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Consent-to-Assign Provisions in Oil and Gas Leases

Provisions in oil and gas leases requiring the lessor’s consent to assignment of the lessee’s interest are common. A lessor may have reasonable concerns about assignment of the lease, especially if the lessor is also the owner of the surface estate of the leased premises. The lessor may have agreed to lease in part because of the reputation and financial condition of the lessee, and he or she may justifiably wish to have control over whether the lease can be assigned to a third party.

Lessees, on the other hand, dislike consent-to-assign provisions in leases. Such provisions may substantially impair the lessee’s perceived value of the leasehold estate it has paid for. Leases are bought and sold like commodities. In the Permian Basin last year, more than $25 billion of transactions took place transferring mineral leasehold interests. Those transactions are made more difficult when lessors’ consents must be obtained to close the transaction.

Before closing a deal to purchase a package of oil and gas leases, the buyer will review the terms of the leases, and included in that review will be identifying leases that require consent to assign. Typically such review will uncover consent-to-assign provisions, in which event the buyer will have to determine whether obtaining such consent will be a condition to closing the deal. In my experience, companies acquiring leases will typically divide the leases containing consent-to-assign provisions into two categories, those with “soft-consent” provisions and those with “hard-consent” provisions. A “hard-consent” provision specifies the consequences of failure to obtain consent — for example, that such a breach is grounds for cancelling the lease, or that specified liquidated damages must be paid for the breach. A “soft consent” is one that prohibits assignment without consent but does not specify a remedy for the breach. Companies may elect to acquire leases with soft-consent provisions without requiring the seller to obtain consent, based on the reasoning that the lessor will have to prove damages for the breach, that damages would be difficult to prove, and that the lessor probably will not sue for the breach. Without a specified remedy for breach in the lease, in particular a right to terminate for the breach, the reasoning is that termination of the lease for breach of the consent-to-assign provision would not be a remedy available to the lessor. The buyer will, however, require the seller to obtain consent for leases containing a hard-consent lease provision, especially if it specifies that breach of the provision would allow the lessor to terminate the lease.

Consent-to-assign provisions may or may not specify any criteria for which the consent may be withheld. A lessee will try to negotiate for inclusion of language saying that the consent may not be “unreasonably withheld,” or may not be “unreasonably withheld, conditioned or delayed.” Without such language, it has been held that a consent-to-assign provision implies no obligation on the lessor to act reasonably in withholding consent. Trinity Prof’l Plaza Assocs. v. Metrocrest Hosp. Auth., 987 S.W.2d 621, 625 (Tex.App.-Eastland 1999, pet. denied); English v. Fischer, 660 S.W.2d 521 (Tex. 1983). So if a lease says simply that assignment may not be made without the lessor’s consent, such consent can be withheld arbitrarily. What constitutes an “unreasonable” refusal to consent may be a subject of dispute. If a lease prohibits “unreasonable” withholding of consent, the lessor may be subject to a claim for substantial damages if his withholding of consent is found to have been unreasonable.

A recent case dealing with a consent-to-assign provision is Carrizo Oil & Gas, Inc. v. Barrow-Shaver Resources Company, 2017 WL 412892 (Tex.App.-Tyler, January 31, 2017). The consent-to-assign provision was contained in a farmout agreement between Carrizo and Barrow-Shaver.  (A farmout agreement is an agreement between the owner of a lease and a third party agreeing to assign the lease or portions thereof or interests therein upon satisfaction of certain obligations, typically the drilling of wells on the lease by the third party.) The agreement provided that the rights granted to Barrow-Shaver “may not be assigned, subleased or otherwise transferred in whole or in part, without the express written consent of Carrizo.” Barrow-Shaver negotiated unsuccessfully for inclusion of a provision that Carrizo’s consent would not be unreasonably withheld. But Carrizo orally assured Barrow-Shaver that it would not unreasonably withhold consent.

After spending $22 million drilling wells on the lease with no tangible results, Barrow-Shaver made a deal with another company to purchase Barrow-Shaver’s rights under the farmout agreement for $27.7 million. But Carrizo refused to grant consent to the assignment unless it was paid $5 million – substantially all of the profit that Barrow-Shaver would have made from the transaction. Barrow-Shaver refused Carrizo’s requirement and the deal fell through. Barrow-Shaver then sued Carrizo for $27.7 million, saying it had unreasonably conditioned its consent and had defrauded Barrow-Shaver into entering into the agreement by assuring it that Carrizo would act reasonably.

The case went to trial. The jury awarded Barrow-Shaver $27.7 million in damages, and Carrizo appealed. The court of appeals reversed, concluding that the contract allowed Carrizo to withhold consent and that it had no obligation to act reasonably. One justice dissented. He would have remanded the case for a new trial because of evidence excluded from the jury as to whether “custom and practice” in the industry would require Carrizo to not unreasonably withhold its consent.

A recent excellent article in the Texas Tech University Law Review, Consent to Assignment Provisions in Texas Oil and Gas Leases: Drafting Solutions to Negotiation Impasse, 48 Tex. Tech L.R. 335 (2106), contains discussions on negotiation of consent-to-assign provisions in oil and gas leases.

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