“Original Mineral Owner” enters into a Lease to lease some or all of his minerals in a particular county.
The lease or memorandum of same is recorded in the deed records of the county when the minerals exist. The operator then seeks to discover minerals that can be produced in paying quantities. At this point, the mineral estate is owned by the original mineral owner and the operator in ratios that might range from 12.5%/87.5% to 25%/75% between mineral owner and operator, respectively.
The “Lease” is really a partial, mineral conveyance subject o the term as shown in the “Lease” or so long thereafter as minerals are being produced from said lands. Upon expiration, the mineral estate held pursuant to the Lease is re-conveyed to the Original Mineral Owner.
Production establishes an asset subject to property taxes. The original owner and the operator are assessed a value on each production unit based upon its ownership ratio in the producing unit. Tax bills are mailed and usually paid by all parties.
However, some original owners, and maybe even some operators, will fail to pay their property taxes. After some time, the taxing district will file suit and obtain court permission to sell the interest for the past due taxes. Conveyance is typically via a Constable Deed or a Sheriff’s Deed, that is without warranty. The party that is foreclosed then has two years to redeem their interest at a predetermined multiple of the foreclosure bid and certain other costs.
Assume that Mr. MBW (mail box watcher) owns 100% of the minerals on a 640 section and that he has sold the surface to fund a lifestyle that he deserves. The money from that sale is gone but luckily he still owns the minerals under that land. He enters into a lease 640 acres subject to a 25% royalty. Operator drills a single vertical well utilizing 40 acres of the 640. The well is now producing 4 barrels per month and the operator is selling that oil for $50 per barrel. Mr. MBW is getting a monthly check of $50 and things are getting a little tight.
He decides that he will simply avoid paying the property tax and after about 3 years, the tax district is ready to foreclose. The Sheriff sells Mr MBW’s property for $1,500 to Mr. TI (Tax Investor).
I have the following questions regarding this:
If money is held in suspense for Mr. MBW, does Mr. TI get those funds?
When the well runs dry and the lease terminates, does Mr. TI own 40 acres or 640 acres that were in the single lease that Mr. MBW failed to protect?
Would the answer be any different if the well was a horizontal well crossing multiple lease lines?
I think we’re confused by the property tax reference. There will be taxes on the minerals produced but you don’t mention those. Are those the taxes Mr. MBW failed to pay, somehow?
If he sold the surface I don’t think he will owe property taxes in Texas. So he can’t default on them.
How much property the well holds will depend on lease language.
correct, then he enters and Oil Gas and mineral lease. operator drills and hits. the minerals are now owned by RI and WI in 25/75 ratio. RI doesn’t pay his tax on the mineral estate. County forecloses and is interest is sold on the courthouse steps. what does the buyer obtain with his foreclosure bid? 25% of the minerals on the 40 acres, 25% on the 640 acres, 100% when lease expires on minerals in the 40 acres or 100% when lease expires on minerals in the 640 acres?
I’m sorry but you are beyond my depth here. Our mineral taxes are paid by the producer so we don’t have to worry about them nor can we default on them personally.
And I have no idea if a default, assuming we could actually do that, would encumber all of our acreage or only that which is held by the well. I think you need a real lawyer.
Joe, so you think pay zones other than current production would be excluded from a tax foreclosure sale? I am yet to find anyone that knows for sure and I could see the outcome being various interpretations. I could see where the portion attributed to the working interest reverts back to the original mineral owner (say 75% WI) leaving the initial mineral owner burned down by 25%. I could also see a case where the lease allowed the drilling which provided the required tax and thus the foreclosure purchaser owned the entire land covered by the lease subject to the lease…
Not sure if it is prudent to purchase tax foreclosures on royalty interests and just thinking about it.
I am not a lawyer and this is my opinion…i don’t think other zones would be included. In Texas non-producing minerals are not taxed. Mr. MBW elected not to pay taxes on the production. For example, Devonian formation. The only producing zone at time of tax sale was certain portions of the Devonian. Therefore, the Sherriffs deed will only convey the current producing interval footage at time of sale. For this purpose lets say 100’ in lower Devonian.
Now granted, i don’t know what would happen if operator goes up or down in recompletion attempt in same Devonian formation or others. That is the peril with wellbore only issues.
didn’t Mr MBW sell the surface and keep all his minerals?
