Executed Division Order Denies Lessor Back Pay on Diluted Royalties from a late filed Unit Designation
Executed Division Order Denies Lessor Back Pay on Diluted Royalties from a late filed Unit Designation.
OHRT ET AL. v. UNION GAS CORPORATION, wherein the Court affirmed that in some circumstances, the Lessee is not obligated to pay back royalties undiluted by unit participation from the time of first production to time of unit creation
X and Y entered into an oil and gas lease in 1999. The lease provided for 3/16th royalty, and contained a pooling provision limiting any gas units to 320 acres. On July 17, 2000, an amendment to the lease was executed, amending the pooling provision to read “if the unit well is located on Lessor’s property, all of Lessor’s remaining acreage will be included in the unit.
In August of 2000, Y drilled and completed a well on land wholly owned by X. By the end of September of 2000, first production of gas occurred. At this time, Y exercised its option to pool and formed a 690 acre gas unit. However, the DPU was not filed until January of 2001, leaving a period of about 3 months in which the well was producing, but the unit was not formed.
On January 19, 2001, Y sent division orders to X containing the name and size of the unit and back-dating its effective date as the date of first production. X executed the division orders and certified their ownership of their fractional unit participation interest in production.
In March 2001, Y started issuing royalty checks with statements of production and calculations of royalty payments. X received and cashed the royalty checks.
X then decided that he was owed the difference between 3/16th of all production from the well located on his land and the unit diluted royalties for the length of time from first production to the formation of the unit by filing the DPU. X filed suit against Y seeking the payment of the back royalties.
On appeal, X argued (1) the pooled unit was formed on the date of filing the DPU, and any royalties on production prior to that should not be diluted by unit participation. The fact that X signed division orders should not change X’s right to receive back royalties, and (2) the pooled unit was formed in violation of lease restrictions, the July 2000 amendment to the lease notwithstanding.
The Court held on Point 1 that the unit was formed on the date that the DPU was filed and not the date of first production as claimed on the DPU. There was a period of time between first production and creation of the unit by filing a DPU during which X was entitled to the entire 3/16th royalty of all production from the well; however, X had waived that right and ratified the diluted interest in unit production by signing the division orders and cashing royalties checks.
The Court held on Point 2 that the language in the amendment superseded the lease restrictions, and operated to ratify Y’s action of including more than 320 acres in the pooled unit.
X was therefore unable to recover any back royalties from Y, despite the fact that there was a period of time where the well on X’s property was producing without being in a pooled unit.
No Partial Lease Termination from Amended Pooling Units
Godfrey v. Chesapeake Exploration, LLC, 2012 WL 2865187 (Tex.App. – Eastland 2012)
Landowner (A) and the Lessee (B) entered into an oil and gas lease in 1997. The primary term of the lease, with extensions, expired on October 17, 2004. The lease contained a Pugh Clause (which terminates the lease as to any acreage that was not allocated to a well in connection with the formation of a unit under the lease).
The lease denied the Lessee any surface rights and provided that “the leased premises are to be utilized solely for pooling purposes” for the drilling and operation of subsurface directional wells. The lease also provided that, to exercise its pooling rights, the lessee must “file of record a written declaration describing the unit and stating the effective date of pooling.”
A Designation of Pooled Unit (DPU1) creating Unit 1 was executed prior to the expiration of the primary term of the Godfrey lease and, on October 1, 2004, was filed for record in the county clerk’s office. DPU1, with an effective date of September 28, 2004, pooled all of the 269 acres that were subject to A’s lease with 50 additional acres adjacent thereto. Operations on the Unit 1 were promptly commenced and continued until a horizontal gas well began producing in paying quantities.
DPU2 created Unit 2 was executed on March 1, 2005, had a stated effective date of February 23, 2005, and was filed for record on March 10, 2005. DPU2 purported to create a pooled unit consisting of 84 acres of A’s lease and 84 additional acres of adjacent property. Operations on Unit 2 were promptly commenced and continued until a horizontal gas well began producing in paying quantities on June 17, 2005.
DPU1-Amended amended DPU1 for Unit 1, was executed on March 11, 2005, and filed for record on March 21, 2005. DPU3 removed from Unit 1 the 84 acres of A’s lease that had been included in Unit 2 by DPU2. Like DPU1, DPU3 had a stated effective date of “September 28, 2004.”
The Landowner (A) argued that because DPU3 had a retroactive effective date of September 28, 2004, the 84 acres were not included in the Unit 1 when the primary term of the lease expired on October 17, 2004, and therefore, terminated A’s lease as to the 84 acres prior to the execution and filing of DPU2.
Although the lease at issue in this case provides that the lessee shall file of record a designation stating the effective date of the pooling or of the revision, the lease contains no provision authorizing the effective date of any such designation to be retroactive.
