Most of the time, if you read Stroud et al v. Hosford et al. even Hamilton Burger might have won on these facts. But when a lease subject to an override is terminated and replaced by another, Texas cases usually end up against the overriding royalty owner.
The court agreed with the jury that the lessee intentionally terminated the lease to, in part, terminate the overrides. The question was whether that conduct is actionable under Texas law. The court reviewed Texas decisions on the subject and said that, even with what appeared to be bad faith, absent a relationship giving rise to a duty of good faith and fair dealing the override owners had no right to recover. The lessee doesn’t generally owe an implied contractual covenant or a fiduciary type duty to protect the interest of an override owner such as to require the lessee to make repairs to well equipment, perpetuate the lease, and ensure that overrides are not extinguished, and the lessee was not precluded by any contract from entering into a new lease.
The court acknowledged cases suggesting that a party that engages in conduct to intentionally wash out an override may be subject to liability. But the facts of this case did not support liability. The override owners have asked the Texas Supreme Court to review the decision.
The (Simplified) Facts:
Do the facts get more “intentional” than these?
- A few days after the lessee was notified that the ORRI owners didn’t have renewal and extension clauses, the well ceased to produce because of a mechanical defect (not caused by the lessee).
- The lessee was advised by his lawyer that he had no obligation to pay the ORRI owners.
- He knew he had a 90-day cessation of operations clause.
- He didn’t order repairs on the well because, among other reasons, he had already offered interests in the property to other investors under other (new) leases.
- There was no work during the 90 days and the lease terminated.
- The lessee admitted that he intentionally returned the well to production after the lease had terminated and he had obtained a new lease.
- He did it that way because he didn’t want overrides on the new lease.
- The new lease was signed less than one month after the well ceased to produce and during the 90-day continuance operations period.
- After the 90-day period expired, the lessee represented to potential investors that he intended to repair the broken well.
- The well was repaired at a cost of $7,500 and production was resumed under the new lease.
- The new lease and well were sold for $2.5 million.
The lone dissent appeared to be offended that such disregard for the rights of others could be rewarded. Relying on lease provisions ignored by the majority and viewing some of the same cases differently, she would have reached a different result. She also would have found that the lessee tortuously interfered with the override owners’ rights in the leases.
Where Do Override Owners Go Now?
I’m sorry to say, it could be here.
Thanks to Bill Drabble for his valuable assistance.