Locke Lord QuickStudy: Another Washout Case

Locke Lord LLP
April 13, 2016

The El Paso Court of Appeals recently continued the trend of Texas courts to allow washouts unless strictly forbidden by agreement. Anadarko Petroleum Corp. v. TRO-X, L.P., 031816 TXCA8, 08-15-00158, March 18, 2016.

The Coopers, property owners in Ward County, executed five leases with TRO-X. TRO-X assigned the leases to Eagle Oil & Gas Co. But TRO-X retained a reversionary interest providing it with a “back-in” option to receive 5% of its original working interest. The “back-in” option applied to “renewal(s), extension(s), or top lease(s) taken within one year of termination of the underlying interest.”   

Eagle assigned its interest to Anadarko Petroleum Corp., who began drilling operations. After allegations by the Coopers that Anadarko breached the leases, Anadarko offered to take a new lease from the Coopers. The Coopers accepted and Anadarko recorded the new lease—all without TRO-X’s knowledge or consent. A few days later, Anadarko recorded a release of the TRO-X leases. The new lease used the same form as the TRO-X lease but changed the length of the primary term, required a larger bonus, and imposed a 240-day drilling commitment.

TRO-X sued Anadarko seeking to exercise its 5% “back-in” option. The trial court held in favor of TRO-X. But the El Paso Court of Appeals reversed and rendered a take-nothing judgment against TRO-X. The critical inquiry was the Coopers’ intent at the time the new lease was executed with Anadarko. Noting that a “lessor is deemed to have waived any formal surrender requirements if it signs a new lease with the intent to terminate the old one,” the appellate court held that the filing of the release did not convert the new lease into a top lease between the time of the execution of the new lease and the recording of the release.
While emphasizing TRO-X’s failure to carry its burden of proof, the court noted that the Coopers did not request a separate release; Anadarko said it was not requesting an extension of the TRO-X lease but was requesting a new lease on different terms; the Coopers did not object; and there was no language in the new lease stating it would not be effective absent a release.

It seems likely that the issue could have been avoided had TRO-X broadened its description of renewals and extensions to include any acreage acquired by a lessee which acreage was previously covered by the TRO-X lease. This case continues the general practice of Texas oil and gas law to only preclude washouts in cases involving bad faith or a breach of a fiduciary duty and to allow washouts unless strictly forbidden by the terms of the agreement.

An interesting issue not reached by the court was a claim relating to an offset well requirement. The TRO-X lease required the drilling of an offset well if an off-lease well were drilled within 660 feet of the lease boundary but with the proviso that “if the Leased Premises should be in any field where a drilling pattern has been established by any State or Federal Government Authority having jurisdiction over such matters and such field is being drilled or developed according to a smaller or larger drilling pattern then the offset distances and the acreage to be surrendered shall be diminished or enlarged” and if the Lessee failed to drill an offset well Lessee was required to surrender a portion of the Lease. Since the Railroad Commission had adopted rules for the field stating that “no vertical well shall hereafter be drilled nearer than … 467 feet to any … lease line,” the question was whether the 467’ rule trumped the 600’ lease provision.

At the time of this writing, the case has not been appealed but is still within the time for appeal.