THE END OF THE LEASEHOLD AS WE KNOW IT: TERMINATION, FORFEITURE, & REPUDIATION
State Bar of Texas, Oil and Gas Disputes CLE, January 2019
by Ryan Clinton
I. INTRODUCTION
How do we know when a lease has ended? Surely the lack of production during the secondary term will end a lease, but is that always true? How do courts decide which requirements in an oil-and-gas lease will effect a termination of the leasehold estate and which won’t?
Likewise, what does it mean to “forfeit” leasehold rights? Is that the same thing as termination or expiration of a lease? And under what circumstances will a court construe a lease so as to avoid “forfeiture”?
These are the questions that this paper attempts to answer. Sometimes the answers are clear in Texas law; sometimes they aren’t. Section II discusses the fundamentals of the Texas oil-and-gas lease—the determinable-fee estate—as well as the classifications and implications of various lease clauses. Section II also analyzes the “rule against forfeiture” within Texas oil-and-gas precedent. Section III presents Texas law on two exceptions to the ordinary rule that leases will terminate for lack of production: the “temporary cessation of production” rule and the repudiation doctrine.
II. THE BEGINNING & THE END OF THE LEASEHOLD ESTATE: THE DETERMINABLE-FEE INTEREST & ITS LIMITATIONS, CONDITIONS, & COVENANTS
A. The Determinable-Fee Estate
Almost one hundred years ago, the Texas Supreme Court was asked—in a tax case—to determine the nature of the oil-and-gas leasehold in Texas. See Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290 (1923). The Court explained that the grant of property in an oil-and-gas lease “effected a severance of the property in the strata of minerals from the property in the remainder of the land.” 254 S.W. at 293. The Court said this was true regardless of the particular language used in a given lease: an oil-and-gas lease will be treated as having effected a severance of the minerals “whether an instrument takes the form of a grant of the exclusive right to mine … [or] a demise of the land, for the sole purpose of mining operations … [or] a grant of the mineral[s] with the exclusive right to mine for, produce, or dispose thereof….” Id. at 294.
In a few short passages, the Court in Stephens County would go on to define the fundamental underpinnings of Texas oil-and-gas law that continue to shape our understanding of oil-and-gas leases today. The Court wrote:
Passing to the consideration of the precise nature of the title created by the instruments before us, it seems obvious: First, that the grants might endure forever, since the lands might never cease the profitable production of oil or gas; and second, that it was intended by all parties that the lands should be used for no other purpose than the specified mineral exploration and production, and that the grants were to be enjoyed only while such use continued and were to immediately terminate on cessation of the use.
Id. at 295. The Court continued:
At common law, a grant of land for such a term and for such use and purpose—and no other—created the estate called a base, qualified, or determinable, fee, defined … as ‘an interest which may continue forever, but the estate is liable to be determined, without the aid of a conveyance, by some act or event, circumscribing its continuance or extent.’
Id. And finally, the Court explained:
The instruments … have passed to appellee determinable fees in the lands; leaving the grantors, their heirs or assigns, the possibility of reacquiring the absolute fee-simple titles, less whatever minerals may be meantime produced and marketed.
Id.
It is no exaggeration that Stephens County gave us some of the most important fundamentals of Texas oil-and-gas law:
· an oil-and-gas lease severs the minerals from the land and conveys the minerals to the grantee;
· the grantee obtains a fee-simple-determinable interest that may last forever, but may automatically terminate upon the occurrence of defined events; and
· the grantor retains the possibility of reverter—i.e., the possibility of “reacquiring the [minerals in] absolute fee-title.”
Id. In fact, virtually the same language is used by the modern Court to explain the interests conveyed—and reserved—in an oil-and-gas lease:
In a typical oil or gas lease, the lessor is a grantor and grants a fee simple determinable interest to the lessee, who is actually a grantee. Consequently, the lessee/grantee acquires ownership of all the minerals in place that the lessor/grantor owned and purported to lease, subject to the possibility of reverter in the lessor/grantor. The lessee’s/grantee’s interest is “determinable” because it may terminate and revert entirely to the lessor/grantor upon the occurrence of events that the lease specifies will cause termination of the estate.
Nat. Gas Pipeline Co. of Am. v. Pool, 124 S.W.3d 188, 192 (Tex. 2003); see also Kaiser v. Love, 163 Tex. 558, 358 S.W.2d 586, 587 (1962).
