Reservations in Favor of a Stranger to Title

Reservations in Favor of a Stranger to Title

By Lisa McManus

Pursuant to common law, no interest in land may be created in favor of a stranger to the title by means of a reservation or exception in a conveyance of the land. Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 310 (LexisNexis Matthew Bender 2012); 1 Eugene Kuntz, A Treatise on the Law of Oil and Gas § 14.4 (Matthew Bender, Rev. Ed.). Numerous oil and gas cases hold void an exception or reservation in favor of a stranger, whether the attempted conveyance is made in a deed or in an oil and gas lease. While some cases have held the reservation or exception ineffective to withhold the oil and gas interest from the grantee, others have determined that title remains in the grantor, although it does not pass to the stranger for whose benefit the reservation was made.

 

In In re Condemnation by Cty. of Allegheny of Certain Coal, Oil, Gas, Limestone , &, Mineral Props., 719 A.2d 1, 1998 Pa. Commw. LEXIS 669, 140 Oil & Gas Rep. 266 (Pa. Commw. Ct. 1998) [enhanced version available to lexis.com subscribers], the Commonwealth Court addressed the issue of a reservation in favor of a non-party to the deed. The matter involved a de jure condemnation of mineral estates in tracts of land for which the chain of title included an exception and reservation in a 1942 deed, wherein Cosgrove-Meehan Coal Company of Pennsylvania as grantor excepted and reserved to the Cosgrove-Meehan Coal Corporation, its successors and assigns, all the coal, gas, oil, limestone and other minerals and the right of the Cosgrove-Meehan Coal Corporation to enter for the purpose of mining, drilling, etc. The Cosgrove-Meehan Coal Corporation was a Delaware corporation and a separate legal entity from the Cosgrove-Meehan Coal Company of Pennsylvania and was not a party to the 1942 deed.

The county alleged that the grantor's reservation of the mineral rights to a non-party to the deed transferred the mineral rights to the grantee. Rejecting this contention, the court held that the reservation to a non-party was void but that the grantor retained the mineral rights. Id. (citing Meadows v. Belknap, 199 W. Va. 243, 250, n. 14, 483 S.E.2d 826, 833, n.14 (1997) [enhanced version] ("Our case law has been definitive in holding that 'a reservation to a stranger to the instrument is void for all purposes.'"); Rye v. Baumann, 231 Ark. 278, 329 S.W.2d 161, 165 (Ark. 1959) [enhanced version] ("A rule, apparently universal in its application, seems to be that 'A reservation or exception in favor of a stranger to a conveyance is void or inoperative.'"); Howard H. Harris, Reservations in Favor of Strangers to the Title, 6 Okla.L.Rev. 127 (1953). In holding that the mineral rights remained in the grantor, the court approved of the trial court's reasoning that because the grantor did not intend to convey the mineral rights to the grantee, those rights were not conveyed and therefore were retained by the grantor. The court rejected the grantee's claim that because the deed was ambiguous as a result of the reservation of rights in a stranger to the title, a construction of the deed against the grantor should result in the grantee's obtaining the rights. The court noted, "It is not that the language of the deed is ambiguous, just that there is a legal rule against attempting to accomplish by the language herein utilized what the parties wanted to accomplish, namely, reserve/except an interest in a non-party to the deed." In re Condemnation by Cty. of Allegheny, at 4. Accordingly, the court could not recognize title in the grantee.

Subsequently, the Virginia Supreme Court cited In re Condemnation by Cty. of Allegheny with approval in its thorough explanation of the so-called "stranger rule" in Shirley v. Shirley, 259 Va. 513, 525 S.E.2d 274, 2000 Va. LEXIS 34 (2000) [enhanced version]. According to the court, the stranger rule, which was established under the common law, provides that a reservation, to be good, must be made to all, some, or one of the grantors, and not to a stranger to the deed. See also Estate of Thompson v. Wade, 509 N.E. 2d 309, 310 (N.Y. 1987) [enhanced version] (stating "that a deed with a reservation or exception by the Grantor in favor a third party, a so-called 'stranger to the deed', does not create a valid interest in favor of that third party."); Tallarico v. Brett, 400 A.2d 959, 964) (Vt. 1979) [enhanced version]; Pitman v. Sweeney, 661 P.2d 153, 154 (Wash Ct. App. 1983) [enhanced version]; Jolynne Corp. v. Michaels, 446 S.E. 2d 494, 502 (W. Va. 1994) [enhanced version]. As the Shirley court explained, a reservation is "the creation of a new right or interest . . . by and for the grantor, in real property being granted to another." Black's Law Dictionary 1309 (7th ed. 1999). At common law, words of "reservation" were not deemed to be words of "grant." Nelson v. Parker, 687 N.E.2d 187, 188 (Ind. 1997) [enhanced version]; cf. Lim v. Choi, 256 Va. 167, 171-72, 501 S.E.2d 141, 143-44 (1998) [enhanced version] (discussing necessity for words of grant or conveyance in deed). Accordingly, a grantor's words of reservation could create a property interest in favor of the grantor but not in favor of a third person, or "stranger," to the deed.

