Problem Questions, Answers, Discussions about Life Estate Issues.
Every petroleum landman should be very familiar with a Life Estate and the issues surrounding it? Simply put, a Life Estate is a Future Interest held by one person in the real property of another that will take effect upon the expiration of the other property’s interest created at the same time as the Future Interest (Remainder Interest). In other words, at the time of the establishment of the Life Estate there is a Future Interest created that will pass upon the death of the Life Tenant. Even though some states have adopted the use of a “Transfer on Death Deed” around 2008, there are times where the landman will have to deal with a Life Estate.
Types of Property Interests
Remainderman Interest
A Remainderman Interest is a Future Interest held by one person in the real property of another that will take effect upon the expiration of the Present Property Interest created at the same time as the Future Interest.
- The Law of Real Property permits a person who owns real estate to convey all or part of his/her rights in the property to another person or persons. Legal Conveyances of property become more complicated when they include Present and Future Interests. For example, the person who owns the property, the Grantor, gives a Present Interest (the right to the possession and use of the property) to one person for either life or a set period of time, and also gives a Future Interest (also called a Non-Possessory Interest – Future Interest) in the property to another person.
Future Interest
The Future Interest is called a Remainder, and the holder of this Interest is called the Remainderman. Remainders are subdivided into two principal categories: Contingent Remainders and Vested Remainders.
Contingent Remainder
A Contingent Remainder can be created in two different ways. First, it can be a Remainder to a person not ascertained at the time the Interest is created. For example, Tom owns Blackacre in fee simple, which means he owns it with no ownership limitations. While Bob and Jane are alive, Tom conveys Blackacre to Bob for life, with a Remainder to the Heirs of Jane. The Heirs of Jane are not yet known, so they have a Contingent Remainder.
Special Condition Precedent
Special Condition Precedent: A Remainder also will be classified as Contingent, whether or not the Remainderman is ascertained, where the possibility of becoming a Present Interest is subject not only to the expiration of the Preceding Property Interest but also to some specific event occurring before the expiration of the Preceding Interest. For example, if Tom owns Blackacre in Fee and conveys Blackacre to Bob for life and then to Jane if she marries Bill, then Jane has a Contingent Remainder In Fee, conditioned on the death of Bob and her marriage to Bill.
Vested Remainder
A Vested Remainder is a Future Interest to an ascertained person, with the certainty or possibility of becoming a Present Interest subject only to the expiration of the Preceding Property Interests. For example: If Tom owns Blackacre in Fee Simple and conveys Blackacre to Bob for life and to Jane in Fee Simple, Jane has a Vested Remainder in Fee that becomes a Present Interest upon the death of Bob. As a Remainderman, she simply must wait for Bob's death before assuming a Present Interest in Blackacre. Sometimes the Life in Being is someone other than the Grantor or Grantee. This is called Pur Autre Vie (Law French for "for another['s] life") is a duration of a property interest.
- While it is similar to a Life Estate, it differs in that a person's life interest will last for the life of another person instead of their own, e.g., “To Beth for the life of my good friend Bob.” For a Remainder to be effective, it must be contained in the same Instrument of Conveyance (document, such as a deed) that grants the Present Interest to another person.
The Remainder following a Life Estate is probably the most common of the various types of Real Property Interests which are classified under the heading of Future Interest. For example: If “A” conveys land to “B” for life with Remainder to “C” and his or her Heirs, “B” has a Vested Life Estate with the right to possession and use of the land during his lifetime, while “C” and his Heirs have a Presently Vested Remainder Interest; but the right of “C” and his Heirs to possession, use and enjoyment of the land is postponed until “B’s” Life Estate is terminated by “B’s” death.
The Life Estate and the Remainder Interests can be conveyed separately by their owners, but the Grantee of such a conveyance takes only the Interest held by his or her Grantor. We have run into issues regarding Life Estates and the ’Open Mines Doctrine.’ Where a Life Estate is conveyed, the Grantee takes the Estate for life of the Grantor, not the life of the Grantee. Normally, the Life Tenant cannot open the land to search for minerals and other natural resources, but if the quarries, mines, or wells were open before the Tenant took the Life Estate, then it is not Waste for the Life Tenant to continue their use.
Careful attention should be paid to a claim made by Remaindermen as to back royalties being allegedly due them in a producing well which is under the Open Mines Doctrine. An Oil and Gas Lease that exists prior to the Life Estate being created is also considered an Open Mine, in some states, even though wells have not yet been drilled prior to the creation of the Life Estate. What steps would you take to determine whether or not an Open Mine exists?
