Texas court rejects drilling company’s claim against co-lessee for its share of the profits
Earlier this year, the Court of Appeal for the Eighth District of Texas in El Paso issued an opinion in a Texas oil and gas case discussing whether the plaintiff company was entitled to an accounting for its share of the profits from a majority-interest co-tenant. Ultimately, the court concluded that the plaintiff company’s lease had expired, eliminating any right the company had to an accounting of the profits.
The facts of the case
According to the court’s written opinion, the plaintiff company leased a one-sixth interest in a tract of land in Ward County, Texas. Another oil and gas company, the defendant, leased the remaining five-sixths of the property. The plaintiff’s lease provided for a five-year term that was “paid-up,” plus an optional second term that was to continue “as long thereafter as oil or gas is produced from said land or from land with which said land is pooled.”
The plaintiff company requested permission from the defendant to drill wells on the property. However, as the primary lessee, the defendant was able to preclude the plaintiff from drilling by withholding permission. Thus, during the initial five-year period of the lease, the plaintiff did not drill a well or produce any oil. During that time, however, the defendant company drilled several productive wells. The plaintiff was paid a portion of these profits during the initial five-year period of the lease.
When that five-year period ended, however, the defendant stopped making payments to the plaintiff. The defendant’s position was that the plaintiff’s primary lease term was over, and because the plaintiff never produced oil or gas from the land, the lease was no longer valid. The trial court agreed with the defendant and dismissed the case, and the plaintiff appealed.
The court affirms the dismissal of the plaintiff’s case
On appeal, the Court of Appeal for the Eighth District affirmed the dismissal of the plaintiff’s lawsuit. The focus of the court’s inquiry was on whether the plaintiff’s lease was still valid. If so, then the plaintiff would still be entitled to an accounting of any profits generated from the property. However, if the plaintiff’s lease had expired, then the defendant had no obligation to provide an accounting.
The plaintiff presented several arguments in favor of a finding that the lease was valid. Most importantly, the plaintiff argued that the lease was unclear, and that the defendant’s production of oil on the land could satisfy the continuation clause in the plaintiff’s lease. Essentially, the plaintiff argued oil was produced (by the defendant), and that the contract did not state whether the plaintiff had to be the one to produce it. The court disagreed, noting that notwithstanding the language in the lease, Texas courts have held such clauses to require the lessee to cause production in order to meet the continuation clause requirements. The court also noted that this interpretation was consistent with the intentions of the parties at the time the lease was formed, because the landowner would not likely have bothered leasing to the plaintiff if it planned on making no effort to extract oil or gas.
The court was similarly unpersuaded by the plaintiff’s policy argument that the court’s decision in favor of the defendant will negatively impact minority interest holders. By allowing the defendant to prevent the plaintiff from producing oil, the plaintiff claimed that the defendant effectively forced the termination of the plaintiff’s lease. The plaintiff argued that this was unfair, and would discourage others from obtaining minority interest rights in the future. The court dismissed the plaintiff’s argument, explaining that the parties were co-lessees and had no duty to each other. The court added that, presumably, the plaintiff knew of its rights when it entered into the minority-interest lease.
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