What Do You Mean When You Write: “Subject To”?

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The augurs of ancient Rome prognosticated by inspecting the entrails of birds. Similarly, courts divine meaning by interpreting the detritus of our documents. When we don’t leave a clear message behind, those who follow get to tell us what the words we used meant. Sometimes they are right; sometimes not.

Ruminations now rushes in where fools fear to tread. We’re going to extract some lessons from a Supreme Court of Texas decision about mineral rights and royalties. Bless those who labor in that world. If we get something wrong in this world of oil and gas and other things extracted, we’re sure to hear from those whose world we are about to invade.

When a married couple purchased a certain 55-acre property, their seller “reserved” a 1/4 mineral interest (actually an NPRI – a non-participating royalty interest) in the property. That means the original owner would continue to get 1/4 of the benefits from all oil, gas, and minerals extracted from beneath the property.

Property ownership involves what is likened to a “bundle of sticks.” That means there are many rights embodied within the concept of ownership. These rights can be separated and different owners can own different rights in the same property. So, in the “mineral rights” concept, one party can own the property’s surface and another can own the subsurface portion. Similarly, one can own all of a property’s land right down to the earth’s core, excluding the minerals in that “dirt,” and those can be owned by another. Just like a “total” property can have multiple owners, so can those minerals. So, here, the married couple had a 3/4 interest in the property’s minerals and their seller kept a 1/4 interest. So far, so good.

The married couple then sold the property to a new owner but reserved 3/8 of the mineral rights for themselves. Effectively, the new owner now held all of the surface rights, but exactly what mineral rights did it acquire? After all, the married couple only owned a 3/4 interest in the mineral rights. So, it would seem that the new owner had acquired 5/8 of a 3/4 interest. [Reserving 3/8 of an interest meant the new owners only got a 5/8 interest. If all the married couple owned was a 3/4 interest, then they would seem to have been conveying 5/8 of that 3/4 mineral interest and 5/8 of 3/4 is 15/32.]

Another way to look at the math would be to treat the married couple as owning all of the mineral rights but having the burden of paying 1/4 to their own seller. Then, when they sold a 5/8 interest in the mineral rights to the new owner, that new owner would have to pay a proportional share of the 1/4 reserved interest. That translates to paying 5/8 of 1/4, and that is the same as retaining 5/8 of 3/4 – again, 15/32. [If you are lost in the numbers, go with the flow – just accept the answer to be 15/32, about 47%.]

At least, that’s the math the way the new owners saw it.

The married couple had a different idea. Their calculation was founded on the idea that they owned all of the mineral rights and that the way their deed to the new owner was written, they were retaining 3/8 of the mineral rights and the new owner was getting a 5/8 interest subject to the entire 1/4 interest held by the original owner. That could have been the deal. Who knows? The parties could have agreed that of the entire mineral rights, the married couple was keeping 3/8 and the new owner was the only one responsible for satisfying the 1/4 interest held by the original owner.

So, exactly what did the deed from the married couple to the new owner say? That’s easy. Here it is:

Reservations from Conveyance:

For Grantor and Grantor’s heirs, successors, and assigns forever, a reservation of an undivided 3/8ths of all oil, gas, and other minerals in and under and that may be produced from the Property. If the mineral estate is subject to existing production or an existing lease, the production, the lease, and the benefits from it are allocated in proportion to ownership in the mineral estate.

Exceptions to Conveyance and Warranty:

. . .

Undivided one-fourth (1/4) interest in all of the oil, gas and other minerals in and under the herein described property, reserved by [Original Owner], et al for a term of twenty-five (25) years in instrument recorded in Volume 400, Page 590 of the Deed Records of Lavaca County, Texas, together with all rights, express or implied, in and to the property herein described arising out of or connected with said interest and reservation, reference to which instrument is here made for all purposes.

. . .

Grantor, for the Consideration and subject to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty, grants, sells, and conveys to Grantee the Property, together with all and singular the rights and appurtenances thereto in any way belonging, to have and to hold it to Grantee and Grantee’s heirs, successors, and assigns forever. Grantor binds Grantor and Grantor’s heirs and successors to warrant and forever defend all and singular the Property to Grantee … except as to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty.

We’ve bolded the words, “subject to,” because those are really what drives today’s blog posting. How are those words to be interpreted? [Note that the words, “subject to” also appear in the first paragraph.]

For those who find the quoted words (from the deed) confusing, you can be excused. They are. It would be fair to characterize them as gobbledygook (wordy and generally unintelligible jargon). We’ll translate. The buyer (new owner) was to get all but 3/8 of the mineral rights with an exception. That exception was that 1/4 of the mineral rights were owned by a third party. Now, for the tricky part – the last paragraph. It embodies two separate concepts. In its first sentence, it says that the married couple was actually conveying the property but the property did not include the “Exceptions to Conveyance.” On its face, that meant the 1/4 interest in the minerals owned by the original owner was not part of the sale. Its second sentence says that the married couple warrants that it actually owned the property it was selling, but not the 1/4 interest in minerals that had been kept by the original property owner. It also says that the married couple wasn’t warranting that it owned the 3/8 interest in minerals it was keeping for itself. Basically, it wasn’t promising the new owners that the married couple actually owned the 1/4 interest or the 3/8 interest, only that they owned what was being conveyed to the new owner (the surface rights and a 5/8 interest in the minerals).

