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Another Retained Acreage Clause Case Arrives in Supreme Court

Litigation of retained acreage clauses seems to be on the rise.  Apache Deepwater, LLC, v. Double Eagle Development, LLC, decided by the El Paso Court of Appeals last year, is now before the Supreme Court on petition for review, and the Court has asked the parties to file briefs on the merits. This after the Court recently issued two opinions on the same subject.

The lease in question in Apache v. Double Eagle covers a section of land in Reagan County. Four vertical wells were drilled and completed on the lease prior to the end of the primary term, and the lessee designated four proration units, 160 acres each, for those four wells. After the end of the primary term, three of those wells ceased producing. The lease has the following retained acreage clause:

Notwithstanding anything to the contrary in the foregoing, Lessee covenants to release this lease after the primary term except as to each producing well on said lease, operations for which were commenced prior to or at the end of the primary term and the proration units as may be allocated to said wells under the rules and regulations of the Railroad Commission of Texas or 160 acres, whichever is greater, insofar as said proration units cover from the surface to the base of the deepest formation penetrated by the deepest of said wells. The description of said tracts around said well shall be compiled and prepared by the Lessee for purpose of executing such release.

The mineral owner signed a lease to Double Eagle covering the three 160-acre tracts on which there was no producing well. Apache and Double Eagle then litigated whether Apache’s lease still was in effect as to the entire section.

The El Paso Court of Appeals sided with Apache. It phrased the question as whether the retained acreage clause operated only at the end of the primary term or at any time after the end of the primary term – whether it was a “rolling” termination clause operative any time production ceased from a retained acreage tract.  It analyzed that question by asking whether “there was a clear intent to negate the habendum clause” of the lease, which provided that the lease would remain in effect after the primary term as long as there was production from the leased premises.  The court concluded that there was not such clear intent. It noted that “draftsmen understand how to create  rolling termination clauses in oil and gas leases,” and that “the lease language here falls short of that kind of clear, precise, and unequivocal language which would cause us to effectively rewrite the habendum clause.”

I’ve written about retained acreage clauses before. Lawyers for mineral owners should heed the court’s advice to draft clear, precise and unequivocal language modifying the habendum clause of the lease.

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