Co-author Trenton Patterson*
We’re not saying you should do it, but there is a recipe for ridding oil and gas leases of pesky burdens: Enter into a new lease covering the same interest as the earlier lease and omit any reference to an intent that the later be subordinate to the earlier. You don’t even have to release the earlier lease. So says TRO-X, L.P. v. Anadarko Petroleum Corp.
You might remember a report on this case at the court of appeal, where we marveled at the skillful (or fortuitous, we’ll never know) way the Anadarko landman won the day via email.
TRO-X, took leases in 2007 from the Coopers. TRO-X entered into a participation agreement with Eagle and transferred its interest in the 2007 leases (after releasing a portion due to an offset well clause). TRO-X retained a five percent “back-in” option if Eagle produced hydrocarbons and reached “project payout”.
There was an “anti-washout” clause: TRO-X’s back-in option “shall extend to and be binding upon any renewal(s), extension(s), or top lease(s) taken within one year of termination of the underlying interest.”
Eagle assigned its interest in the 2007 leases to Anadarko. After failing to drill a required offset well, Anadarko surrendered 320 acres to the Coopers and negotiated the 2011 leases, which were:
- between the same parties as the 2007 leases,
- covered the same mineral interest,
- contained several terms that were materially different,
- did not mention either the 2007 leases or TRO-X’s interest, and
- did not release the 2007 leases.
The 2011 leases had an effective date of June 17, and were executed before Anadarko executed a written release of the 2007 leases. Anadarko denied TRO-X’s effort to confirm its back-in interest. Litigation ensued.
Were the 2011 Leases top leases and therefore subject to TRO-X’s back-in?
No. Notwithstanding the absence of any release language in the 2011 leases, there was no evidence that Anadarko and the Coopers intended for the 2011 leases to be subordinate to the 2007 leases. The act itself of executing the 2011 leases terminated the 2007 leases. Anadarko prevails.
Why is that?
An existing lease terminates when the parties enter into a new lease covering the same interest, unless the new lease objectively demonstrates that both parties intended for the new lease not to terminate the prior lease. (i.e. language in the new lease making it subordinate, or restricting the new lease’s grant, or limiting the grant to a different interest from that conveyed by the prior lease).
Even if there is no surrender clause, “the parties may mutually agree to a release, or they effectively terminate their lease by signing a new one.”
Anadarko’s failure to release the 2007 leases prior to the execution of the 2011 leases did not result in both sets of leases existing at the same time. The court found no language evidencing that intention.
*Trenton is another outstanding Gray Reed summer associate and is a 2-L at SMU Law School.
Here is another recipe for you.