This dispute could have been easily resolved by following what might have been a default rule in Texas when dealing with the deeds seen as providing “no guidance.” That rule states the burden of prior royalty interests is to be shared, proportionately, between the holders of a property’s mineral interests. That rule would align with the new owner’s position. This was the route taken by the appellate court.

The Texas Supreme Court rejected this approach, though it reached the same result. Here’s how it explained its own approach:

The parties’ intent, when ascertainable, prevails over arbitrary rules. And we can ascertain the parties’ intent here by careful examination of the entire deed. Applying default rules or other mechanical rules of construction to determine the deed’s meaning is, therefore, both unnecessary and improper.

Yes, there’s that word and concept again – “intent.” Intent is the holy grail of contract interpretation – courts seek to find “intent.” According to the court, interpreting the deed turned, “in large part, on the meaning of the subject-to clause.” Essentially, it sought to understand the meaning of the conveyance being “subject to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty” provision in the deed. Under Texas case law, “subject to,” used in its ordinary sense, means “subordinate to, subservient to or limited by.”

Here’s where we need to get a little wonky and might be displaying our general unfamiliarity with mineral rights and royalties or with royalty interests. (Apparently, there is a distinction between the two.) So, we’ll just present the words of the court:

[I]n general, the principal function of a subject-to clause in a deed is to protect a grantor against a claim for breach of warranty when some mineral interest is already out-standing.

[But] the beguiling simplicity of the “subject to” clause has often misled conveyancers into using it for quite different purposes. … As a long series of cases has made painfully clear [, use of a subject-to] clause to perform some function other than a limitation on the deed warranty is likely to introduce an element of ambiguity into the deed which may be resolved only through litigation.

We recognize … that subject-to clauses are widely used for other purposes. [In an earlier case], for example, we held “that a ‘subject to’ clause that excepts fractional mineral interests from lands and minerals conveyed does not form part of the description of the land[,] but does limit the estate granted and warranted. Subject-to clauses are also used when the property to be conveyed is subject to an outstanding mineral lease and that lease is to be maintained after the conveyance.

Here, no question exists that the interest granted to the [new owner] was “limited by” or “subservient to” the [original owner’s 1/4 interest]. But in this transaction between individual citizens for 55 acres in Lavaca County, we think [t]he best construction is that which is made by viewing the subject of the contract as the mass of mankind would view it; for … it may be safely assumed that such was the aspect in which the parties themselves viewed it. …  Giving the deed’s words their plain meaning, reading it in its entirety, and harmonizing all of its parts, we cannot construe it to say the parties intended the [new owner’s] interest to be the sole interest subject to the [previously reserved 1/4 interest]. … And, declining to apply mechanical rules or require the use of “magic words,” we will not read such an intent into this document.

Now, Ruminations suspects that most readers, but for those steeped in mineral rights law, are thinking: “This is an unremarkable result. It makes sense. Obviously, that’s what the parties intended. It’s only fair.” Well, that wouldn’t be the case as to three of the court’s Justices (assuming they were Ruminations readers) because they were parties to a rather lengthy dissenting opinion, more than twice that of the majority opinion. They would have held that the entire burden of the pre-existing 1/4 mineral interest came out of the new owner’s 5/8 share. That was the married couple’s position. So, while five Justices interpreted the “subject to” language in one way, three went the opposite way.

So, what’s the point Ruminations wishes to make today? Basically, as we’ve written time and time again when parties don’t agree on the meaning of something in their agreement, they expose themselves to the “divining powers” of a court. And, when the court finds the parties’ document text to be ambiguous, capable of two meanings, they’ve left their fate in the hands of a body that wasn’t there when the deal was made. The court is going to dissect what it finds, essentially look at the entrails of their deal. And, it is going to tell the parties “what they intended.” That’s why we need to write down what we intended and stop using hackneyed language we ourselves don’t really understand – gobbledygook. Really, what does “subject to” mean? Does it have a different meaning in a deed’s warranty clause than it has in a lease? More fundamentally, how carefully have we thought about the effect of a deed’s warranty clause on “what is being conveyed”? How carefully have we thought of what we’ve written when we cut and paste from earlier documents?

Ruminations knows that many, maybe most, readers have little, if any, interest in the arcane language found in deeds. But deeds and their warranty provisions are not the point of today’s posting. Saying what you mean and meaning what you say is today’s message.

How much simpler and clearer would it have been had the parties to this deed actually done some math and written either that the new owners would get what was left after the sellers took their 3/8 interest and the original property owner took its 1/4 interest or, in the alternative, that after the pre-existing 1/4 interest was taken out, the selling married couple would get 3/8 of what was left and the new owner would get the other 5/8?

Translate the lesson of today’s insignificant mineral rights case to the leases, purchase agreements, easements, loan documents, etc. that we negotiate and write every day. Let’s start (or continue, for some) writing things so clearly that there can be little doubt as to what we mean. A little extra time spent in this stage of a transaction can avert a great deal of grief and uncertainty down the road, not to ignore that it will save money as well. (This dispute saw judges in three different courts.)

[Fellow wonks seeking wisdom and guidance from the Texas Supreme Court by reading the majority and dissenting opinions can click: HERE to see those opinions.]

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