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Texas Supreme Court asked to take up duty of holder of executive rights in Lesley v. Veterans Land Board

The Texas Supreme Court has been asked to review a case decided by the Eastland Court of Appeals, Lesley v. Veterans Land Board, that raises important questions about the duty of a mineral owner to owners of non-executive mineral interests. If the Court decides to take the case, the outcome could have important implications for future development of mineral interests in urbanized areas of Texas.

The important facts in Lesley are as follows:

Lesley v. VLB concerns a tract of 4000 acres in Erath County, which is in the Barnett Shale play. The Hedrick group owns 1/2 of the minerals under the tract. The surface and the other 1/2 of minerals, and the exclusive right to lease (the “executive right”) were owned by the Lesley group. In 1998, the Lesley group sold the land, reserving 1/4 mineral interest but conveying to the buyer all executive rights. The land was subsequently sold to a land developer, Bluegreen. So Bluegreen became the owner of 1/4 of the minerals and all executive rights; the Lesley group owned 1/4 of the minerals, with no executive rights; and the Hedric group owned 1/2 of the minerals, with no executive rights.

Bluegreen subdivided the entire 4000 acres into 1200 residential lots of one to four acres, and began selling lots. Bluegreen imposed restrictive covenants on the lots which prohibited any commercial use, including any oil and gas exploration. When it sold a lot, Bluegreen conveyed its 1/4 mineral interest with all executive rights. So each lot owner became the owner of 1/4 of the minerals and all executive rights to his/her lot.

Because of the restrictive covenants, no company was willing to lease the minerals in the 4000 acres for exploration and development. So the Hedrick and Lesley groups sued the developer and the lot owners for breach of their duty to the non-executive mineral owners, by placing the restrictive covenants on the lots and refusing to lift those restrictions and lease the minerals under their lots.

The Eastland Court of Appeals held that the lot owners had no duty to lease the minerals and so had breached no duty to the owners of the non-executive mineral interests. In so holding, the court relied on a previous case decided by the Texas Supreme Court, In re Bass, 113 S.W.3d 735 (Tex. 2003). Bass involved facts similar to those in Lesley.

In In re Bass, the Bass family of Fort Worth owned a ranch in Kenedy and Kleberg Counties, containing 22,000 acres. The McGills owned a 1/8th royalty interest in the land. The McGills sued the Basses for refusing to lease the ranch for mineral development. The McGills sought to require the Basses to disclose to them in discovery seismic information that the Basses had covering their ranch, in order to prove that the land was prospective for oil and gas exploration. The trial court ordered the Basses to produce the seismic data, and the Basses appealed that ruling, contending that the seismic data constituted valuable trade secrets. The Supreme Court agreed with the Basses that the seismic data was a trade secret. It then addresssed whether it was necessary for the Basses to produce the data in the lawsuit, even as a trade secret, on the ground that it was material and necessary to the litigation and could not be obtained in any other way.

The Court concluded that the seismic data was not relevant, because the Basses had no duty to the McGills to lease the minerals. The Court said that it so no reason to impose such a duty “as doing so would potentially place many Texas landowners in a position of owing a duty to remote royalty interst holders that would burden fee simple estates in a manner contrary to traditional property law.”

In 1984, in Manges v. Guerra, 673 S.W.2d 180, the Texas Supreme Court had held that the holder of executive rights has a fiduciary duty, also described as a “duty of utmost fair dealing,” to owners of non-executive interests in their land. The Court in Bass distinguished its earlier holding in Manges by saying that such duty arises only if the holder of the executive right decides to lease the property. “Bass’ duty to protect the amount of the McGill’s royalty does not arise until Bass executes a lease.”

The practical result of Lesley, if the ruling stands, is that a real estate developer can effectively prohibit mineral development within his project if he acquires a significant portion of the mineral executive rights, by placing restrictive covenants on his subdivision that prohibit mineral development, without fear of liability to the owners of non-executive mineral owners under his subdivision. Until In re Bass, no Texas court had directly addressed whether a holder of executive rights has a duty to lease the mineral estate. In light of the fact that more and more of Texas is becoming urbanized, substantial mineral deposits may become inacessible to development, in effect condemning the value of non-executive mineral interests under those lands.

This is another example of the conflict between surface and mineral interests that also reveals itself in the newly developing “accommodation doctrine,” in which courts have held that the mineral lessee must accommodate existing uses of the surface. Both Lesley and the accommodation doctrine are in some ways erosions of the traditional Texas rule that the mineral estate is the dominant estate.

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