What Will Happen to My Oil and Gas Interests in a Divorce?

Oct 26

What Will Happen to My Oil and Gas Interests in a Divorce?

What Will Happen to My Oil and Gas Interests in a Divorce?

While divorce attorneys across the country deal with the division of assets daily, many do not have to deal with the added complications that arise when oil and gas interests are involved.  In Texas, it is more common for couples to have these oil and gas interests that need to be addressed when going through a divorce.  So, what exactly happens to those oil and gas interests in a divorce?   

Overview

In Texas, oil, gas, and mineral interests are considered real property, meaning they are treated the same as any other real estate, like your home or investment property. When deciding what to do with these kinds of interests in a divorce, the Court must first characterize the property as either community property or separate property.  The primary way of doing this is to look at when and how the oil, gas, or mineral interest was obtained.  After it is characterized as one of the two, you then have to address the different byproducts that come from oil, gas, and mineral interests.  

Oil and Gas Interests as Community Property

Suppose oil and gas interests were obtained during the marriage—unless by gift or as part of an inheritance—those interests will likely be characterized as community property.  If the interest is determined to be community property, then all income that comes from those interests will also be considered community property.  This includes income from leases, delay rentals, royalties, and bonus payments.  Basically, if the oil and gas interests are community property, then those interests and resulting income are subject to division by the Court in a divorce. 

Oil and Gas Interests as Separate Property

If one spouse obtained the oil and gas interest before marriage, those interests would be the spouse’s separate property.  However, if those interests are acquired during the marriage but one spouse can prove that they received the oil, gas, or mineral interest as a gift or part of an inheritance, they will likely be that spouse’s separate property.  

It gets complicated when an oil, gas, or mineral interest is determined to be separate property. The questions arise on addressing the income and issues related to royalties, bonus payments, leases, and delay rentals created by those separate property interests.    

Royalties and Bonus Payments 

For most oil, gas, and mineral interest holders to capitalize on the resources contained in their land, they will enter into some sort of lease agreement with an energy company.  This means that the interest owner will enter into a contract with a third party, giving the third party the right to enter the land and mine, drill, or collect the resources in exchange for periodic lease payments.  These lease contracts will usually contain provisions for royalties and bonus payments. 

Royalties are payments made to the third party’s interest holder based on the amount of oil, gas, or minerals that the third party produces during a certain period of time.  Bonus payments are similar, except these payments are one-time lump sums paid to the interest owner upfront to allow the third party to develop/acquire those resources.  

In Texas, any income made off of a spouse’s separate property during the marriage is still considered community property.  An exception to this exists, though, as it relates to oil and gas royalties and bonus payments.  Texas courts have determined that these types of payments are actually still the spouse’s separate property because it’s viewed as the spouse “selling” a part of the land—that being the oil, gas, or minerals taken out of the land.  See Norris v. Vaughn, 260 S.W.2d 676, 679-80 (Tex. 1953); Lessing v. Russek, 234 S.W.2d.891, 894 (Tex. App.—Austin 1950, writ ref’d n.r.e.). Since oil, gas, and minerals are considered a part of the land that is being removed, the royalty and bonus payments are not considered income from the land but rather payments for the sale of pieces of their separate property.  

In short, if a spouse can prove that his or her oil, gas, or mineral interests are separate property, then any royalty or bonus payments made in relation to those interests is also separate property, regardless of whether the payment is made before or during the marriage. 

Leases and Delay Rentals 

As stated above, many oil, gas, and mineral interest owners will enter into a lease agreement with a third party in exchange for periodic lease payments. 

Many times, these contracts also include what’s called “delay rentals,” which gives the third party the option of paying a pre-determined amount to the interest owner, even if the third party does not actually exercise their right to mine, drill, or collect the resources until a later date.  This basically reserves the third party’s right to go in and start working on the land when it’s best for them without having to worry about the interest owner leasing to a different third party. 

Texas courts have determined that these kinds of lease payments and delay rental payments are community property if made during the marriage, even if the underlying interest is determined to be separate property.  These types of payments differ from royalties and bonus payments because, instead of being based on the extraction or sale of part of the land, they are based solely on the passage of time.  The amount of the lease or delay rental payment does not change based on any amount of oil, gas, or mineral that may be produced, but stays the same for each time period that passes.  See McGarraugh v. McGarraugh, 177 S.W.2d 296, 300-01 (Tex. App.—Amarillo 1943, writ dism’d). 

Leases and delay rentals on oil, gas, and mineral interests are basically treated the same as the income one might get from leasing out their investment property.  Because of this, lease payments or delay rental payments on oil and gas interests that are related to a spouse’s separate property, but made during the marriage, will be considered community property.    

In short, even if a spouse owns oil, gas, or mineral interests as separate property, if they enter into a lease agreement that includes periodic lease payments and delay rentals, those payments will be considered community property if they are made during the marriage.  

Conclusion

As you can see, oil, gas, and mineral interests are not straightforward or simple assets to divide during a divorce.  Much of the outcome will depend on how the interests are characterized and what kinds of payments are being received out of those interests.  It is important to go into a divorce involving oil, gas, and mineral interests with an attorney who understands these differences and can ensure that those interests are protected. 

 

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