The Open Mines Doctrine pertains to a well that was drilled prior to the creation and execution of a Life Estate. In such case, the royalty would belong to the Life Tenant and to whomever the Life Tenant awards it via a Probated Will. Again, although the Life Tenant has the right during his or her life to possession and use of the property, he or she does not have the right to Commit Waste – that is, to do anything which will diminish the value of the land when the owner of the Remainder becomes entitled to possession at the end of the Life Estate.
Production of oil or gas by a Life Tenant is considered Waste and is prohibited unless the Open Mines Doctrine is applicable. If a Mine has been opened prior to creation of the Life Tenancy and Remainder Interest, the Life Tenant has the right to continue to use the land in the manner that it was used at the time the Life Tenancy was created. Therefore, if the Minerals are being produced at the time of creation of the Life Estate, the Life Tenant may continue to produce the Minerals and retain the proceeds of such production.
When first established, this Doctrine probably applied to coal and iron pit mining. In application to oil and gas production, instead of being concerned with ‘Waste’, the issue is who gets paid royalty from production on a property on which a Life Estate exists. The Open Mines Doctrine relating to oil and gas production may be summarized as: If there was a producing well or wells in existence when the Life Estate was created, the Life Tenant will continue to receive all the royalty from the wells, and the Remaindermen will take nothing until termination of the Life Estate.
If there was no producing well on the property, and it was not subject to an oil and gas lease when the Life Estate was created, the Life Tenant is not entitled to royalty on any new lease but is allowed to use the royalty for life. This usually means the Life Tenant’s royalty share is held in Trust and the Tenant receives the interest earned from the royalty (banking interest). On the death of the Life Tenant, the Remaindermen is entitled to all the accrued royalty income.
This summary is the Law in Texas. Other oil and gas producing states may have variations of the Open Mines Doctrine. To summarize: If the Open Mines Doctrine does not apply, the Life Tenant only receives Delayed Rentals and interest only on Royalties paid into escrow. If the Open Mines Doctrine does apply, the Life Tenant gets the Delayed Rentals, the Lease Bonus, and the Royalty. But normally you must look carefully at the Will, deed, or other Vesting Documents to look for specific directives that will change any of this.
When acquiring an oil and gas lease on an Interest which is owned by both a Life Tenant and Remaindermen, both the Life Tenant and Remaindermen should execute the same lease or separate leases and one should Ratify the lease signed by the other. The laws of the state in which the property is located will determine who is entitled to production proceeds from a well drilled on those lands.
QUESTIONS/ANSWERS
Question: If you are named in a Life Estate as a Remainderman, can it be revoked by anyone at any time?
Answer: The answer is NO. The Beneficiaries have no rights to the property until the death of the Grantor(s).
Question: I would like to know if a Quitclaim Deed with Life Estate can be revoked/canceled? My sister as the Grantor, filed a Quitclaim Deed with Life Estate, listing her husband and myself as the Grantees (Remaindermen).
Answer: A Life Estate is generally not able to be reversed or revoked unless there is a mechanism, such as a Reversionary Clause. For example, the Grantor may stipulate that if her brother dies before both herself and her husband, the interest is to revert to the Grantor, or in some states a Special Power of Appointment Clause, in the granting deed would allow this. Income is paid directly to the Life Tenant.
Question: My mother is the Life Tenant for a parcel of land. Can she allow someone to build a house on the property that is included in the Life Estate? She wishes to allow one of her daughters to build a house on the Life Estate Property. The house would be a Modular Home, or a home built from a kit. Is she, as the Life Tenant allowed to build a home on the Life Estate Property? The property (4.77 acres) already has 3 homes on it. One is a brick home another is a permanent residence of some kind, and one is a mobile home. She wishes to have our nephew and his mobile home removed from the property, then allow her daughter to build a home in its place.
Answer: Notice there are two questions. One is whether the Life Tenant can build a home and the other is whether she can allow someone else to build a home. Is the answer the same for both?
NOTE:
- The Life Tenant cannot remove the mobile home without your permission.
- She cannot make major alterations without your permission.
- She has a right to live there and an obligation to maintain it.
- She has the right to treat the property as hers in regard to control of who can enter the property.
- She can prohibit you from entering the property.
Question: Can the Life Tenant transfer her interest to her daughter? If so, can her daughter then build on the property? I have been under the impression that consent from the Remainders is needed for all concerns. I don't know what I am supposed to do under these circumstances.
