Royalty owners in Texas are getting new protections under a new law signed by Gov. Greg Abbott. It is designed to safeguard mineral owners from fraudulent activity and at the same time, strengthen private property rights.
House Bill 3838 amends the Texas Property Code to require mandatory disclosures in offers to purchase mineral and royalty interests in the state of Texas. Under the legislation authored by Texas Representative Ernest Bailes, a document which does not contain the appropriate disclaimers is void.
This will allow operators to have title certainty, because if the document does contain the required disclaimer, it would be presumed valid. By requiring the disclaimer, this practice should be greatly curtailed, if not eliminated, because the vast majority of the sales would not occur if the owners knew that it was not a valid lease.
House Bill 3838 also expands the remedies to be able to rescind the sale and recover damages — including royalties and bonuses paid to the purchaser or any successor, court costs, and attorney’s fees — if the purchaser fails to include the required disclaimer as part of the royalty lease.
An estimated 600,000 households in Texas received billions of dollars every year in oil and gas royalties.
The new law was the result of growing deceptive agreements. Under the guise of an offer to “top lease” minerals in exchange for a cash payment, some company representatives have been trying to con mineral and royalty owners into selling mineral interests rather than properly leasing them.
In these situations, the supposed buyer claims that in exchange for the “top lease,” the mineral or royalty owner will receive a cash payment and a 25 percent “royalty.” The owner is then presented with a document intended to mimic an oil and gas lease. However, the document is not a legitimate top lease. Instead, the owner is selling 75 percent of their royalties for as long as the “royalty lease” is in effect. Oftentimes, the goal of such schemes is to try to time the purchases with redevelopment of new horizontal wells and take 75 percent of the owners’ royalty stream for a minimal payment.