The fellow on the right is after your lease. The result in Cabot Oil & Gas Corporation v. Healey, LP was so bad for the lessee I’m going directly to …
Landmen: First, when offered a lease with automatic termination language, run away like you’re chased by an Obamacare Navigator who hasn’t undergone a background check, especially when termination is triggered by something as immaterial as failing to share data. I don’t care how much your geologist says that’s where all the hydrocarbons are.
Second, for all those times you will ignore the first suggestion, redouble your lease administration processes so that burdensome and out-of-the-ordinary lease requirements are not overlooked. I have litigated these provisions. Protecting your assets from a catastrophe is a matter of having both good processes and good people.
Landowners: If you are in the middle of the play, especially if you have big acreage, see “Second”. Used in good faith, data-sharing, automatic termination and similar clauses protect you from operators who might otherwise ignore legitimate concerns.
Three oil and gas leases required the lessee to deliver to the lessor daily drilling reports, copies of all logs, monthly production reports for the life of the well, copies of all reports and forms filed with the Railroad Commission, locations, dates of completion and abandonment, and copies of title opinions.
Any breach of the lease “ … shall be grounds for cancellation of this lease …”.
Cabot and its predecessor, Enduring Resources, drilled 21 wells without providing all the required information. Healey contacted Cabot, suggested that the leases had been breached, and requested to be treated as a working interest owner. In response, Cabot provided a “sizable amount” of data in accordance with the data-sharing provision.
Healey sought a declaratory judgment that the leases had terminated, that Healey was an unleased co-tenant in the wells, and for an accounting. The jury found that Healey had effectively terminated the lease due to Cabot’s breach. The court signed a judgment declaring that the leases were terminated, the amount of production expense for each well, and determining Healy’s ownership percentage in each of the units and awarded Healey attorney fees.
If you don’t go to trial for a living, you may stop reading now
A declaratory-judgment action is not the proper procedural vehicle for determining whether the lease had been terminated, and the court so ruled. The proper procedure is trespass-to-try-title. But Cabot didn’t preserve the error because it had not filed special exceptions to Healey’s petition.
What you say in a hearing months before trial can haunt you. At a continuance hearing Cabot said it needed to conduct discovery from Enduring on the reasonable and necessary expenses for the wells. Months later, at a limine hearing, the lawyers explained that they had been told to “take a hike”, and didn’t try harder (letters rogatory, depo notices, etc). Thus, there was no evidence of those expenses.
The court discussed Rule 1006 (summaries of voluminous records) and Rule 803(6) (the business records exception to hearsay).
Challenges to the jury questions on substantial compliance, waiver, and quasi-estoppel are worth a look.