Texas Court Parses Three Retained-Acreage Clauses – Part 2

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Yesterday we discussed aspects of PPC Acquisition Co., LLC, et al. v. Delaware Basin Res., LLC, et al. Today we consider whether the retained-acreage clauses created a special limitation or a covenant and the relationship between the clauses and Field Rules in place at several different times. Did Field Rules establishing 640-acre units expand  acreage each lessee could retain? (The clauses are highlighted in the opinion and facts are in yesterday’s post.)

What’s the difference?

Texas distinguishes a special limitation in an oil and gas lease (a “condition”) from a covenant. Under a special limitation the lease will automatically terminate upon the happening of a stipulated event. On the other hand, a covenant is a promise made by the lessee to perform a certain action, which if not performed subjects the lessee to a lawsuit for damages and/or specific performance.  It does not automatically terminate the lease.  A court will not find a special limitation unless the language is so clear, precise, and unequivocal that it can reasonably have no other meaning.

Northern Trust Lease

  • The clause did not create a special limitation, but rather a covenant by the lessee to release acreage upon a triggering event.
  • The clause providing that the lessee “shall release” acreage that has not been dedicated to a proration unit prior to cessation of continuous operations does not establish automatic termination in the event of a breach.
  • The lease did not automatically terminate in 2003 when the retained-acreage clause was first triggered.

Lowe Lease

  • This clause was a special limitation, triggered in 2003 when Tom Brown failed to continuously develop the lease after completing the Colt #1.
  • Under the retained-acreage clause, the lease “shall terminate…,” is a special limitation terminating the lease automatically. BUT …
  • The D.A. (Devonian) Field Rules applied to the well and “prescribed” a 640-acre proration unit, which is larger than the 160 acres specified in the retained-acreage clause.
  • Because the Field Rules “prescribed” the larger unit, when the retained-acreage clause was first triggered in 2003, lessees were entitled to retain 640 acres around the Colt #1.
  • The lease did not partially terminate in 2003.
  • Because of the “rolling” clause, the 160-acre proration unit resulted in termination of 480 acres in 2010.

 Colt Lease

  • The requirement to dedicate a proration unit did not create a special limitation that would cause the lease to terminate if the lessee failed to timely designate.
  • The clause provided, “Lessee shall . . . designate and be entitled to retain only …”. Because it was not expressly stated that failure would automatically terminate the lease, it was a covenant, for which Colt could sue the lessee only for damages and/or specific performance.
  • Tom Brown’s failure to timely designate a unit for the Colt #1 did not cause the lease to terminate in whole or in part.
  • Although the designation provision was not a special limitation, the last part of the retained-acreage clause, “…the rights of Lessee hereunder shall ipso facto terminate . . . except as to those portions of the leased premises which Lessee may be permitted to retain under [the retained-acreage clause]” was clear and precise language paramount to a special limitation.
  • The Field Rules applied to the Colt #1 at the time the retained-acreage clause was triggered in 2003. As such, Tom Brown was “permitted to retain” the acreage established by the Field Rules, i.e. 640 acres for a gas well.
  • Accordingly, the lease did not terminate, in full or partially, in 2003.

Little-known fact: Last Saturday was the vernal equinox.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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