As land professionals, part of our job is to be alert and aware of all the details of a given lease, and the possible impact of any errors when assigning a lease to another party.

In the recent case of Marathon Oil Permian, LLC v. Ozark Royalty Company (March, 2019 – NM)*, the court illustrates the dangers of a defective acknowledgement and its impact on the validity of an oil and gas lease or subsequent assignment of the lease.

These Are the Facts of the Case

 

  • In November, 2016, Ozark Royalty Company (Ozark) leased 40 acres of land from Cynthia Herron-Sweat, the mineral owner. The lease was successfully recorded in the county records.
  • In December, 2016, Ozark conveyed the lease to Black Mountain by executing an “Assignment of Lease.” However, the acknowledgement was defective in the assignment because of a notary error. Instead of notarizing the signature of Rick Brian Coker, Ozark’s designated official, the notary’s own signature was notarized. Because of this defective acknowledgement, the county clerk refused to file the assignment of record. Thus, this assignment was unrecorded.
  • In June, 2017, Black Mountain conveyed the lease to Marathon. Black Mountain all the while was urging Ozark to correct the defective acknowledgment and record a corrected assignment but Ozark refused. The conveyance from Black Mountain was recorded without issue.
  • In November, 2017, Ozark conveyed the same lease to Tap Rock.

Pop Quiz!

With what you know from the facts of the case above, what are the correct answers to the following questions? Don’t worry, this won’t be graded!

1.) Who owns the oil and gas lease?

a. Black Mountain
b. Marathon
c. Ozark
d. Tap Rock

If you answered d, “Tap Rock,” you are correct.

The Court held that Tap Rock was the rightful owner of the lease because they were an innocent purchaser.  A search of the county records did not reveal that Ozark had previously conveyed the lease of Cynthia Herron-Sweat and so Tap Rock purchased the lease in good faith.

2.) Can Ozark be held in breach of contract if Black Mountain paid consideration for the lease assignment?

a. Yes
b. No

If you answered a, “Yes,” you are correct.

Ozark violated its contract with Black Mountain because the assignment stated that the lease would be conveyed.  Presumably monies were exchanged to effect this change.  By refusing to fix the defect and subsequently conveying the lease a second time to Tap Rock, Ozark is held in breach of contract.

3.) True or False – A defective acknowledgment invalidates the oil and gas lease?

a. True
b. False

If you answered b, “False,” you are correct.

A defective acknowledgment does NOT invalidate the lease.  It may prevent the lease from being recorded but the lease is still valid between the parties.  Remember, recording the lease protects your claim from someone else taking the same lease.

4.) What’s the lesson to be learned?

a. Always make sure that the acknowledgement is correct and immediately fix any defects that prevent the instrument from being recorded.
b. Even though Black Mountain will recover money damages for its breach of contract claim against Ozark, those damages will pale in comparison to the potential for millions of dollars Tap Rock could earn with a successful well.
c. Always dot your i’s and cross your t’s when leasing or assigning since an error could ultimately result in the loss of a valuable lease.
d. All of the above.

If you answered d, “All of the above,” you are correct.

This should be a cautionary tale for all of us.  Details matter in this business. Make the smallest mistake and it could ultimately result in the loss of a valuable lease and potential earnings.

*Read the court’s opinion, here.

Further Understanding

What is an acknowledgment?

An acknowledgment in an oil and gas lease or assignment is a short statement that typically appears at the end of the document evidencing the conveyance.  It is executed by a notary public, a public officer of the court, who confirms the identity of the person who signs the conveyance.

An acknowledgment typically requires that the person whose name appears in the instrument  must sign the lease in the presence of the notary public.  The notary public will first verify that the identity of the person signing is the same as the name that appears in the lease or assignment before completing the acknowledgment.

What was the problem with the acknowledgment in this case?

The notary (“John Smith”) was supposed to notarize the signature of Rick Brian Coker, the representative of Ozark.  Instead the notary printed his own name in the acknowledgment form: