals underlying the public road, is vested in the State of Arkansas. Plats placed of record creating subdivisions generally create easements for all roadways and public thoroughfares within the platted lands.

A complicating situation can arise where the public road was constructed on an easement granted for roadway purposes and then was subsequently widened by the State of Arkansas, and the land for the additional right-of-way was granted in fee to the State of Arkansas by deed. Under these circumstances, the State of Arkansas would be considered the fee owner of the land under the widened roadway including the underlying minerals.

There are many conveyances of record in the State of Arkansas which describe by metes and bounds a tract of land with a highway right-of-way as its boundary. The Courts of Arkansas hold that it is generally not the intention of the grantor in such instruments to exclude the fee underlying the adjoining highway or public road easement. Crute v. Hyatt, 220 Ark. 537, 249 S.W.2d 116 (1952).

(c) Procedure for Leasing State Lands:

A lessee seeking to lease State owned land in Arkansas must apply to the Department of Finance and Administration for a lease or a permit to develop. Arkansas Code Section 22-5-805. The application is made on forms provided by the Department. Each lease or permit must expressly define and limit the area from which the lessee will be allowed to take the minerals. Arkansas Code Section 22-5-805(c)(1). Once production starts, the lease will automatically terminate if "commercial production" is discontinued for six months or longer unless the lease expressly provides otherwise. Arkansas Code Section 22-5-805(d).

Once the application is received and the Department determines that such lease would be in the best interest of the State, the Department will publish a notice for three days in a statewide newspaper and for one day in a newspaper of the County where the land is located. Such notice shall contain a description of the lease sought, the minimum fee or royalty, the terms and conditions of the lease, and shall state that persons may bid on the lease by filing a sealed bid with the Department. Arkansas Code Section 22-5-807(b)(2). Other bids must be received within twenty days of the last day of publication. Arkansas Code Section 22-5-807(b)(3). If no other bids are received, the lease may be awarded to the applicant. Arkansas Code Section 22-5-807(c). If other bids are received, the lease is awarded to the highest bidder. However, the Department may reject all offers.

Any person taking oil, gas, or minerals from state lands without the required lease or permit shall be deemed guilty of a misdemeanor and, upon conviction, shall be fined not less than $300.00 nor more than $1,000.00. Each day of unauthorized taking of minerals will be a separate offense. Arkansas Code Section 22-5-803(a). Further, the State can bring an action to recover the value of any oil or gas taken in addition to the fine imposed. Arkansas Code Section 22-5-803(b).

C. FORFEITED LANDS SOLD BY THE STATE

In 1939, Section 5 of Act 331 of the Acts of the General Assembly of the State of Arkansas required that "all coal, oil, gas, and mineral rights . . . be reserved to the State," in lands suitable to be returned to private ownership and disposed of as such by the Commissioner of State Lands. There was confusion, however, as to whether this section applied to land which was forfeited and sold to the state for non-payment of taxes due. To eliminate this confusion, Act 94 of the Acts of the General Assembly of the State of Arkansas was approved and became effective on February 24, 1943.

Act 94 provided that deeds disposing of lands forfeited to the State for non-payment of taxes would not contain any restrictive covenants or reservations relative to such oil, gas, and mineral rights. The Act did not effect the validity of any such lease in effect at that time but, at such time as the lease expired, the rights then passed to the fee owner of the surface estate. Further, where oil, gas, and mineral rights in tax forfeited lands had been reserved, the rights were immediately passed to the present owners of the fee title. In the more recent past, Section 5 of Act 331 has been codified as Arkansas Code Section 22-5-307, and Sections 1 and 2 of Act 94 have been codified as Arkansas Code Section 22-6-502.

Although rare, should one of the deeds making this reservation be found in a chain of title, Subsection (d) of Section 22-6-502 sets forth the manner that the owner of the surface rights can have a Quitclaim Deed issued by the State releasing its interest in and to all coal, oil, gas, and mineral rights reserved. Therefore, for the small deed fee of five dollars, this perceived problem in the chain of title can be remedied.