DPU1-Amended cannot be read to retroactively remove the 84 acres from Unit 2, nor can the stated effective date of the DPU1-Amended change history. On the actual date of October 17, 2004, A’s lease, including the 84 acres, was held in effect by Unit 1 pursuant to DPU1. Later, but prior to the execution and filing of the DPU1-Amended, the 84 acres were pooled into Unit 2 pursuant to the DPU2.
On June 27, 2012, the San Antonio Court of Appeals decided the case of Arabella Petroleum Company, LLC v. J.H. Baldwin, Jr. In this case, An Oil & Gas Company (A) negotiated with Landowner (B) to acquire oil and gas leases of a 50% mineral interest on two tracts of land in Clay County, Texas (the North Tract and South Tract). B then received a separate Oil, Gas and Mineral Lease and Bank Draft for each tract from A. The executed leases and bank drafts were to be returned to A’s bank, to be held in escrow.
The bank draft had 3 key statements:
1. “Payable on approval of Agreement described hereon, and on approval of title to same by drawee not later than thirty (30) banking days after arrival of this draft at collecting bank.”
2. “Subject alone to the acceptance of payment hereof by drawee, within said time.”
3. “In the event this draft is not paid within said time, the collecting bank shall return the same to forwarding bank and no liability for payment or otherwise shall be attached to any of the parties hereto.”
B signed the leases and bank drafts and took them to his bank to forward to A’s bank. Two days later, A’s bank notified A that it received the documents.
A then discovered that the owner of the other 50% mineral interest in the North Tract was unwilling to lease the interest to A on terms that A considered to be reasonable.
Two weeks later, A contacted A’s bank and instructed it to fund the South Tract bank draft. After funding the draft, A’s bank mistakenly sent A the lease for the North Tract, not realizing it was the wrong lease, and A recorded it on October 31, 2008.
Three months later, A instructed A’s bank to return the North Tract draft and lease as cancelled. When A’s bank returned the documents as cancelled, A’s bank discovered that it had mistakenly sent A the North Tract lease. A executed a release of the lease, immediately after A’s bank informed A of the mistake.
B then sued A for breach of contract. The trial court ruled in B’s favor and ordered A to pay B $126,625 for the North Tract lease.
On appeal, A argued that due to the language contained in the bank drafts, the agreement (1) lacked mutuality and (2) a condition precedent to the formation of the agreement was never satisfied.
In deciding the case, the Court found that:
(1) the “no liability” clause is an exculpatory clause that causes the parties’ agreement to fail for lack of mutuality and
(2) the phrase “subject alone to the acceptance of payment hereof by drawee, within said time” made the funding of the draft within the thirty days a condition precedent to the formation of a contract between the parties.
The Court relied on the following 7 principles of Texas law:
(1) Texas law requires Courts to construe the lease and the draft together, not as independent documents. Sun Exp. & Prod. Co. v. Benton, 728 S.W.2d 35, 37 (Tex.1987).
(2) “[A] contract must be based upon a valid consideration, and [ ] a contract in which there is no consideration moving from one party, or no obligation upon him, lacks mutuality, is unilateral, and unenforceable.” Tex. Gas Utils. Co. v. Barrett, 460 S.W.2d 409, 412 (Tex.1970)
(3) Because the bank draft provided conditions precedent to the formation of the parties’ overall agreement, and specifically stated it was drawn to pay for the Oil & Gas Lease, the Court could not view the obligations under the draft independent of the lease. Accordingly, the Court could not construe the language in the lease as providing consideration independent of the draft.
(4) In the absence of a contractual requirement that a party make a reasonable effort to perform, Texas law will not imply such a requirement because Texas law does not impose a general duty of good faith and fair dealing in contracts, including oil and gas leases. See City of Midland v. O’Bryant, 18 S.W.3d 209, 215 (Tex. 2000). Had the draft or the lease contractually imposed such a good faith or reasonable efforts requirement, the outcome of this case may have been different.
(5) If A had paid the draft, lack of mutuality would no longer be a defense to the enforceability of the lease because “The test for mutuality is to be applied, not as of the time when the promises are made, but as of the time when one or the other is sought to be enforced.” Hutchings v. Slemons, 174 S.W.2d 487, 489 (Tex.1943). Thus, “[a] promise may be unenforceable for want of mutuality when made, and yet the promisee may render it valid and binding by supplying a consideration on his part before the promise is withdrawn.” Big Four Ice & Cold Storage Co., 9 S.W.2d at 178.
