LEASE MAINTENANCE AND TITLE ISSUES ACROSS THE SHALE BASINS: EAGLE FORD/BARNETT
| Jurisdiction | United States |
(May 2014)
LEASE MAINTENANCE AND TITLE ISSUES ACROSS THE SHALE BASINS: EAGLE FORD/BARNETT
Partner
Andrews Kurth LLP
The Woodlands, Texas
Emmie M. Gooch
Senior Attorney
Andrews Kurth LLP
The Woodlands, Texas
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CRAIG L. STAHL is a Litigation Partner with the law firm Andrews Kurth LLP and splits his time between the firm's Houston office and The Woodlands office, which he manages. Craig's practice is focused on complex commercial litigation with a heavy emphasis on the oil and gas industry, although he has also handled trial and appellate matters in a wide variety of fields involving contractual disputes and business torts. As lead trial counsel, Craig has had primary responsibility for numerous multi-million dollar lawsuits and appeals in state and federal courts, not only in Texas, but also across the nation. He has represented a broad range of clients, including major energy producers, pipelines, marketers, royalty trustees, and financial institutions, and has also served as an arbitrator on energy-related matters. Craig received his J.D. from Southern Methodist University's Dedman School of Law in 1984, and his B.A., cum laude, from Princeton University in 1981.
"Texas is neither southern nor western. Texas is Texas."
--Senator William Blakley
I. Introduction
As can be expected given the unprecedented boom in unconventional oil and gas extraction techniques in recent years, so too have our nation's courthouses seen a boom in oil and gas litigation. A recent study by a major consulting firm found that, in the twelve month period ending with the second quarter of 2013, there was a 69 percent increase nationally in the number of unconventional oil and gas cases filed, in comparison to the average volume of similar cases filed in the previous twelve month period, mostly in state courts.1
Texas leads the way with the highest number of new cases. In the study timeframe, 42 percent of unconventional oil and gas cases were filed in Texas, and, in the second quarter of 2013, Texas saw 177 such cases filed, compared to 50 cases for the next closest jurisdiction.2 The study further found that, for the first time, by the end of 2012, lawsuits related to land and lease rights, such as lease termination, overtook royalty disputes as the predominant type of cases being filed. This trend continued in 2013.3
Lease termination lawsuits are not new to Texas, or any other state with established oil and gas jurisprudence. There has always been a tension between the competing interests of lessors and lessees. It is just that today's unprecedented levels of activity in shale plays like the Eagle Ford and Barnett--with the related unprecedented levels of potential profit--have heightened this tension. As a result, Texas is witnessing a new frontier of sorts, as unconventional drilling technologies yield new court decisions, with judges attempting to apply longstanding oil and gas concepts to modern drilling technologies and their related legal conundrums.
This paper takes a look at some recent Texas case law on lease maintenance and title issues. It analyzes how Texas courts have both established new ways of looking at basic oil and gas concepts, as well
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as how they have left many of these basic concepts intact even in the midst of industry changes. The topics covered in this paper include:
• Modern courts' interpretation of lease provisions and key terminology, like "production" and "continuous operations";
• Lessors seeking lease termination based on arguments unique to hydraulic fracturing and horizontal drilling;
• Surface use issues involving historical concepts like the dominance of the mineral estate and the accommodation doctrine;
• The distinction between covenants and conditions in leases;
• The types of acts that qualify as lease repudiation by a lessor; and
• Title disputes involving such claims as scrivener's error and adverse possession.
II. The Basics
Before delving into recent Texas shale play case law, this paper will first discuss some of the typical clauses and definitions in oil and gas leases as a foundation, since many of these clauses and definitions are the focus of the cases and concepts discussed in the sections that follow.
