CHAPTER 14 ETHICAL OBLIGATIONS OF LAWYERS AND LANDMEN IN NEGOTIATING LEASES

• Jurisdiction: United States

Drafting and Negotiating the Modern Oil and Gas Lease
(May 2018)
CHAPTER 14
ETHICAL OBLIGATIONS OF LAWYERS AND LANDMEN IN NEGOTIATING LEASES
John S. Dzienkowski ¹
University of Texas School of Law
Austin, TX

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JOHN S. DZIENKOWSKI is the John F. Sutton, Jr. Chair in Lawyering and the Legal Process and a Professor of Law at the University of Texas School of Law in Austin, Texas. (He was formerly the John S. Redditt Professor in State & Local Government Law at Texas.) John is a summa cum laude graduate of the University of Miami with a Bachelor of Business Administration and a high honors graduate of the University of Texas School of Law. While in law school, John served as the Editor-in-Chief of the Texas Law Review and received the honors of a member in the UT Chancellors and the Order of the Coif. He served as a judicial law clerk for Ninth Circuit Court of Appeals Judge Joseph Sneed (1983-84) and for District of Massachusetts Judge Robert Keeton (1984-85). John began his teaching career at Tulane Law School in New Orleans and joined the Texas faculty in 1988. He has been a visiting professor at a number of law schools around the country. John teaches and writes in the areas of professional responsibility of lawyers, real property, international energy transactions, and oil and gas taxation. He is widely regarded as one of the most dynamic and effective speakers on topics of professional responsibility and he has delivered almost one hundred ethics presentations to in-house corporate departments, large and small law firms, state bar continuing legal education programs, and law faculties throughout this country. He also was the recipient of the Texas Exes Faculty Teaching Award at the Law School in 2005. John is a four-term member of the drafting committee of the Multistate Professional Responsibility Examination. In the areas of both professional responsibility of lawyers and natural resources law, John has authored and edited numerous books and articles on a variety of legal ethics topics. John is the long-time co-chair (with Bob Peroni) of the bi-annual Parker Fielder Oil and Gas Taxation Conference, co-sponsored by the University of Texas School of Law and the Internal Revenue Service.

I. Introduction

II. Negotiating Outside of a Lawyer's Jurisdiction of Licensure

III. Negotiating with Represented Parties

IV. Negotiating with Unrepresented Parties

V. The Ethics of Negotiation

VI. The Effect of Good Faith and Fair Dealing Covenants in Oil and Gas Leases and the Duties of Lawyers for the Lessees

VII. Obligations When Committing a Lease to Pooling and Unitization

VIII. Conclusion

I. Introduction

A mineral leasing transaction has become more commonplace across the United States as resources have become recoverable through unconventional drilling and development. A subject that was originally dominated by a small number of states has become more common in areas of the country that have not been viewed as oil and gas states.

In most cases, oil companies that seek to acquire leases are represented by lawyers or landmen in their negotiations with landowners. Many landowners, at least initially, are not represented by counsel. Although the leasing industry has long relied upon form contracts that tend to standardize the basic terms of the transaction, there are important open terms and potential modifications of the standard terms that are often the subject of negotiations. Given this common situation, interesting issues arise about the obligations of a lawyer or landman in representing a client in a leasing transaction.

This paper provides an overview of the obligations of lawyers and landmen who represent a lessee in a leasing transaction. It will primarily focus on the duties placed upon lawyers in such transactions, but it will note, where appropriate, the obligations of professional landmen.²

II. Negotiating Outside of a Lawyer's Jurisdiction of Licensure

A. Traditional Jurisdictional Limitations of Lawyers

Historically, the regulation of lawyers has occurred on a state-by-state basis, therefore, lawyers will begin by obtaining a license to practice law in one state.³ The various jurisdictions have rules and regulations that require that every lawyer who practices within the jurisdiction must have an appropriate license or be authorized to represent clients in the jurisdiction.⁴ Although unauthorized practice of law restrictions apply to nonlawyers who deliver legal services, they also prohibit lawyers from practicing outside their jurisdiction of licensure.⁵