(6) In order to determine whether a condition precedent exists, the intention of the parties must be ascertained; and that can be done only by looking at the entire contract.’ “ Solar Applications Eng’g, Inc. v. T.A. Operating Corp., 327 S.W.3d 104, 109 (Tex.2010)
(7) ‘In order to make performance specifically conditional, a term such as “if,” “provided that,” “on condition that,” or some similar phrase of conditional language must normally be included.’ “ Id. “ ‘While there is no requirement that such phrases be utilized, their absence is probative of the parties’ intention that a promise be made, rather than a condition imposed.’ “ Id. The Court found the phrase “subject alone to” is similar to the phrases the Texas Supreme Court has expressly held to be phrases of conditional language.
Accordingly, the Court reversed the trial court’s judgment and rendered judgment that B take nothing on his breach of contract claim against A.
On May 17, 2012, in the Fort Worth Appellate Court case of FARM & RANCH INVESTORS, LTD. v. TITAN OPERATING, L.L.C., et al,, the Court affirmed the trial court’s decision that prior restrictive covenants do not reserve mineral interests. In deciding the case, the Court focused on the following:
(For ease of reading – the actual parties to the case are referred to as X, Y & Z)
X was the owner of roughly sixty acres of land. In 1994, X recorded a dedication and restrictions for the land in the deed records. One of the restrictions stated, “No oil drilling, oil development operations, oil refining, quarrying or mining operations of any kind shall be permitted upon or on any lot. All mineral rights shall belong and shall continue to belong to X.”
After the restrictive covenants were recorded, X divided the land into lots and sold the lots to individual owners. The warranty deeds that conveyed the property to the individual owners stated, “This conveyance is made subject to any and all easements, restrictions, and mineral reservations affecting said property that are filed for record…” The deeds did not contain a separate reservation of the mineral interest. Subsequently, X purported to convey all of the oil, gas, and mineral rights to Y by special mineral deed.
Z, the oil and gas company decided that Y did not hold the mineral rights to the lots and refused to sign a lease with Y. Instead, Z contracted with the nine lot owners individually. Z then filed suit against Y seeking a declaratory judgment that it owns the mineral rights to the nine lots.
On appeal, Y argued that the deed restrictions reserved the mineral rights to X and that the statement in the lot owners' deeds that conveyed the property subject to any recorded restrictions means that X conveyed only the surface estate to the lot owners.
At the time that X filed the restrictions, it owned both the mineral and surface rights to the land. The trial court held that an owner cannot reserve to himself an interest in property that he already owns, and the restrictions did not convey any surface or mineral estates to another party.
Y argued that the restrictions and the deeds “must be read as an integrated instrument of conveyance....” by pointing out that the “subject to” language imports the language of the restrictions into the deed and is constructive notice of the restrictions.
The Court held that a statement that does not rise to a reservation cannot retroactively transmute into a reservation when referenced in a later deed and that a reservation must be made at the time of the conveyance or lease.
The “subject to” language is not null, but merely served to protect X's warranty. Even though X may have intended to reserve the mineral rights, it did not effectively do so because the restrictions were insufficient to reserve the mineral interests.
In the recent Texas Supreme Court case of Severance v. Patterson, 2012 WL 1059341 (Decided on March 30, 2012), the divided Court answered the question of whether Texas recognizes a “rolling” beachfront access easement. In deciding the case, the Court focused on the following:
1. The State of Texas owns the “soil covered by the bays, inlets, and arms of the Gulf of Mexico within tidewater limits”, including the area from mean low tide to mean high tide (the “wet beach”), and “constitutes public property that is held in trust for the use and benefit of all people.”
2. The area from mean high tide to the vegetation line (the “dry beach”), is often privately owned and the right to use it is not presumed by Texas law.
3. The public has an important interest in the enjoyment of the “public beaches” vs. the right to exclude others from privately owned realty.
4. If the dry beach is privately owned, in order for the public to have the right to enjoy it, the State must establish an easement over the land or show the public has a right to use of the beach “by virtue of continuous right in the public since time immemorial.”
5. It was clear that the public had a right to use the “dry beach” in question because an easement was established in 1975 by the State on a seaward property. Plaintiff’s property was not located on the “dry beach” until Hurricane Rita wiped away the seaward property.
6. Current title to realty and corresponding encumbrances on the property may be affected in important ways by the breadth of and limitations on prior grants and titles. In 1840, the Republic of Texas granted the land to the original owners without any limitations.
7. There is no support for the proposition that, during the time of the Republic of Texas or at the inception of our State, the State reserved the oceanfront for public use.
8. Texas recognizes that property boundaries established by bodies of water are dynamic due to natural forces that affect the shoreline, but that there are different legal consequences for sudden, perceivable changes in land, as opposed to gradual changes in land due to natural causes.
9. If the public is to have an easement on newly created and privately owned dry beach after a hurricane, the State must prove that an easement exists or acquire one from the owner of the property.
10. Texas does not recognize a “rolling easement.”
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Brandon M. Barchus