In the latest dustup between royalty owners and energy developers, the Texas Supreme Court will decide whether a 1986 lease imposed an overriding royalty interest on all future hypothetical oil and gas leases.
The case turns on a provision in the lease known as an “anti-washout” clause. These clauses are typically designed to prevent an overriding royalty interest from lapsing when a lease is renewed or extended. Whether such a clause applies to an entirely new lease is at question in the appeal heard last week.
Tommy Yowell, et al. v. Granite Operating Co. and Apache Corp., et al. presents an issue of first impression: Does the inclusion of commonly used “new lease” language in an “anti-washout” provision violate the constitutional rule against perpetuities?
In 2013, the Yowell Group, successors-in-interest to the overriding royalties on three-fourths of a section in Wheeler County, sued Granite and Apache, who had acquired the leases, for the unpaid royalties.
Granite and Apache argued that the “anti-washout” clause in the original document should not apply because it violates the anti-perpetuities rule, under which “no interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance.”
The trial court granted summary judgment for Granite and Apache on their argument that the anti-perpetuities rule defeated the Yowell claim.
The Seventh Court of Appeals affirmed. In a 2-1 decision, the court said the overriding royalty interest was dependent on the leasehold from which it was carved and did not survive when the underlying lease was terminated.
In an amicus brief filed with the Supreme Court, the Texas Oil & Gas Association cautioned against reversing the intermediate appellate court. The brief was written by Danica Milios, senior counsel in the Austin office of Jackson Walker.
“If the Court reverses, it will become the first Court to hold that two parties may – by contract between them – create a vested interest in real property that neither of them owns and that may never exist. Oil and gas companies would face the likelihood of unknown executor interests springing into effect to reduce the value of their leasehold estates at any moment in the future,” said Milios.
Lawyers for the Yowell group say letting the Seventh Court decision stand would expose hundreds and possibly thousands of overriding royalty interests and other non-participating royalty interests to being judicial invalidation.
Amarillo attorney and legislator John Smithee presented arguments for the Yowell group. He said his clients have a real property interest that has a “life independent from and longer than the lease itself.” Smithee’s firm is Templeton, Smithee, Hayes, Heinrich & Russell.
Ryan Clinton, an Austin shareholder at Davis, Gerald & Cremer, said the 1986 lease could not and did not create a vested property right in different leases executed by different parties decades later.
The court also heard arguments on a subsidiary issue involving the Peyton Royalties group, which prevailed at the trial court and court of appeals on its contention that it did not owe Granite and Apache indemnification based on an indemnity clause in a stock-purchase agreement.
Watch the arguments in 18-0841 Yowell, et al. v. Granite Operating Co. and Apache Corp., et al. here.