This article is from the McGinnis Lochridge Oil & Gas newsletter, Producer’s Edge – Vol. 4, Issue 1. Read the full newsletter here.
Title disputes related to the partial termination of oil and gas leases under the terms of retained acreage clauses continue to grace the pages of this Texas’ oil and gas jurisprudence. In many cases, the disputes arise when an oil and gas operator receives notice from a top lessee (who is often a competing operator) demanding release of some portion of the “bottom” lease that the top lessee claims has terminated. As Texas courts have explained “[a] top lease is a lease granted by a mineral owner during the existence of another lease that will become effective if and when the existing lease expires or terminates.” Headington Royalty, Inc. v. Finley Res., Inc., 623 S.W.3d 480, 485 n.3 (Tex. App.—Dallas 2021, pet. filed).
A question often asked by operators in such cases is whether they have a claim for tortious interference against the top lessee. Tortious interference claims against top lessees are somewhat difficult to maintain, principally because the top lease is contingent in nature. Practitioners have long argued that a top lease cannot interfere with a bottom oil and gas lease. That argument is based on the following premise: if the bottom lease is valid and effective, the contingent, top lease is not, and is therefore not interfering with any contract or property right; on the other hand, if the top lease is in effect, that means the bottom lease has terminated as to the acreage in dispute, and no contract or property right exists with which to interfere.
The El Paso Court of Appeals recently addressed the issue of tortious interference claims against a purported top lessee in MRC Permian Co. v. Point Energy Partners Permian, LLC, 624 S.W.3d 643 (Tex. App.—El Paso 2021, pet. pending). That title dispute involved ownership of four leases covering property in Loving County, Texas. The operator, MRC Permian (“MRC”), had drilled and completed five wells during the primary term of the leases, but failed to timely commence drilling on its next well by the deadline provided in the leases’ continuous drilling clause. In early June of 2017, Point Energy Partners Permian, LLC (“Point Energy”) acquired new leases covering the same property from the mineral owners. The new leases were traditional oil and gas leases when executed, but each was later converted to a top lease. Point Energy also acquired the mineral owners’ right to seek termination of MRC’s leases. MRC, apparently unaware of the new leases, subsequently informed the mineral owners that its drilling delay was caused by a force majeure event, and that a rig would soon be on location to drill the next well. Point Energy responded by letter to MRC, stating that MRC’s leases had expired and that MRC was obligated to release all interest in the leases outside production units for existing wells Point Energy’s letter also challenged the applicability of the force majeure clause, and warned MRC that any entry onto the leases may constitute bad faith trespass. MRC filed suit against Point Energy and the mineral owners to protect its interest, seeking a declaration that the force majeure clause applied and extended the drilling deadline. MRC also asserted claims for slander of title and tortious interference with existing contract. The parties filed a number of summary judgment motions, including competing motions on the lease termination issue. The trial court granted Point Energy’s motion, determining as a matter of law that MRC’s leases had automatically terminated as to the disputed acreage. The trial court also granted Point Energy and the mineral owners’ motion for summary judgement against MRC’s tortious interference claim. Taking a permissive appeal, the El Paso Court of Appeals determined fact issues existed as to whether the force majeure clause prevented the leases from terminating, and reversed and remanded the summary judgment. It also reversed and remanded the trial court’s dismissal of MRC’s tortious interference claim.
On appeal, MRC argued that the trial court’s ruling on tortious interference should be reversed because it established a prima facia case of tortious interference, that Point Energy’s leases were not top leases when executed, and that the interference was not justified. Point Energy and the other defendants argued that MRC could not make a prima facia case of tortious interference, that the Point Energy leases were top leases that cannot tortiously interfere, and, alternatively, that any interference was legally justified. In analyzing the tortious interference claim, the court began its analysis by restating the elements of tortious interference, which requires (1) the existence of a valid contract subject to interference; (2) a willful and intentional interference by a third party; (3) proximate causation; and (4) that the plaintiff suffered actual damage or loss. The appellate court applied its prior determination that fact issues existed as to the validity of MRC’s leases. The appellate court also found that a fact issue existed as to the first element of tortious interference, whether MRC had a valid contract subject to interference. It applied the same analysis to determine that fact issues existed as to Point Energy’s legal justification defense. With respect to the second element of tortious interference, willful and intentional interference, Point Energy and the other defendants argued they could not have known MRC would claim force majeure at the time they executed the new leases, and therefore there was no evidence that any interference was intentional or willful. The appellate court disagreed, citing as evidence the fact the new leases contained the same force majeure provision as MRC’s leases. The court also noted that once MRC had invoked the force majeure clause, Point Energy responded by asserting the validity of its own leases and suggesting MRC would commit a bad faith trespass if it entered any portion of the leases not included in an existing proration unit. As to the third and fourth elements, causation and damages, MRC argued that Point Energy’s assertion of superior title (along with the lessors’ repudiation of MRC’s leases), MRC was forced to alter drilling plans and lease operations in a manner that allowed MRC to develop and operate only on the production units provided for by the MRC leases’ retained acreage clauses. MRC claimed this resulted in rerouting and lost-efficiency costs, and provided both testimony and documentary evidence in support of these claims. As a result, genuine issues of material fact existed as to each element, and MRC established a prima facia case of tortious interference.
In addressing Point Energy’s argument that top leases could not interfere with MRC’s bottom leases, the court of appeals again found fact issues related to whether or not Point Energy’s leases were in fact top leases. This was because the leases, when executed, were in the form of traditional leases, but were subsequently converted to top leases. Additionally, the court of appeals focused on Point Energy’s initial communication with MRC, which: (1) did not indicate Point Energy’s leases were top leases; (2) asserted that Point Energy was the rightful lessee and that MRC’s leases had expired as to the disputed acreage; and (3) warned that MRC could be liable for bad-faith trespass upon any entry into the disputed acreage. Based on the foregoing, the El Paso court determined a fact issue existed regarding whether the leases were top leases or traditional leases.
The El Paso Court of Appeals did not directly address the legal issue of whether a top lease can support a claim for tortious interference. The issue has, however, been raised by Point Energy in its petition for review and brief on the merits, and the case is now pending before the Texas Supreme Court. Whether the Texas Supreme Court squarely addresses the issue or not, the case raises interesting questions regarding the potential of tortious interference claims in title disputes involving top leases.
About the Author
Derrick Price is a partner in our Austin office and a member of the Oil & Gas Practice Group. Derrick handles a wide variety of civil, regulatory and transactional matters in the oil and gas industry, representing both oil and gas operators and landowners. He has extensive experience litigating a broad spectrum of oil and gas issues, including retained acreage issues and related title claims, and he regularly advises clients on these topics. He often speaks at Texas oil and gas CLE seminars, and will be presenting on the topic of retained acreage at the 48th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute on April 22, 2022 in Houston.
To learn more about Derrick Price, click here.