In Wheeler v. Enbridge Pipelines,[i] the Supreme Court of Texas provided guidance to midstream companies on the proper calculation of damages to real property stemming from the breach of a pipeline right-of-way agreement (“ROW”). Although Wheeler arose from operations on a pipeline ROW, the decision has implications well beyond the oil and gas industry and provides guidance for all future rea property damage calculations in Texas. 

Texas Courts of Appeals have struggled with how property damages that result from a breach of contract should be calculated in the absence of an express contractual provision. Some courts applied the traditional “temporary-versus-permanent” distinction from tort law, while others applied differing methods outside of the traditional framework. Further complicating the analysis, the “temporary-versus-permanent” distinction has been interpreted differently throughout Texas, with some courts employing specialized exceptions.

The Wheeler court provides guidance on the following major areas of discussion:

• As a general rule, temporary injury is compensated by the cost of property restoration, while permanent injury is compensated by the loss in the fair market value to property
• The “temporary-versus-permanent” distinction is a question of law and applicable to breach of contract claims as well as tort.
• The definitions for “temporary” and “permanent” injury.
• Texas now expressly recognizes the application of the economic feasibility exception[ii] to temporary injury for real property damages, which provides that when the cost of restoration exceeds the property’s loss in value, the damages are no longer feasible and the temporary injury will be deemed permanent.
• The intrinsic value of trees exception[iii] to permanent injury can apply when the destruction of trees on real property results in no or very little diminishment of the property’s fair market value, but the landowner may still recover the intrinsic value of the trees lost.

What Happened in Wheeler?
Enbridge contractually agreed to preserve the trees on the Wheeler property during pipeline installation; however, Enbridge’s contractor was not informed of the agreement and clear‑cut several hundred feet of trees. Wheeler sued for breach of contract and trespass. The trial court did not submit a jury question asking whether the damage to the real property was temporary or permanent. The jury awarded Wheeler $300,000 for the reasonable cost to restore the property under breach of contract and $288,000 for the intrinsic value of trees destroyed. The Court of Appeals rendered a judgment in Enbridge’s favor because the Wheelers failed to secure a finding on the temporary or permanent nature of their injury. Wheeler petitioned for review.

Key Holdings and Analysis

Application to Breach of Contract Claims
The Court held that classifying injury to real property as either permanent or temporary applies to breach of contract and tort claims. While contracting parties are free to specify how damages will be calculated, when they do not, “both courts and parties benefit from the application of general principles with respect to calculating damages for such injury.”

Definitions of Temporary and Permanent Injury
For clarity, the Court defined temporary and permanent injury:

• “An injury to real property is considered permanent if (a) it cannot be repaired, fixed, or restored, or (b) even though the injury can be repaired, fixed, or restored, it is substantially certain that the injury will repeatedly, continually, and regularly recur, such that future injury can be reasonably evaluated.”
• “Conversely, an injury to real property is considered temporary if (a) it can be repaired, fixed, or restored, and (b) any anticipated recurrence would be only occasional, irregular, intermittent, and not reasonably predictable, such that future injury could not be estimated with reasonable certainty injury.

“Temporary-versus-Permanent” as a Question of Law
The Court held that “whether an injury is temporary or permanent is a question of law for the court to decide.” However, “when the facts are disputed and must be resolved to correctly evaluate the nature of the injury, the court... must present the issue to the jury, relying on the definitions we have provided in this opinion.” In this case, the Court held that the injury to the Wheeler property is permanent because of: (i) the parties’ agreement and acquiescence in the briefs, and (ii) the economic feasibility exception (discussed below) converts the injury from temporary to permanent. 

Economic Feasibility Exception
The economic feasibility exception provides that, when the cost of restoration exceeds the property’s loss in value, the damages are no longer feasible and the temporary injury will be deemed permanent. Prior to Wheeler, the Supreme Court of Texas had not formally recognized the economic feasibility exception, although it had applied similar concepts to prevent overcompensation to landowners. In Wheeler, the court expressly adopted the exception and applied it because the diminution in the fair market value of the land was between $0 and $3,000, while the cost of restoration was $300,000. 

Intrinsic Value of Trees Exception
Generally, the Court affirmed the “intrinsic value of trees” exception in Texas and clarified that it could apply, even if the diminution to the property value was nominal. Again, the court compared the $3,000 diminution in value to the $383,000 fair market value of the property, and concluded that the exception was appropriate for the circumstances in Wheeler.

Following the above analysis and holdings, the Court reversed the Court of Appeals and remanded the case to that court to address any remaining issues in a manner consistent with the opinion.

What is Wheeler’s impact?

Wheeler clarifies how to value real property damages arising from pipeline ROWs. Wheeler makes it difficult (if not impossible) for landowners to recover damages that exceed the fair market value of the property. Although Wheeler clarified the damages calculation if an agreement is silent, the best way to address the issues remains a clear contract provision that delineates the calculation and valuation of timber and/or surface damages. To the extent timber or other surface damages are not expressly provided for in a ROW, midstream companies may wish to consider either: (i) revising standard ROW forms to include a clear contract provision addressing timber and real property damages or (ii) for existing ROWs, entering into side-letter agreements with landowners to specify the calculation and payment of timber and/or surface damages prior to conducting surface operations.

[i] ---S.W.3d---, No. 13-0234, 2014 WL 4252273 (Tex. Aug. 29, 2014).

[ii] See e.g. N. Ridge Corp. v. Walraven, 957 S.W.2d 116, 119 (Tex. App.-Eastland 1997, pet. denied).

[iii] See Porras v. Craig, 675 S.W.2d 503, 504 (Tex. 1984) (creating the exception to compensate landowners for the loss of the aesthetic utilitarian value that trees confer on real property).