Answer: Yes - during her lifetime, as long as any act done by the Life Tenant is not considered Waste, she is allowed the full use and enjoyment of the property. She can only sell or transfer the rights she has in the property. Upon her death all right to the property will pass to the Remaindermen and whoever is living on the property must relinquish it.
Question: Does the Life Estate outweigh the Will of the Grantor concerning the property? I have been told that the Grantor cannot Will the property to anyone because it is now a Life Estate. Is this true?
Answer: The Will does not trump the Life Estate. Remember, her interest expires immediately upon her death and passes, by operation of law, to the Remaindermen. Therefore, she cannot Will property that she does not own.
Question: What are my rights as a Grantee/Remainderman?
Answer: You do have the right to stop the Life Tenant from committing Waste. If Waste is committed, you may be entitled to compensation. Of course, upon the death of the Life Tenant(s) you can then take possession of the property.
WORKSHOP DISCUSSION
Grandpa was in the oil business and drilled a well on his land where he owned all the Minerals as his own sole and separate property. When he died, he left the oil company to his wife and the land and Minerals to his wife as a Life Tenant with their grandchildren as Remaindermen. Even though there is now a Life Estate, Grandma, as Life Tenant and via the Open Mines Doctrine now owns all the royalty from the well and from any new wells drilled under that existing lease. The Minerals and land are Future Interests of the Remaindermen. Before her death she conveyed the royalty from the well only (well bore) to her church. When she passed, the Remaindermen thought that they now owned the well and revenue.
However, the Remaindermen discovered a ’Royalty Deed’ filed of record before her death to the church on the one well and a clause in her Probated Will where she mentioned the bequest of the well and revenue to her church upon her death to own until its plugging. The question is: Do the Remaindermen have a claim? Do they have to wait to enjoy the development of their minerals due to Grandpa’s well, even though they own the minerals? Can they enter into an agreement with another oil company to develop the minerals?
But what if Grandpa’s oil company had taken a lease from Grandma and then drilled the original well? What if another well was drilled on Grandpa’s land after the Life Estate was created, would the royalty from this new well then belong to the Remaindermen or the church?
Questions to Consider
- In such case, does Grandpa’s well hold all the Minerals under his company’s lease?
- What about the drilling of any Increased Density wells or the deepening of the original well of Grandpa’s oil company, who gets what in that regard?
- Is it possible that no additional wells can be drilled on this property until Grandpa’s original well is plugged (depends on the language in the oil and gas lease and state spacing laws)?
- Do the Remaindermen have any claim to any revenue, whatsoever?
Think about it. What if, all the minerals under Grandpa’s oil company lease are in fact HBP by the well. The church cannot give a farmout because they only own interest in the revenue and in the existing well, not the lease. What about another formation in Grandpa’s well that required the well to be deepened? In this case, would the church still own the royalty or the Remaindermen?
Some who have worked this problem say that it seems the church would not have the right to negotiate an agreement to either workover (open another formation or repair the well) or deepen because they only own a Royalty Interest in the well. Therefore, someone would have to approach the Remaindermen for the Agreement, but the church would still get the Royalty. While others say that the Life Tenant’s conveyance to the Church terminated with the Life Tenant’s Life. There may not be a clear answer in such a case and the Remainder may have to go to court over this one.
What if a company approaches the church to buy the well and its equipment, who will get the money from the sale - the church or the Remaindermen?
- Some say: The Remaindermen due to the church’s interest only being a Royalty Interest. Would that new owner be able to continue producing the well and complete new formations up-hole or by deepening the well?
- Some say: It depends on the language in the lease and State Rules. And would the company retain all the revenue until it’s plugged if it were completed in other formations?
- Some say: It depends on the language in the ‘Royalty Deed’, such as further Life Estate Language.
- Others say: I think the Royalty Deed terminates upon the Death of the Life Tenant, so the Royalty Deed would not control and the Remaindermen should get the money after the Life Tenant dies.
Final Thought
Would the company have the right to other formations? Some say: Yes, again the church’s interest is a Royalty Interest. Others say: The Royalty Interest terminates so it depends on the Company’s contract with the Remaindermen.
To learn more about Life Estates along with the Transfer on Death Deed or Will and Heirship issues, visit our website at www.InstituteOfEnergyManagement.com. View our course catalog and click on Wills and Heirship Issues Essentials course.