VIII.
TRESPASS

A. GOOD FAITH OR BAD FAITH

Where a producer takes oil and gas or other minerals from the earth, thereby causing a depletion of another's minerals, the rule of capture may protect the lease operator. However, Arkansas does not allow the rule of capture to protect all production. For example, production resulting from secondary recovery processes is not protected by the rule of capture. Where the rule of capture does not afford a producer protection, he can be liable for subsurface trespass. There are two measures of damages for the subsurface trespasser.

For good faith trespass the idea of recovery is to make the injured party whole. National Lead Co. v. Magnet Cove Barium Corp., 231 F.Supp. 208 (W.D. Ark. 1964). If the injured party is incapable of producing the minerals himself, as most landowners are, the correct measure of damages is based on royalty for the minerals taken. However, if the injured party has the ability to produce the minerals himself, the correct measure of damages would be an amount equal to the value of the minerals produced less reasonable costs for production. In National Lead, the court also awarded damages for "disturbed" minerals, those affected but still in place, because of the increased cost of removal the trespass had caused.

While the usual remedy for trespass is an injunction, the Arkansas court has indicated that an injunction was not available to stop a good faith trespass such as a secondary recovery operation. Jameson v. Ethyl Corp., 271 Ark. 621, 609 S.W.2d 346 (1980). In Jameson, the court stated that trespass was not a proper remedy.

The measure of damages for bad faith trespass is the value of minerals produced. This measure is punitive and is not limited to making the injured party whole. The harshness of the bad faith measure of damages has led to a reluctance to find bad faith by the Arkansas Supreme Court. Even where the trespasser is not completely innocent, the court has found good faith. In National Lead, supra, the court found a lack of reasonable care in ascertaining the boundary lines, yet still found good faith on the part of the trespasser. Bad faith trespass will rarely be found.

There is one time when the court will not hesitate to find bad faith trespass. This is the case of the "slant" or directional well. Because of the advanced state of drilling technology, "the plea of good faith in drilling a trespassing directional well will rarely be favorably received in court today." Wright, 9 UALR Law Journal at 239 [citation omitted].

In addition to trespass where the trespasser actually takes oil or gas from the injured party, the situation can arise where a trespasser drills a dry hole or a well which has no commercial production. In such a case, the injured party may claim speculative value loss. The injured party can claim that the trespass resulted in the inability of the injured party to execute a lease at the prevailing market rate. Wright, 9 UALR Law Journal at 240. Arkansas has no cases discussing this type of recovery for loss of speculative value. Texas has allowed speculative value to be recovered from a trespasser in this situation. Humble Oil Refining Co. v. Kishi, 276 S.W. 190 (Tex. Comm. App. 1925).

B. SEISMIC TRESPASS

Another area of possible liability for a trespasser is where the trespasser enters upon land for the purpose of conducting a geophysical survey. Such a survey may indicate that no recoverable oil or gas exists and thereby may decrease the speculative value of the owner's property. There are no Arkansas cases in this point.

In Williams & Myers, Oil and Gas Law, Section 230 (Abridged Ed. 1981), the authors discuss Angelloz v. Humble Oil & Refining Co., 199 So. 656 (La. 1940), where Louisiana allowed recovery for trespass which consisted of a geophysical survey. The majority of the damages recovered in Angelloz, supra, appeared to be for loss of speculative value. Williams & Myers list four possible measures of damages for such a geophysical trespass:

The value of the right to enter on the land for the survey;
The loss of speculative value by reason of the unfavorable publicity resulting from the survey;
The value, to the trespasser, of the information obtained; and
Punitive damages for bad faith trespass.

Williams & Myers, Oil & Gas Law, Section 230 (Abridged Ed. 1981). No liability has been assessed for sending shock waves through another's property without actual physical trespass. Even though Arkansas has not developed the law on seismic trespass, most legal authorities are of the opinion that Arkansas would recognize seismic trespass.

In the event the mineral estate is severed from the surface estate, permission for a seismic survey would be required from the owner of the mineral estate. The permission of the owner of the leasehold estate, in the event of an outstanding oil and gas lease, would also be necessary. In either event, severed mineral estate or outstanding oil and gas lease, the right of entry to the surface should be obtained from the surface owner.

IX.
DAMAGES

When something goes wrong and the surface is damaged in some manner, the question becomes "due to the contractual obligations created by the lease, what is the measure of damages that the operator is liable for?" The surface owner may seek restoration costs or may seek the value of the land. Depending upon the characterization of the damages, either one may be assessed.

