U.S. District Judge Matthew Kacsmaryk, in Amarillo, recently wrote an opinion in Mayo Foundation for Medical Education and Research v. BP America Production Company, 447 F.Supp.3d 522 (March 3, 2020) dealing with the enforceability of a lease provision requiring the lessee to obtain the lessor’s consent to assign an oil and gas lease. The opinion addresses issues that, remarkably, have never been discussed by a Texas court. Judge Kacsmaryk provides a detailed discussion and analysis of legal arguments on the construction and enforceability of consent-to-assign clauses in oil and gas leases.
Barbara Lips owned a ranch in Roberts and Ochiltree Counties. She signed an oil and gas lease to Alpar Resources in 1994. Ms. Lips died in 1995 and devised the ranch to the endowment arm of the Mayo Clinic. Bank One was hired as agent to manage the Clinic’s interest. The lease was later amended to contain the following provision:
The rights and obligations of the Lessee hereunder are not assignable or transferable in any respect by it, except upon the written approval of Bank One Trust Company, N.A., as Agent, or any successor Agent, which approval shall not be unreasonably withheld.
The lease, as to a portion of the land, came to be owned by BP America, which asked Bank One for permission to assign its interest in the lease to Courson Oil & Gas. Bank One refused to grant consent, citing past business dealings and litigation with Courson. Mayo Foundation then sued BP seeking an injunction to prevent the assignment.
The Court first addressed whether the consent-to-assign provision is an unenforceable restraint on alienation. A restraint on alienation is a restriction on one’s right to convey a real property interest. In Texas, an oil and gas lease conveys an interest in the oil and gas estate in the leased premises for the term of the lease. The Court therefore concluded that the lessee’s interest is considered an interest in real property subject to the law of restraints on alienation. The Court first remarked that, despite three decades of oil and gas expansion in Texas, “no Texas court has squarely and decisively addressed” whether a consent-to-assign provision in a lease is an invalid restraint on alienation.
The Court then looks to the Restatement of Property for guidance. Restatements are promulgated by the American Law Institute as summaries of generally recognized law on different topics. They are not themselves the law, but they are assembled by panels of legal experts and are often cited as authoritative by courts. The Restatement divides restraints on alienation into three categories: promissory restraints, disabling restraints, and forfeiture restraints. A promissory restraint is a provision that imposes contractual liability on the party who assigns without consent. A disabling restraint is a provision that any attempted transfer is “void.” A forfeiture restraint is a provision that an attempted assignment results in termination or the possibility of termination of the estate conveyed. A promissory restraint on alienation is deemed valid under the Restatement if it permits transfers to at least some possible transferees.
The Court concludes that the consent-to-assign provision in the lease is a promissory restraint. The only consequence of the lessee’s assignment without consent is potential contractual liability for breach of the provision; the clause does not say that any such assignment would be void (a disabling restraint), or that assignment without consent allows the lessor to terminate the lease (a forfeiture restraint).
The Court then notes that the clause is not absolute, because it potentially allows transfers to some transferees. “By prohibiting ‘unreasonable’ refusals to consent, the [clause] salvages the Alpar Lease’s promissory restraint on alienation from invalidity pursuant to the standards set forth in the [Restatement].” In other words, because the lessor’s consent cannot be “unreasonably withheld,” it is not an unenforceable restraint on alienation. Note that, if the provision had simply said no assignment without lessor’s consent, under the Court’s analysis it would have been an unenforceable restraint on alienation. Likewise, under the Restatement disabling restraints and forfeiture restraints are unenforceable.
Finally, the Court considered whether Mayo’s refusal to grant consent was “reasonable.” Again the Court found no guidance in Texas case law. “To date, no Texas court has published an opinion delineating or discussing the relevant ‘reasonableness’ factors in a case construing a consent-to-assign clause.” From other states and legal treatises, the Court provided a list of factors to judge whether a refusal to grant consent to assignment is “reasonable”:
- the assignee’s solvency and track record on making timely royalty payments
- the assignee’s industry reputation for honesty and reliability
- the assignee’s prior working relationship with the lessor
- the assignee’s capacity to operate the leasehold in an efficient manner
- whether the assignee is a ‘lease flipper’ that will not actively develop the property
- whether the assignee would increase the non-cost-bearing burdens on the leasehold (i.e., overriding royalties)
- whether the assignee is a competitor in the field
Weighing these factors, the Court concluded that Mayo had not presented evidence to show that it had reasonably withheld consent.
I have written about lease consent-to-assign provisions before. Recently the Texas Supreme Court upheld a consent-to-assign provision in a farmout agreement, in Carrizo Oil & Gas v. Barrow-Shaver Resources. In that case the Supreme Court held that a promissory consent-to-assign provision in the farmout, which did not provide consent could not be unreasonably withheld, was valid and enforceable and did not include any implied obligation that the farmor, Carrizo, had to act reasonably in withholding consent. But the parties did not argue, and the Court did not discuss, whether the provision was an unenforceable restraint on alienation. It might be argued that a farmout agreement is, like an oil and gas lease, a conveyance of an interest in real property, and so subject to restraint-on-alienation analysis. Some farmout agreements are in fact structured as term assignments of oil and gas leasehold estates.
Many oil and gas leases now contain consent-to-assign provisions. Some provide that consent may not be unreasonably withheld, some do not. Some provide that any attempted assignment without consent is void (a disabling restraint); others provide that any attempted assignment without consent entitles the lessor to terminate the lease (a forfeiture restraint). If Judge Kacsmyrik’s prediction of Texas law on application of the law of restraints on alienation to oil and gas leases is correct, then it would appear that the only possibly valid consent-to-assign provision is a promissory restraint including a provision that consent may not be unreasonably withheld. On the other hand, if a consent-to-assign provision does not provide that assignment without consent is void or entitles the lessor to terminate the lease if assignment is made without consent, in my experience such provisions are often ignored and are difficult to enforce. Witness Mayo’s efforts in attempting to prevent BP’s assignment. Certainly more guidance from Texas courts is needed on these issues.