February 2015 Exclusive Story
Operators Need Proactive Approach To Avoid Tax Bill Surprises
BIRMINGHAM, AL.–In the new environment of horizontal drilling and unconventional plays, different issues and problems may arise that are not experienced with conventional vertical drilling. Also, horizontal drilling that can stretch across several tracts of land amplifies property and pooling issues that could lead to liability for trespass or conversion. The “Mother Hubbard Clause” and its expansive possibilities could provide relief in various circumstances encountered in both conventional and unconventional plays.
The Mother Hubbard, or all-inclusive clause, is a common staple in an oil and gas lease. While the language may vary somewhat, depending on the type of oil and gas form used, the overall purpose of the clause remains the same.
The original purpose of the clause was to include ditches, strips or other small sections of land that might be left out by the property description, but nonetheless are owned by the lessor.
A sample Mother Hubbard Clause found in a common producer lease form states, “This lease also covers and includes, in addition to that above described, all land, if any, contiguous or adjacent to or adjoining the land above described and (a) owned or claimed by lessor by limitation, prescription, possession, reversion or unrecorded instrument, or (b) as to which lessor has a preferential right of acquisition.”
On its face, the language provides some uncertainty and vulnerability to the lessor, who could own some property/mineral rights that were not originally being leased. However, for a lessee and operator, the all inclusiveness of the Mother Hubbard Clause provides assurance that small portions of land are included, even though they might fall outside of the legal description in the oil and gas lease. This prevents a producer having to contract for small nonleased strips of land, or being sued for conversion because it took minerals that were not included in the lease, but were owned by the lessor. Depending on the facts, the clause could be beneficial in fixing miscalculations of leased tracts in horizontal drilling, alleviating pooling and unitization issues, or resolving ownership issues.
There is an assumption by some courts and people who draft and execute oil and gas leases that the Mother Hubbard Clause should be used solely to ensure that no small strips or sections of land are left out of the description of the lessor’s property. A legitimate argument exists, however, that the Mother Hubbard Clause could apply to more than merely a “strip or section” of land. Instead, based on its literal meaning, the Mother Hubbard Clause should include “all land, if any, contiguous or adjacent to or adjoining the land” owned by the lessor and described in the lease agreement.
Therefore, the lessee has a lease on any adjacent land owned by the lessor, arguably even if the lessor owns it jointly with another. While no court has taken a completely literal approach, some cases have applied the clause to more than a strip or section of land.
Courts generally disfavor applying the Mother Hubbard Clause. So, even though a court may enforce it, the clause will be construed strictly. An example of a strict interpretation of the clause is a well known Texas case that is often referenced in order to limit the Mother Hubbard clause.
In Smith v. Allison, 301 S.W. 608 (Texas 1956), the deed conveyed a mineral interest in two quarter sections of land, which were specifically described in the deed. The deed also contained a Mother Hubbard Clause. Allison sought to add a one-quarter mineral interest in the northeast quarter of a section, arguing that the clause, according to its terms, should be applied to include such additional land.
In deciding that the Mother Hubbard Clause could convey only small strips or tracts of land, the court stated that a literal application of the clause would cause an inclusion of land significantly greater than that specifically described in the deed or even sought by Allison. According to the court, the Mother Hubbard Clause, if applied literally, would result in a one-half mineral interest in 1,400 acres being added to the already described one-half mineral interest in 320 acres.
As can be expected, the court placed an emphasis on the difference between what was specifically described in the deed and the possible end result with the Mother Hubbard Clause. The idea that the clause’s “apparent reasonable purpose is to prevent the leaving of small unleased pieces or strips of land” remains the focus in avoiding a literal application (Sun Oil Co. v. Bennett, 84 S.W.2d 447, 452 [Texas 1935]).
Courts have expanded the clause to include more than only a strip of land or ditch. In one case, the Supreme Court of Alabama noted the specific purpose of the Mother Hubbard Clause and how courts disfavored it, but also included an extra one-acre strip of land to a previously described five-acre lease because of the clause’s language. In Whitehead v. Johnston, 467 So. 2d 240 (Alabama 1985), the court stated that the phrase “five acres more or less” in the bonus rental of the lease acted as a qualifier of the number of acres, and therefore, could include more acreage.
The language of the Mother Hubbard Clause was almost identical to the example stated earlier. The court said the clause would include the strip of land if the conditions in the clause were met. The dissent criticized the majority’s analysis and lack of restricted application as giving the clause a literal application. While a restrictive application was acknowledged, the court placed an emphasis on the actual language in the Mother Hubbard Clause and the intent of the overall lease.
Besides the Alabama court, other courts have included land that is not measured in feet, but in acres instead. Because of the Mother Hubbard Clause, courts have enlarged a specifically described 106.25 acres by 3.736 acres, a specifically described 27.00 acres by 2.59 acres, a specifically described 80.0-acre tract by 5.63 acres, and a 34.0-acre tract by 10.9 acres. These enlargements resulting from interpreting and incorporating the Mother Hubbard Clause have added not only a strip of land that was omitted mistakenly, but instead have added adjacent acres, roads and rights of way that could be vital in various unconventional plays and horizontal drilling situations.