B. Limitations, Conditions, and Covenants in Oil-and-Gas Leases
Six years after Stephens County, the Texas Supreme Court issued another landmark oil-and-gas opinion expounding upon the nature of the oil-and-gas leasehold estate—this time providing critical guidance on the distinctions between various terms, requirements, and conditions in Texas oil-and-gas leases. In W.T. Waggoner Estate v. Singler Oil Co., 118 Tex. 509, 19 S.W.2d 27 (1929), the Texas Supreme Court gave us the framework for discerning between obligations and limitations in oil-and-gas leases, as well as the consequences for the “breach” or violation of the various types of lease clauses.
The court provided three classifications of lease restrictions: limitations, conditions subsequent, and covenants. The distinctions between the three are as important today as they were ninety years ago.
1. Classifying Lease Terms
a. Special Limitations
A “limitation” is a clause “in a conveyance [that] delimit[s] the duration of [the] interest in land [conveyed].” Id. at 29. Said another way, a limitation “marks the period or event which is to determine the estate without entry or claim.” Id. at 31. As a result, “no affirmative act is necessary to vest the right in the grantor.” Id. “[U]nder a limitation[,] the estate granted is automatically terminated on the happening of stipulated events….” Id.
Examples of limitations are: clauses “providing for the termination of the lease … unless a well was commenced” by a specific date; clauses conveying the land “for the sole and only purpose of mining and operating for and producing oil and gas; clauses stating that the lease will remain in force after the primary term as long “as oil or gas was produced from the land”; and clauses stating that the lease will terminate absent payment of annual rentals. Id. at 29-30; see also Endeavor Energy Res., L.P. v. Discovery Operating, Inc., 554 S.W.3d 586, 606 (Tex. 2018) (listing limitations).
b. Covenants
A “covenant” is an express or implied “obligation” listed in the lease. W.T. Waggoner Estate, 19 S.W.2d at 29; see also Johnson v. Gurley, 1879 WL 7746, 52 Tex. 222, 226 (1879) (“A covenant is an agreement duly made between the parties to do or not to do a particular act.”); A.W. Walker, Jr., The Nature of the Property Interests Created by an Oil and Gas Lease in Texas, 8 TEX. L. REV. 483, 488 (1930) (a covenant is “[a]nything that a grantee, or lessee, is under a duty to do, or to refrain from doing”). The breach of an obligation—or “covenant”—in a lease “will not authorize the forfeiture of the lease.” W.T. Waggoner Estate, 118 Tex. at 29. “The usual remedy for breach of [a covenant] is an action for damages, though, under extraordinary circumstances—where there can be no other adequate relief—a court of equity will entertain an action to cancel the lease in whole or in part.” Id.
An example of a “covenant” is the implied covenant for reasonable development of the oil-and-gas lease. Id. The “promise to pay royalties is generally a covenant, which will give rise only to a remedy of damages.” Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344, 354 (Tex. App.—Fort Worth 2010, pet. denied). Likewise, the “obligation to protect from drainage is a covenant …, and the lessor’s remedy for such failure is a suit for damages, not forfeiture.” Mitchell v. Mesa Petroleum Co., 594 S.W.2d 507, 513 (Tex. Civ. App.—San Antonio 1980, writ ref’d n.r.e.).
Critically, oil-and-gas leases ordinarily do not include a duty “to drill, to continue production after oil or gas is discovered in paying quantities, or to commence new drilling operations after existing wells have ceased producing.” Lynch v. S. Coast Drilling Co., 442 S.W.2d 804, 807 (Tex. Civ. App.—San Antonio 1969, no writ). That’s why the failure to obtain production as necessary to perpetuate a lease is not considered a breach of contract, but instead will effect automatic termination of the lease “by force of … limitation.” Id. The occurrence “terminating [a] lease [is] not a breach of duty by lessees and create[s] no cause of action in [the] lessor.” Id. (citing A.W. Walker, The Nature of the Property Interests Created by an Oil and Gas Lease in Texas, 7 Tex. L. Rev. 1, 18 (1928)).
c. Conditions Subsequent
A “condition subsequent” is a clause that authorizes the lessor to bring an action for forfeiture of the lease. W.T. Waggoner Estate, 118 Tex. at 29. It is “a qualification annexed to an estate by the grantor, whereby it may [be] created, enlarged, or defeated upon an uncertain event.” Johnson, 52 Tex. at 226-27. Whereas “under a limitation the estate granted is automatically terminated on the happening of stipulated events, … under a condition subsequent, the lessor has the election to terminate or continue the contract after breach of the condition.” W.T. Waggoner Estate, 19 S.W.2d at 31.
