06.01.2022

This article is from the McGinnis Lochridge Oil & Gas newsletter, Producer’s Edge – Vol. 4, Issue 1. Read the full newsletter here

 In Tier 1 Resources Partners v. Delaware Basin Resources, LLC, the El Paso Court of Appeals held that a lease covering two 640-acre sections of land terminated as to one 640-section at the end of the lease’s primary term. The court held that a “separate lease clause” required the lessee to treat the two sections as if covered by two separate leases. The lease required the lessee to release all acreage at the end of the primary term, unless the acreage was dedicated to a production unit or the lessee suspended automatic termination by conducting continuous development operations. The lessee conducted operations on only one section during the primary term, because of its holding that the sections were considered to be covered by separate leases, the court held that the lease terminated as to the other section where no operations were occurring.

In or around 2014, Delaware Basin Resources, LLC (“DBR”) entered several oil and gas leases with several lessors that the Tier 1 court referred to as the “Bush Lessors.” The leases were on identical forms and covered different parcels of land. The lease subject to dispute covered two, non-contiguous 640-acre (more or less) sections of land, referred to as “Section 6” and “Section 2.” The habendum clause in paragraph 2 provided that “[u]pon lease expiration, DBR’s interest automatically terminated ‘as to all the lands and depths then covered thereby except lands and depths then designated by Lessee . . . to be within a ‘production unit’ . . . assigned to each well then producing in paying quantities on the leased premises or lands properly pooled therewith.” The court noted that DBR could suspend termination of the lease, if it timely conducted continuous development operations. However, Paragraph 11 expressly provided “each of the separately designated tracts described shall be treated for all purposes as a separate and distinct Lease.” Nothing in the lease was expressly designated a “tract.”

Prior to the end of the primary term, DBR conducted operations on Section 6, but conducted no operations on Section 2. In 2017, a time after the primary term had expired and Section 2 had not been developed, the Bush Lessors executed a new oil and gas lease, with Tier 1 Resources as lessee, covering Section 2. DBR filed suit against Bush Lessors and Tier 1 Resources, contending that its lease had not expired and the Tier 1 Resources’ lease was a cloud on DBR’s title.

Although there were several issues in dispute, the court and the parties agreed that the central issue was whether DBR’s lease had terminated as to Section 2 at the end of the primary term. The court held that Section 2 was “a clear, precise, and unequivocal special limitation that automatically terminates the lease if no operations are conducted on the covered land during the primary term.” DBR did not dispute this conclusion, but did dispute whether the lease should be interpreted as one lease covering two sections, so that operations on Section 6 would not perpetuate the lease as to Section 2.

After construing Paragraph 2, the court commented that the “dispute centers around the first sentence of Paragraph 11,” which provides “Notwithstanding any other provisions in this 1 633 S.W.3d 730 (El Paso 2021, pet. filed). Lease or any wording contained herein . . . each of the separately designated tracts described shall be treated for all purposes as a separate and distinct Lease.” The court explained that it was required to construe this sentence as directed by the Texas Supreme Court, such as harmonizing it with the rest of the lease in a manner which give it effect and applying the language’s plain meaning.

Ultimately, the court concluded that Paragraph 11 required the lease provisions to be applied separately to Section 2 and Section 6. Although the term “tract” was not defined in the lease, the court applied the plain meaning of that term and concluded that it must refer to the two separate sections. When the lease terms were separately applied to Section 2, where DBR conducted no operations during the primary term, the court held that the lease terminates as to that Section.

ABOUT THE AUTHOR

Chris Halgren represents clients in a wide variety of business disputes in the oil and gas industry, secured lending, and various other commercial disputes.

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