So said the lessor-plaintiffs in Walker v. Chesapeake Louisiana, L.P. The lessee-defendant, the trial court, and the court of appeals said “Yes, but . . .”. The lessors accused the lessee of breaching six leases and sought cancellation. The court invoked the doctrine of “judicial control” that allows a court to avoid cancellation when equity requires it.
The “Gotcha” Lease
The leases had three provisions that the lessee allegedly breached:
- There would be no surface operations without the lessor’s consent (Operations were minimal and there was no damage to the land);
- Subject to a mutually agreed data license agreement, the lessee was required to furnish lessor certain information regarding wells on the premises (The agreement hadn’t been negotiated, and the lessee contacted the lessor the day after receiving a demand for cancellation);
- If a seismic permit was obtained within one mile of the premises, the lessee must negotiate in good faith to include the premises and surrounding acreage in the seismic coverage (The court construed this clause in lessee’s favor, so there was no breach).
The Court’s View
La. Civil Code Art. 2013 allows judicial dissolution of a contract when the obligor fails to perform. There are several ways for a court to let a breaching lessee off the hook in the face of a claim for lease cancellation. Louisiana, like virtually all states, frowns upon forfeiture of a contract. This is especially true, said the court, where the breach is not substantial and there is no injury to the lessor. Such was the case here.
The court also pointed to a Louisiana case that discussed the “good faith” of the breaching party, holding that the court would deny cancellation if the breach was of minor importance and was caused by no fault of the obligor or is based on a good faith mistake of fact.
This case has several lessons for all of us.
- Lessor: You have the right to enforce each unreasonable provision in your lease, or enforce each reasonable provision in an unreasonble way. But don’t expect every court to be enthusiastic about helping you. Listen to this advice: http://www.youtube.com/watch?v=kn481KcjvMo
- Lessee: Resist unreasonable lease terms when you can. You might survive a fight over arbitrary or unreasonable lease terms, but it will be troublesome and expensive. You don’t want to have to rely on equity (a/k/a, the court’s mercy) to avoid a bad result.
- Landman: When your geologist says that without that certain tract her favorite prospect will be worthless and the company’s future doomed, warn her how painful it will be when the lessor insists on enforcing the “gotcha” lease that you will have to live with. And don’t fall for aw-shucks platitudes from the lessor: “Gosh, I wouldn’t ever enforce any of this stuff. I don’t even understand it, but my lawyer says I need it to keep people like you honest”.
- Out-of-state lessee who has been sued on the lessor’s home turf: Think about getting to the federal courthouse. See my March 27, 2012, post to see what can happen if you don’t.
The Back Story?
Just as history is written by the victors, opinions are written by the judges who see facts and equities in a certain way. Rare is the losing party who agrees. Any analysis of a decision is based on what you see in the opinion, which is usually a lot less than everything that happened.
With that caveat, let’s speculate. One can see what motivations might have been in play here. The leases were signed in 2008 for land in Caddo Parish. Looks like a good Haynesville well was drilled when gas prices were far higher than the anemic sub-$2.00 now being paid. The lessors refused to negotiate with the lessee over the breaches, and the suit swung for the fences: nothing less that cancellation of all six leases. The result would be a windfall – ownership of a nice well after the lessee risked millions of dollars to buy the leases and drill the wells.