A. Habendum Clause
The habendum clause, derived from the Latin word for "to have and to hold," is the place to look when determining the lifespan of a lease--how long the lessee can "have and hold" the rights granted by the lessor. It is typically one of the first provisions in the lease and is made up of two terms: the primary term and the secondary term. The primary term establishes a fixed number of years during which the lease is to remain in force, usually between two and ten years.4 The secondary term (the "thereafter provision") allows for the lease to
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survive after the primary term as long as minerals are produced from the associated land.5
Sometimes, the secondary term can be based not only on production, but also on development or operations.6 So in order to determine whether the secondary term is triggered to extend the lease, you need to know whether any minerals have been "produced," or whether the lease is being "developed" or "operated." Countless disputes have centered on the definitions of these terms, and recent cases have turned on what they mean in the context of shale plays, where production, development, and operations can differ from conventional plays. Cases interpreting lease terminology are discussed in Section III herein.
B. Production
Today's cases on "production" are based on an established definition: When a lease provides that it is to continue during the primary term and "so long thereafter as oil, gas, or other minerals are produced," the term "produced" means "production in paying quantities." This is a longstanding rule of oil and gas law, stated in the seminal case of Clifton v. Koontz from the Texas Supreme Court in 19597 and derived from case law from across the nation dating back to the early 1900's. The definition from Clifton is important for understanding when the secondary term is in effect. While the rule has been around for years, it is still the subject of disputes, and current courts have applied it and added contours to match industry changes, as discussed in Section III.A.
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C. Savings Clauses
Even if the primary and secondary terms expire, a lease can still stay alive through so-called "savings clauses," which generally allow the lessee to take action or make payments in order to save the lease. As with other provisions related to lease termination, these clauses contain terms that have been interpreted by courts faced with a wide variety of factual scenarios. Thus, while there are some patterns in how savings clauses will be viewed by courts, there are not always bright line rules. And given advances in drilling technology, the ways in which a lease can be "saved" are changing.8 By way of background, a few standard savings clauses are as follows:
1. Dry Hole Clause
The dry hole clause allows the lease to be extended in the situation where a well was completed during the primary term, but was a dry hole, resulting in no production. The dry hole clause provides that a lease upon which a dry hole was drilled can remain in effect as long as the lessee performs drilling or reworking operations within a certain number of days after the drilling of the dry hole, often 60 days.9
2. Cessation of Production Clause
Similarly, the cessation of production clause applies when there was production at some point in the primary term, but it ceased.10 In this situation, the lessee can extend the lease by performing drilling or
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reworking operations within a certain number of days after cessation of production, often 60 days.11
3. Continuous Drilling Operations Clause
The continuous drilling operations clause allows a lease to survive after the primary term if there has been no production but if the lessee is engaged in drilling operations. The clause provides that the drilling operations must be continuous, with no cessation of more than a certain number of days, often 30 days.12 A recent Eagle Ford Shale case dealt with interpretation of a continuous drilling operations clause, as discussed in Sections III.B.
4. Delay Rental Clause
In many lease forms (sometimes called "unless" leases), the lessee is required to commence drilling operations within a certain timeframe, usually within a year of the execution of the lease, and if the lessee fails to do so, the lease terminates. In such leases, there is usually a savings clause called a delay rental clause, which states that the lease will terminate as provided, unless the lessee pays delay rentals to the lessor in exchange for the right to extend the time to start drilling or production.13 Not all delay rental clauses use the term
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"unless." For example, there are also "or" leases, in which the lessee must either drill or pay delay rentals.14
As discussed more extensively below in Section VI, issues have arisen in shale play cases over whether late or missed delay rental payments terminate the lease, or instead merely trigger a claim for damages. Often these issues center on the use of "unless," indicating a condition that must be met or else the lease terminates on its own, as opposed to "or," indicating a covenant, the breach of which results in a damage claim, but not automatic termination. One way lease drafters have dealt with issues regarding payment of delay rentals is the "paid-up lease," in which the lessee pays delay rentals upfront.15
5. Shut-In Royalty Clause
Like the delay rental clause, the shut-in royalty clause allows the lessee to pay a fee to the lessor in order to keep the lease open. This clause applies when there is a well capable of producing in paying...
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