Moreover, the Shirley court noted that in a case a century earlier, it had held that when a deed reserved the right to raise ore to the owners of a furnace, who were not parties to the deed, the right to raise the ore remained in the grantor until the grantor subsequently conveyed the right to the owners of the furnace by a separate instrument. Lee v. Bumgardner, 86 Va. 315, 10 S.E. 3 (1889) [enhanced version]. In finding that the exception and reservation could not create a right in a person not a party to the deed, the court reasoned that any change in the common law rule would affect not only inchoate but also vested property rights. The court noted that if application of the common law rule frustrated a grantor's intent, such frustration could be alleviated if the grantor directly conveyed the desired property interest to the third party before conveying the fee, subject to the already existing interest in the third party. Alternatively, the grantor could reserve the interest to the grantor and then convey the reserved interest to the third party.

Other courts have rejected the inflexible common law rule that an interest may not be created in favor of a stranger to the title by an exception or reservation. For example, in Simpson v. Kistler Investment Co., 90 O&GR 364, 713 P.2d 751 (Wyo. 1986) [enhanced version], the court adopted a rule of determining and applying the intention of the grantor. Thus, a provision ''excepting and reserving'' all mineral rights in favor of four named persons with the percentage of ownership specified and with the expression that such mineral rights ''shall be distributed and vested'' in such persons was treated as a grant to the named persons in the prescribed proportions. The decision may also be viewed as an application of the principle that a grantor may grant interests to any number of persons by one instrument so long as words of grant are used. Id. See also Aszmus v. Nelson, 743 P.2d 377, 380 (Alaska 1987) [enhanced version]; Willard v. First Church of Christ, Scientist, Pacifica, 7 Cal. 3d 473, 498 P.2d 987, 991, 102 Cal. Rptr. 739 (Cal. 1972) [enhanced version]; Nelson v. Parker, 687 N.E.2d at 190 [enhanced version]; Townsend v. Cable, 378 S.W.2d 806, 808 (Ky. 1964) [enhanced version].

While arguably the rule is at odds with the modern trend in property law to give effect to a grantor's intent, and the rule may frustrate the grantor's intent to grant estates to others in the subject property, the Shirley court rejected those claims. On the other hand, 14-81A Powell on Real Property § 81A.05 makes a good argument for jettisoning the old rule:

Suppose that the owner of a parcel of land desires to create an easement over the parcel in favor of one person while conveying the land to someone else. Conceptually, two methods would be appropriate to accomplish the grantor's wishes, both of which require two transactions. The grantor could first grant the easement to one person by means of a traditional grant of easement; thereafter, the grantor could convey the land to the second party subject to the previously granted easement. In the alternative, the grantor could first convey the land to the grantee but reserve an easement over the land. The owner could then convey the easement (together with the dominant estate, if required) to the ultimate taker of the easement.
 
The term ''reservation'' would be appropriate in the second case because the grantor is creating the easement in himself or herself. However, for the sake of efficiency, or out of ignorance of the conceptual foundation of a ''reservation,'' the grantor may attempt to both convey the land to the grantee and ''reserve'' an easement in favor of another person, all in the same deed. Under traditional conveyancing doctrine, such a procedure is impermissible. It notes the fact that the grantor has attempted to reserve an easement in favor of someone other than the grantor himself, and points to the incongruity of that process. The use of the term ''reservation'' means that the grantor has kept the interest for himself or herself.
 
But why is it necessary to dwell on the unfortunate use of a particular word? Why can the grantor not be allowed to accomplish in one step what obviously can be accomplished in two? Certainly it is clear that the grantor meant to grant two separate interests to two separate people. If the transaction is so viewed, then the grantor is merely making two grants in the same document, which seems legitimate. If this were not possible, then it would be impermissible for a grantor to convey, in the same deed, a life estate to one person and a remainder to another. 

Nonetheless, based on a review of the authorities, and in particular the holding in In re Condemnation by Cty. of Allegheny, it appears that Pennsylvania will continue to apply the common law rule that an exception and reservation cannot create an estate in a "stranger to the deed," which the authorities recognize as a nonparty to the deed.  This is a brief overview of the law and is not intended as legal advice. For more information on this topic, see Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 310 (LexisNexis Matthew Bender 2012); 1 Eugene Kuntz, A Treatise on the Law of Oil and Gas § 14.4 (Matthew Bender, Rev. Ed.); 14-81A Powell on Real Property § 81A.05.

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