A “condition subsequent” often arises from what would ordinarily be a covenant, but in a particular lease the covenant is coupled with the authority of the lessor to terminate the lease upon its breach. Gulf Prod. Co. v. Kishi, 129 Tex. 487, 103 S.W.2d 965, 970 (1937). For example, although the duty to pay royalties is ordinarily a covenant, “parties to a mineral lease may create an express condition subsequent allowing the lessor the option of terminating the lease in the event of the lessee’s failure to pay royalty.” XTO Energy, Inc. v. Pennebaker, No. 07-10-00396-CV, 2011 WL 6846196 (Tex. App.—Amarillo Dec. 29, 2011, no pet.) (mem. op.) (citing Coastal Oil & Gas Corp. v. Roberts, 28 S.W.3d 759, 763 (Tex. App.—Corpus Christi 2000, pet. granted, judgm’t vacated w.r.m.)).
The key distinction between a “limitation” and a “condition subsequent” is that “[t]he grantor of an estate subject to a condition subsequent retains a power to terminate the estate on the occurrence of a specified event,” but that termination is not automatic. XTO Energy, 2011 WL 6846196, at *3. “On the occurrence of the specified event, the estate continues until the grantor exercises its power of termination.” Id. Said another way, “[t]he breach of a condition does not, of itself, divest the estate of the lessee, but to do this the lessor must, by express act, take advantage of the same by re-entry, or that which in law would be equivalent thereto.” Henshaw v. Tex. Nat. Res. Fd., 147 Tex. 436, 216 S.W.2d 566 (1949) (citations omitted). In fact, it has been held that the lessor may waive the breach of a condition subsequent by failing to call for the termination or “forfeiture” of the lease upon a breach. Tickner v. Luse, 220 S.W. 578, 580 (Tex. Civ. App.—El Paso 1920, writ ref’d) (“[W]here a condition subsequent in a deed provides for a forfeiture of the grantee’s title and a reversion in a case of breach, the right of forfeiture is lost to the grantor by a failure to claim a forfeiture.”).
2. Blurred Lines
It can sometimes be difficult to determine whether a particular lease clause is a limitation, condition subsequent, or covenant.
That confusion may be created by the drafting of the instrument—such as, for example, the disputed clause in Decker v. Kirlicks, which contained elements of all three types of clauses. 110 Tex. 90, 216 S.W. 385, 386 (1919). The clause stated that the lessee “agrees and covenants” to drill a certain number of wells on a timeline, but if the lessee fails to do so, undeveloped acreage “reverts to the [lessor] by written notice” served on the lessee. Id. The words “agrees and covenants” would ordinarily create a covenant; the words “reverts” would ordinarily describe the triggering of a limitation; and the words requiring “written notice” by the lessor prior to termination indicate a condition subsequent. Id. For what it’s worth, the Court did not classify the clause, but did choose to construe it in a way to avoid “forfeiture” of the leasehold estate. Id.
In Knight v. Chicago, a lease provision prohibited the lessee from assigning “undivided interests, overriding royalties or oil payments without the written consent of the Lessors,” and stated that if the lessee attempted to make such assignments, the “lease shall ipso facto terminate as to the interest so assigned.” 144 Tex. 98, 188 S.W.2d 564, 565 (1945). The Court noted the parties’ dispute over the clause’s classification, but ultimately didn’t reach the issue. The Court commented: “Of the several questions exhaustively briefed, none is more abstractly interesting than that of whether [the clause] should be construed as a special limitation or as a condition subsequent, but under our views … that question is not reached.” Id. at 566.
