A colleague recently pointed out to me that I had miss-read the Texas Supreme Court’s recent opinion in Endeavor Energy Resources v. Energen Resources Corporation. In my previous post on the case I said that the Court had concluded that the retained acreage clause being construed was ambiguous and had remanded the case for a trial on the meaning of the clause. Instead, the Court concluded that, because the clause was ambiguous, it should be construed in favor of the lessee, Endeavor.
The retained acreage clause in Endeavor’s lease allowed the lessee to retain all interest in the leased premises if, after the primary term, it drilled a new well every 150 days. The clause also allowed Endeavor to “accumulate unused days in any 150-day term … in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.” If and when the lessee failed to do so, the lease will terminate except as to specified acreage earned by wells then completed and producing. The dispute was over the meaning of the quoted language. Endeavor argued that the language allowed it to carry forward unused days across multiple 150-day terms; or alternatively, Endeavor argued that the language is ambiguous and that “the disputed language may not operate as a special limitation.” The Court concluded that the clause was indeed ambiguous and, because it operates as a “special limitation” on the lessee’s title, it should be construed in favor of the lessee.
[I]t has long been the rule that contractual language will not be held to automatically terminate the leasehold estate unless that “language … can be given no other reasonable construction than one which works such a result.” Knight, 188 S.W.2d at 566 (citing Decker, 216 S.W. 38). As explained above, the Lease’s description of the drilling schedule required to avoid termination is ambiguous under these circumstances. Courts should not treat an obligation so “lacking in definiteness and certainty as introducing” into a lease a “limitation leading to …termination of [a] vested estate.” W.T. Waggoner Estate, 19 S.W.2d at 31. Because the disputed provision is ambiguous, it cannot operate as a special limitation under these circumstances.
In other words, the tie goes to the lessee.
The first case cited by the Court in support of its holding, Knight v. Chicago Corp. 188 S.W.2d 564 (Tex. 1945), involved a lease clause restricting the lessee’s right to assign the lease, violation of which would result in termination of the lease. The lessor brought suit contending that the lessee had violated this provision and the lease had terminated. At the time, there were five producing wells on the lease. The alleged violation was Chicago Corporation’s effort to include the lease in a field-wide unit. The Court held that the restriction-on-assignment clause was not violated, and the lease did not terminate. Because the clause imposed a restraint on alienation and imposed a forfeiture for violation, the Court said the clause should be construed strictly against forfeiture.
The second case cited by the Court is Decker v. Kirlicks, 216 S.W.385 (Tex. 1919). The facts in that case are more similar to those in Endeavor. The lease in Decker provided:
It is further agreed that in the event oil is found in paying quantities in said first well, then the lessee agrees and covenants that within thirty days from the completion of such successful well he will begin the boring of a second well on some other acre of said tract herein leased, and continue to bore additional wells with due diligence in such order as to additional wells on the tract herein leased as developments may justify, until at least five or six wells have been completed, or the acre upon which said second party has failed to drill a well reverts to the first party by written notice to that effect being served upon said second party by said first party.
The lease covered 20 acres divided into one-acre blocks. The lessee did complete five wells, but four of them were on the same one-acre tract. The lessor contended the lease terminated as to all one-acre tracts on which no well had been drilled. The lessee claimed he had satisfied the five-well requirement. The Court of Appeals had held that the provision was ambiguous and so its meaning should be submitted to the jury. The Supreme Court held instead that, if it was ambiguous, it should be construed so as to avoid forfeiture of any lease acreage:
The last case cited by the Court, W.T. Waggoner Estate v. Sigler Oil Co., 19 S.W.2d 27 (Tex. 1929), involved construction of a lease of the Waggoner Ranch covering 85,000 acres. The lease provided that each producing well drilled during the primary term would hold 2,000 acres in a square. Sigler Oil was assigned the lease as to 3,000 acres of the leased premises, and it drilled two producing wells. Waggoner sued, contending Sigler had forfeited its right to those 3,000 acres by failing to reasonably develop the property. The trial court issued a judgment requiring Sigler to drill at least eight walls, one each six months, or forfeit its leasehold interest. The Court of Appeals concluded that Sigler had no implied duty to further develop the 3,000 acres. The Commission of Appeals concluded that Sigler should forfeit all of the 3,000 acres except for 10 acres around each producing well. Finally, the Supreme Court held that the lease provision did not negate the implied covenant of reasonable development and that the implied covenant did not impose a special limitation on the term of the lease. The proper relief for violation of the duty to reasonable develop is damages.