Header graphic for print
Energy & the Law

Lessee Escapes Termination

Posted in Contract Disputes, Lease Disputes

terminatorCo-author Trevor Lawhorn ∗

Escondido and Justapor. Next up on Tiny Desk Concert? Good guess, but no. They are the parties in Escondido v. Justapor, a Texas case presenting the perils of lease termination clauses and vaguely-drawn contracts.

The agreements

Justapor as lessor and Escondido as lessee entered into an oil and gas lease in 2008 on the 803-acre Justapor Ranch in Webb County. Among other provisions,

  • Escondido must pay royalties within 60 days.
  • Annual “true-up” of royalty underpayments.
  • Termination if Escondido doesn’t pay the correct royalty.

In 2011, the parties entered into a separate agreement under which Escondido would convey certain interests it acquired in the Ranch to an entity designated by Justapor.

The lawsuit

Justapor sued in 2013, alleging intentional failure to make up underpayments in 2012 and 2013, breach of contract, bad-faith trespass, trespass to try title, and declaratory judgment on lease termination and the parties’ rights relating to a 42-acre “vacancy tract” Escondido was to convey per the 2011 agreement.

Everybody moved for summary judgment on lease and vacancy tract issues. The (home town) trial court granted a final summary judgment for Justapor and denied Escondido’s cross-motion. Escondido appealed.

The court of appeals speaks                                         

  • The lease did not terminate due to Escondido’s breach of the true-up provision. The court parsed the lengthy and complicated termination clause and said it could not be applied without rendering the true-up provision superfluous or giving Escondido conflicting deadlines to make payments.
  • Judgment rendered for Escondido on Justapor’s remaining claims.
  • Because the trial court said the lease terminated in 2012, Justapor’s claim for breach of the true-up provision in 2013 was never addressed.  That claim was remanded so that the trial court could address a typo and determine if Escondido breached the true-up provision in 2013.
  • Judgment on the vacancy tract reversed. Justapor never designated an entity for Escondido to convey interests to. Justapor, therefore, could not establish a breach of contract claim.

Lawyers, pay attention

Escondido waived its defenses to Justapor’s breach of contract claim by failing to expressly present the defenses in its summary judgment response. A “mere reference” to facts supporting affirmative defenses was not enough. Summary judgment for Justapor affirmed for Escondido’s breach of the lease.

Takeaways

  • Lessees: Faced with a termination clause? Don’t agree to this Sword of Damocles! At best, it produces sleepless nights. At worst, it could mean an ugly end to your investment.
  • Drafters: Avoid using confusing language that leads to an unanticipated result.
  • Plaintiffs: Make sure you have performed your own obligations before seeking specific performance.
  • Defendants: Never make Her Honor have to guess about your defenses.

∗ Trevor is a 2-L at SMU’s Dedman School of Law, LSU undergrad, clerking at Gray Reed for the summer.

The New Orleans version of the gospel standard is really two halves of one song: The first half is the dirge, wherein the departed is brought to the final resting place; the second half is the march, the celebration by those left behind. Don’t give up on this one too soon.  Whatever it is you need to get back to can wait.