Proper Execution of Oil and Gas Leases Covering Mineral Estate Held as Community Property

In California, when real property is held as community property by a husband and wife, both spouses “must join in executing any instrument by which that community real property, or any interest therein, is leased for a longer period than one year, or is sold, conveyed, or encumbered.” See Cal. Fam. Code § 1102(a). Because an oil and gas lease conveys to the lessee a profit ‘a prendre, or an interest in real property, unless the term of the lease is for less than one year, it falls within the scope of Section 1102(a) of the Family Code and thus must be signed by both spouses. Section 1102(a) does not make exception to the joint execution rule for extenuating circumstances, such as a lengthy separation or the desire of one spouse to alter the nature of the property interest. Rather, property remains held as community property during the entire marital relationship unless an agreement has been made between the husband and wife altering (also known as “transmuting”) the character of the community property to one spouse’s separate property. Further, after 1985, such transmutation agreement must be evidenced in writing. See Cal. Fam. Code § 852.

Where an oil and gas lease is executed in violation of Section 1102(a) of the Family Code, it is not void automatically, but is voidable. The nonconsenting spouse can sue to void the instrument in its entirety, including the one-half interest of the consenting spouse. See Droeger v. Friedman, Sloan & Ross (1991) 54 Cal.3d 26, 37. The California Supreme Court recognized a split of authority in California appellate courts concerning the extent of relief available to a nonconsenting spouse during the marriage, namely, whether the transfer by one spouse was valid as to that consenting spouse’s one-half of the community property or whether the entire transfer was invalid because one spouse did not consent. In concluding that the nonconsenting spouse could sue to invalidate the entire transfer, including that of the consenting spouse, the Droeger Court reasoned that “the correct rule is one that protects each spouse from the unauthorized acts of the other that may defeat the community interests in the real property.” See Id. at 37.

Accordingly, the failure of an oil and gas company to obtain the signatures of both spouses on an oil and gas lease taken on a mineral estate held as community property with a term of more than one year may result in the lease being held void as to the entire mineral interest. To avoid this result, confirm that the signatures of both spouses are obtained or that such property was properly transmuted to separate interests.

Termination of Mineral Owner’s Surface Entry Rights

Did you know that in certain limited circumstances a surface owner can sue to terminate the surface entry rights of a mineral lessee? California Code of Civil Procedure § 772.030(a) provides that an owner of the surface estate may sue to terminate all or a portion of an oil and gas lessee’s surface entry rights. The court must find that: (i) the oil and gas lease is more than 20 years old; (ii) the surface of the subject land is not occupied by a producing well or well bore, an injection well or well bore for the injection of water, gas, or other substances to aid oil and gas production, a well or well bore utilized for production of water for use in injection, waterflood, and pressure maintenance programs, or a well or well bore utilized for waste disposal; and (iii) termination of the surface entry rights “will not significantly interfere with the right of the lessee, under the lease,” to continue oil and gas production. Id. at § 772.040. This procedure only applies to lands situated within “a city in any county with a population exceeding 4,000,000, or with a population of more than 700,000 and less than 710,000/as determined by the 1960 Federal Decennial Census.” Id. at § 772.010. Moreover, the rights created by these provisions cannot be waived by the terms of any new oil and gas lease, or by an amendment of an existing oil and gas lease executed within 20 years of the date of the lease. Id. at § 772.060.

Oil & Gas Law Alert is a publication of the Oil & Gas Practice Group in the Natural Resources Dept. at Downey Brand LLP, California’s Premier Natural Resources law firm