A few words can make a big difference. In XTO Energy, Inc. v. Pennebaker, the lease gave the lessor the option to terminate the lease if the lessee failed to timely pay royalties as required under the lease’s terms. No. 07-10-00396-CV, 2011 WL 6846196, *1-3 (Tex. App.—Amarillo Dec. 29, 2011, no pet.) (mem. op.). Because the clause gave the lessor the option to terminate the lease—as distinguished from an automatic-termination clause—the court classified the duty as a “condition subsequent,” and held that the lessor failed to call for the lease’s termination. Id. at *3-4. In contrast, the lease in Wagner & Brown, Ltd. v. Sheppard included a “special addendum providing that if royalties were not paid within 120 days” of the first gas sale, the lease “would terminate the following month.” 282 S.W.3d 419, 421 (Tex. 2008). There, it was undisputed that the lease automatically terminated—evidently without any action by the lessor. Id.; see also Freeman v. Magnolia Petroleum Co., 141 Tex. 274, 171 S.W.2d 339, 341-42 (1943) (holding that lease “lapsed” for failure to pay required gas rentals).
3. Standing to Enforce
An interesting but rarely litigated issue is the question of who has the power to enforce a limitation, condition subsequent, or covenant. This will not be an issue when litigation is brought by a lessor against a lessee to terminate a lease—because the two are in direct privity of contract. But the issue can arise if suit for the termination or cancellation of a lease (or for trespass to try title based on the termination of an existing lease) is brought by a top lessee against a prior lessee of the same interest.
In an opinion adopted by the Texas Supreme Court, the El Paso Court of Appeals wrote in 1920 that only the lessor may enforce the breach of a condition subsequent:
No one can take advantage of a breach of a condition subsequent, but the grantor or his heirs. If the grantor or his heirs do not take steps to enforce a forfeiture of the estate granted on the ground of the condition, the title remains unimpaired in the grantee.
Tickner, 220 S.W. at 580. Apparently, then, a second lessee of the same minerals would be unable to sue for title to a leasehold estate based on a prior lessee’s breach of a condition subsequent.
The same rule should apply to the breach of a covenant, which ordinarily creates nothing more than a breach of contract claim for damages. Only a party to the lease—or, presumably, a third-party beneficiary of the lease—should be able to enforce a breach of an express or implied lease covenant. See Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex. 2011) (“A third party may enforce a contract it did not sign [only] when the parties to the contract entered the agreement with the clear and express intention of directly benefitting the third party.”) (citing MCI Telecomms. Corp. v. Tex. Util. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999)).
The same is not true of a special limitation. Because an occurrence triggering a special limitation on a leasehold estate automatically terminates the estate without any action of the lessor, a second lessee with an interest in the same acreage may sue a prior lessee in a trespass-to-try-title action to recognize its superior title to the leasehold estate. E.g., Endeavor Energy Res., L.P. v. Discovery Operating, Inc., 554 S.W.3d 586, 605-06 (Tex. 2018) (holding, in suit brought by subsequent lessee, that prior lessee’s leases had terminated as to undeveloped acreage).
4. Even the Texas Supreme Court Gets Confused
Even though the three categories of lease terms—covenants, conditions, and limitations—appear widely settled in Texas oil-and-gas law, there is a line of Texas Supreme Court cases that collapses conditions and limitations into a single category (which it calls “conditions”). See Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex. 1989); Wagner & Brown, 282 S.W.3d at 429. In Rogers, the Court was called upon to determine whether a lease-assignment contract terminated for the alleged breach of an express duty to “assume and agree to perform and discharge all of the [base] lease obligations.” 772 S.W.2d at 78. The Court reasoned that it was required to decide whether the provision was a “covenant” or a “condition”—leaving out the possibility of a limitation. Id. at 79. Although the Court correctly noted that the [b]reach of a covenant does not automatically terminate the estate,” id. (citing W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, 29-31 (1920), it incorrectly wrote that the “[b]reach of a condition results in automatic termination of the leasehold estate upon the happening of stipulated events,” Rogers, 772 S.W.2d at 79.
The Court’s confusion in Rogers appears to stem from Freeman v. Magnolia Petroleum Co., 141 Tex. 274, 171 S.W.2d 339, 341-42 (1943). In that case, the lease included an ordinary habendum clause stating that the lease would remain in effect after the primary term so long as oil or gas was produced. Id. at 340. But another clause stated that if gas was produced but not sold, the well would be considered in production only if the lessee paid a flat royalty for each gas well. Id. at 341. The lease produced gas but it wasn’t sold, and the lessee did not pay the royalty. Id. The question, then, was whether the lease was perpetuated beyond the primary term, and the Court answered that “no,” explaining:
If [the lessees] had wanted to prevent lapsation of the lease for nonproduction, they could easily have done so by paying the fifty dollars on or before the last day of the primary term. They could have met the condition which they imposed upon themselves when they accepted assignment of the lease. For their failure to do so they have only themselves to blame. The lease lapsed as a matter of law when they so failed.