A lawyer who is licensed in one state of course may negotiate a lease for an oil company client with a landowner lessor on property located in that one state. However, when that lawyer crosses a state line by travelling to another state or by negotiating via telephone or internet for a property located out-of-state with an out-of-state owner, that lawyer risks violating the other state's unauthorized practice of law restrictions.⁶

The original cases in this area addressed lawyers who travelled to a neighboring state to represent a client in a real estate transaction in the other state. In Ranta v. McCarney,⁷ a Minnesota lawyer travelled to represent an owner of a car dealership located in North Dakota and the North Dakota Supreme Court

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held that the lawyer could only collect the fees for work done physically in Minnesota.⁸ In Lozoff v. Shore Heights, Ltd,⁹ a Wisconsin lawyer negotiated a real estate contract in Illinois representing an Illinois seller and when the deal fell through the seller refused to pay the attorney's fees. Although the Supreme Court of Illinois said that there may be a case where an out-of-state lawyer collects a fee in a nonlitigation matter, in this case the lawyer could not collect the fee.

Apart from a denial of a fee, a lawyer who violates the unauthorized practice of law restrictions of another state may face professional discipline in the home state or away state, may face misdemeanor criminal charges, or may face an injunction from the other state's bar association. Of course, such rules had disproportionate impact on solo practitioners and small law firms and gave a significant advantage to law firms with offices in many states.

In some of the physical presence cases, lawyers have argued that negotiation is not the practice of law and therefore they should be able to negotiate a real estate transaction in another jurisdiction. Most authorities refuse to segregate lawyer conduct into actions that are authorized and actions that are unauthorized. Therefore, it would be difficult to argue that a lawyer who represented an oil company in securing leases by travelling to another state was not engaged in the practice of law.

Before the ABA modified the Model Rules, the only way for lawyers to practice law out-of-state was to associate with local counsel (and often bill the legal fees through local counsel), hire a lawyer as a partner or associate in the law firm who is licensed in that jurisdiction to supervise their work, or to become licensed in the neighboring state. Transactional work did not have the pro hac vice admission system that litigators had when they sought to file cases in jurisdictions in which they were not licensed.¹⁰

B. ABA Multijurisdictional Practice of Law Provisions

In 2002, the ABA took notice of the increasing transboundary practice of lawyers and modified Model Rule 5.5 to accommodate temporary practice in states in which the lawyer is not licensed to practice law.¹¹ It is important to note that if a lawyer seeks to establish a permanent presence in another state, the lawyer must become licensed to practice law in that jurisdiction. The definition of temporary is not exactly clear;¹² however, a lawyer who regularly practices in another jurisdiction would be advised not to rely on the rules that permit a temporary practice.

The ABA MJP provisions authorized lawyers who do not hold themselves out as authorized to practice in another jurisdiction to provide temporary legal services in a transactional representation when the lawyer (1) associates with local counsel,¹³ or (2) when the out-of-state practice arises out of or is

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reasonably related to the lawyer's practice in a jurisdiction in which the lawyer is licensed.¹⁴ The first exception formalized the association with local counsel exception that existed under the practice before this provision was enacted. The second exception would apply when the connection of the transaction is somehow related to the lawyer's home state of licensure. In an oil and gas leasing transaction, a lawyer could engage local counsel when the lawyer travels to a state in which he or she is not licensed to practice. But the second exception is harder to apply in a leasing situation. Would a client from the lawyer's home state be enough? Or if the lease was included in a partnership or joint ventured formed under the law where the lawyer was licensed to practice, would that be enough of a connection? Some states, such as Oklahoma, have refused to adopt Model Rule 5.5(c)(4) because it could be viewed as a general loophole to allow out-of-state lawyers to practice whenever there is a slight connection to the other state.

The ABA MJP rules also clarified that entity clients, such as corporations, can use in-house lawyers who are licensed in one state to represent them in other jurisdictions.¹⁵ In other words, an oil company could use an in-house lawyer licensed in one state to represent the company in the other 49 states without violating Model Rule 5.5. However, states such as California have adopted in-house registration statutes that can provide additional regulations for what in-house lawyer may do and how they must register in the new state. In some ways, these in-house registration requirements are more onerous than before Model Rule 5.5 was amended. In-house lawyers in those days did...