In the law of property damages, there are two classifications, permanent or temporary. The clearest way to define a not so clear distinction is that "temporary damages" are those damages which may be remedied. In general the measure of damages, if an injury is permanent, is the difference between fair market value of the land before and after the injury. Fox v. Nally, 34 Ark. App. 94, 805 S.W.2d 661 (1991). When the damage to the property is temporary, however, the correct measure is the restoration cost. Id. A problem arises when the damages are found to be temporary, but the cost of restoration exceeds the market value of the property. How much should the operator be forced to pay above the value of the property? This argument was addressed by the Arkansas Supreme Court in Benton Gravel Co. v. Wright, 206 Ark. 930, 175 S.W.2d 208 (1943). In Benton Gravel Co., the Court relied on the statement that:

"It is often difficult for a court to determine the true measure until all the evidence is in. It may turn out that the cost of [restoration] in a certain case would be less than the difference in the value of the land, and then the cost of [restoration] would be the proper measure of the damages; or it may be that the cost of [restoration] would be much greater than the injury by the [damage], when the true measure would be the difference in value . . . ."

Therefore, in situations such as this, the best argument for the correct measure of damages is that should the restoration costs exceed the market value of the land before the injury, the operator should then be liable for the value of the land. The landowner's attorney will argue that the injury is temporary which permits the full restoration or remediation cost rather than be limited to the difference in market value.

X.
THE OIL AND GAS LEASE PROVISIONS

A. HABENDUM CLAUSE

The habendum clause normally provides that the lease will remain in effect for a prescribed number of years and "for as long thereafter as oil or gas is produced" or "for as long thereafter as oil or gas is produced in paying quantities."

(a) What is a "Paying Quantity"?

In Arkansas, "paying quantities" means production profitable to the lessee. Turner v. Reynolds Metal Co., 290 Ark. 481, 721 S.W.2d 626 (1986). In determining profitability, the basic test is whether or not such production is sufficient to pay monthly operating costs. Overriding royalty interests and recoupment of drilling and/or reworking costs are excluded from the determination.

(b) Cessation of Production.

The phrase "as long thereafter as there is production" indicates that any cessation of production would result in termination of the lease. The Arkansas rule is that a temporary cessation of production does not automatically terminate the lease. The lessee has a reasonable time after cessation to restore production. Reynolds v. McNeill, 218 Ark. 453, 236 S.W.2d 723 (1951).

Many leases contain clauses which give the lessee a specific number of days in which to restore a lease to production. These provisions will be enforced by Arkansas courts. Wright, 10 UALR Law Journal at 28.

(c) Continuous Operations Clause.

A lease may contain a clause which will extend the lease into the secondary term, even if there is no production, so long as "operations" have commenced. Where a clause continues the lease in force for so long as operations (directed at drilling) are carried out, the lessee who acts in good faith and with diligence is allowed to continue. Haddock v. McClendon, 223 Ark. 396, 266 S.W.2d 74 (1954). Note that some continuous operations clauses are limited to the wells being drilled at the end of the primary term.<

Articles

THE ARKANSAS LEASING MANUAL

by

Charles A. Morgan

THE ARKANSAS LEASING MANUAL

by

CHARLES A. MORGAN

Table of Contents

THE ARKANSAS LEASING MANUAL

I.
ORIGINAL CLAIMS TO THE STATE OF ARKANSAS

II.
THE NATURE OF OWNERSHIP INTERESTS

A. RIGHTS AND INTERESTS IN LAND

Articles

THE ARKANSAS LEASING MANUAL

by

Charles A. Morgan

THE ARKANSAS LEASING MANUAL

by

CHARLES A. MORGAN

Table of Contents

THE ARKANSAS LEASING MANUAL I. ORIGINAL CLAIMS TO THE STATE OF ARKANSAS

II. THE NATURE OF OWNERSHIP INTERESTS

A. RIGHTS AND INTERESTS IN LAND

THE ARKANSAS LEASING MANUAL

I.
ORIGINAL CLAIMS TO THE STATE OF ARKANSAS

II.
THE NATURE OF OWNERSHIP INTERESTS