AUSTIN – The Texas Supreme Court has clarified an important oil and gas title question involving multiple leases on the same property, an old phenomenon becoming more prevalent with oil price fluctuations. The court held that an existing lease is terminated unless the new lease objectively demonstrates both parties’ intent otherwise.
The decision means that original lessee TRO-X L.P. is not entitled to a percentage interest in wells drilled under subsequent leases executed by Anadarko Petroleum Co. in Ward County. The decision, issued last Friday, upheld a lower appeals court ruling that had reversed a trial court judgment awarding TRO-X an undivided 5 percent working interest under its earlier lease agreements with the property owners.
In 2007, leasing agent TRO-X secured five leases with five members of the Cooper family in 2007. The terms required TRO-X to drill offset wells under certain conditions and, if the wells were not drilled, to release a portion of the leased premises to the Coopers.
TRO-X later transferred its interest to Eagle Oil & Gas Co. under a participation agreement that allowed TRO-X to exercise a “back-in” option for 5 percent of well production. Eagle Oil eventually assigned its interest in the 2007 leases to Anadarko, which completed a well on adjacent land but failed to drill the required offset well.
In 2011, Richard W. Cooper sent Anadarko a demand letter asserting that Anadarko had breached the offset well clause. Anadarko concluded that its lease on the acreage Cooper sought under the contract demanded had terminated. The company then engaged the Coopers in negotiations for new leases.
In 2014, TRO-X sued Anadarko for breach of contract and sought a declaratory judgment that the 2011 leases were top leases subject to TRO-X’s back-in interest.
The case was tried to a judge, who determined that the 2007 leases remained in effect. In 2016, the Eighth Court of Appeals in El Paso reversed, saying that TRO-X had to prove the Coopers did not intend for the 2011 leases to terminate the 2007 leases.
The Supreme Court agreed. Writing for a unanimous court, Justice Phil Johnson held that Anadarko’s 2011 leases were not top leases and TRO-X carried the burden to prove that the parties intended the previous lease to survived.
“In sum, when a lessor and lessee under an existing lease execute a new lease of the same mineral interests subject to the existing lease, the existing lease is terminated unless the new lease objectively demonstrates both parties’ intent otherwise – for example, by language in the new lease making it subject or subordinate to the prior lease, or restricting the new lease’s grant or limiting the grant to a different interest from that conveyed by the prior lease,” Johnson said.
The court used the case to clarify its 2004 holding in Ridge Oil Co. v. Guinn Investments Inc. that previous leases were terminated solely by the fact that the parties executed new leases of the same mineral interests before production resumed. TRO-X had used Ridge Oil to argue that the Anadarko lease must contain specific language showing that the parties intended for the new lease to terminate the prior lease.
“To clarify what we explained in Ridge Oil, if necessary, an existing lease between the parties as to an interest terminates when the parties enter into a new lease covering that interest unless the new lease objectively demonstrates that both parties intended for the new lease not to terminate the prior lease between them,” Johnson wrote.
Deborah Hankinson of Dallas represents Anadarko. Samuel Stennis and W. Clark Lea of Midland represent TRO-X.
Read the opinion in TRO-X v. Anadarko here.