In one vertical drilling case, Gardner v. Amerada Pet. Corp., 91 F. Supp. 134 (S.D. Texas 1950), the federal district court interpreted the word “adjacent” in the Mother Hubbard Clause to include a lot situated across the street from the specifically described land in the oil and gas lease owned by the lessor. So, while courts may not favor the clause, they are interpreting it in a ways that can be very beneficial to a lessee in conventional plays, and likewise in unconventional plays.
When comparing the various cases with enlargements in land, whether it be allowed enlargements in these cases or the disallowed enlargement in Smith v. Allison, courts have explicitly or perhaps subconsciously placed an emphasis on the ratio between the specifically described land and the land that the lessee desires to include through the Mother Hubbard Clause.
When the ratio is almost equal, is equal, or the size of the desired enlargement surpasses the specifically described parcel, courts become very hesitant to expand the Mother Hubbard Clause. While this may be the case, the analysis should not change, regardless of the size of the land desired to be included. Looking past the “wow” moment of such large enlargements, courts instead should look to the overall intent of the lease.
An oil and gas lease is a contract, so it must be examined under contractual analysis. If a contract is capable of only one reasonable interpretation, then the court must adhere to the contract under that interpretation. However, if a contract is ambiguous or has more than one meaning, then a court must determine whether the ambiguity is latent or patent.
A latent ambiguity is not ambiguous on its face, but only on extrinsic facts that cause the meaning of the agreement to be uncertain. If the ambiguity is patent, or on the face of the document, then evidence can be used only to determine what was written, and the rules of interpretation control.
If the ambiguity is latent, then outside evidence is used to determine the intentions of the parties. In all actuality, the court probably will view outside evidence of the parties’ intentions anyway in its initial determination of ambiguity to see whether there is more than one reasonable meaning.
Ambiguity is the typical cry of a lessor when a Mother Hubbard Clause is used. Applying latent ambiguities has been an avenue for courts to disallow the use of Mother Hubbard clauses by saying that both parties would not intend for such additional land to be included in the lease when they specifically described such a small tract (Smith v. Allison, 301 S.W.2d at 616).
However, in an oil and gas lease, there is only one clear meaning evidenced by the lease: that the lessee desires to lease all land owned by the lessor. Even if there is a latent ambiguity and outside evidence is used, the evidence will demonstrate that the lessee/operator intends to secure the greatest amount of land possible because of pooling and drainage issues. Furthermore, the lessee probably would not enter into a lease with an owner knowing that it was not the complete tract of land owned by the lessor within a unit, and the lessor should have demonstrated his intention by explicitly excluding the land in the lease agreement.
The second method of contractual analysis employed by the court pertains to a specific clause controlling over a general clause. If the specific and general clauses are conflicting, then the specific description will control. This, however, would always make the Mother Hubbard Clause useless and would be against the intention of the parties. The specific description and the Mother Hubbard Clause must be viewed as complementary and not conflicting.
As a practical matter, it may be better to include a clause stating that if the Mother Hubbard Clause is used, then bonus and rental shall be tendered in accordance with the new tract of land. This could give greater credence to the intent of expansiveness and combat the negative views and public policy arguments associated with expansiveness.
Combating Negative Views
There are sure to be negative views of using a Mother Hubbard Clause to expand the tract of land in a mineral lease. The negative push-back could come from the public, the lessor, or from the courts. Several explanations can be made to justify using the clause and the fairness of its use.
First, the contract is a lease and not a deed. Therefore, this is not a “land grab,” and the lessee is not stealing land, mineral rights or money from the landowner. The royalty payments more than likely will be based on the amount of land owned in the pool, so the landowner will be compensated for the additional land included in the lease.
As stated previously, the lease can provide that rental payments will be adjusted to reflect including additional land through the Mother Hubbard Clause. This can be accomplished by stating in the clause that “the lessor must execute a supplemental lease for a more accurate or complete description of the land,” or by stating that “rental and bonus rental payments shall be increased for an increase in the description specifically stated above.”
Second, in examining the nature of the oil and gas relationship, the lessor is not being forced to give away his mineral rights, but is doing so in order to receive payments for minerals that the lessor more than likely could not extract without the help of a professional. The lessor probably would have to enter a lease through forced pooling or would at least desire to act in order to avoid drainage.
The lessor, in the original lease, already has shown an intent to lease mineral rights, demonstrating that leasing additional land is not going against his will. Negative views of expansiveness from the court and the public should diminish since the lessor still owns the land, the lessor is being compensated, and leasing the additional mineral rights is more than likely inevitable.
The Mother Hubbard Clause can be a vital tool when problems arise in leasing, drilling or pooling. In the ever-changing world of unconventional oil and gas plays, this conventional clause in a lease can provide another avenue to handle problems when they arise.
WESLEY FAIN is an attorney with Cabaniss Johnston in Birmingham, Al., where he practices transactional law, commercial litigation and natural resources law. Fain holds a degree in accounting from the University of Montevallo and a juris doctorate from the Cumberland School of Law.