Id. at 342. It is Freeman’s reference to the provision as an automatically operative “condition” that apparently led to the Court’s confusion in Rogers and Wagner. If the Court had followed its prior precedent, it would have described the clause as a limitation—not a condition.
5. Revival and Estoppel
Theoretically, once an oil-and-gas lease has automatically terminated by its own terms, it is over and cannot be “revived” absent the execution of a new lease. The Texas Supreme Court adopted that reasoning in Guerra v. Chancellor, 103 S.W.2d 775, 777-78 (Tex. Civ. App.—San Antonio 1937, writ ref’d). There, the Court was asked whether the parties to a lease could have orally agreed to extend the time to accept a payment that was required to extend the lease. Id. at 777. The Court answered with an emphatic “no”:
The original … lease, upon which [the lessees] base their claim, is what is commonly termed an “unless” lease. … The “unless” clause as used in this lease is not a provision for a forfeiture based upon a condition subsequent but is a limitation upon lessee’s estate. It marks the limit of the estate granted. … A limitation is self-operative, and this means that when the stipulated event happens, the lease comes to an end regardless of the acts or desires of the parties. The lessor is entirely without power to waive a termination of the lease in this manner and, once the lease has come to an end, nothing that the parties can do will restore its vitality.
Id. (citations omitted).
The Court reached the same decision in Freeman v. Magnolia Petroleum Co., 141 Tex. 274, 171 S.W.2d 339, 342 (1943). There, the lease required the payment of royalty on produced but unsold gas in order to perpetuate the lease. Id. at 341. The lessees tendered the royalty payment four months after it was due, and the Court held that the lease, having been terminated, could not be revived by the late payment:
[I]f the [royalty] was not paid on or before April 7, 1940, … the lease terminated…. That is precisely what the contracting parties said should follow, and they were privileged to define what they meant…. [The lessees] could thus have met the condition which they imposed upon themselves when they accepted assignment of the lease. … The lease lapsed as a matter of law when they so failed, and it could not be revived by their attempt to perform the condition more than four months after the contract said it should be performed.
Id. at 342.
But the Texas Supreme Court has twice ruled differently, apparently allowing a bending of the strict-termination rules under certain circumstances. In Brannon v. Gulf States Energy Corp., for example, it was uncontested that a lease’s delay-rental payment was not timely paid. 562 S.W.2d 219, 220 (Tex. 1977). Two months after the deadline, a payment was mailed to the lessor along with a letter that read, “Enclosed please find . . . $202.00 which is for lease rental ….” Id. at 221. That check was “received, accepted, endorsed, and deposited” in the lessor’s bank account. Id. Rejecting the argument that the lease had terminated, the Texas Supreme Court wrote:
We consider the letter and the check relating to “lease rentals” as contractual in nature because late payment and acceptance of annual rentals provided for in an oil and gas lease has the effect of reviving the lease as though it had never terminated…. By the same token, the written tender of lease rentals by [the lessee] to [the lessor] two months late and her acceptance, endorsement, and deposit of the check to her account had the same effect as a binding agreement to revive the only existing lease on which any “rentals” were due.
Id. at 222.
A similar decision was reached in Humble Oil & Ref. Co. v. Harrison, 205 S.W.2d 355 (Tex. 1947). There, a lessee made insufficient delay-rental payments based on what the court described as a “mistake … in misconstruing the mineral deed.” Id. at 360. There was “no evidence that [the lessee] did not act in good faith, nor [did] the evidence show that [the lessee] acted negligently.” Id. The lessor deposited initial payments with “no objection,” then later refused payments based on the earlier payments’ insufficiency. Id. at 358-59. The Court recognized a split among Texas courts over whether delay-rental deadlines should be strictly construed or enforced in a “relaxed” manner. Id. at 360-61. The Court ultimately held that it would not strictly construe the deadline, and rejected the lease’s termination:
In the present case, [the lessee’s] failure to pay to [the lessor] his full share of the rentals . . . is due primarily to a misconstruction of an ambiguous mineral deed to which [the lessee] was not a party, and, secondarily, to a failure on the part of [the lessor], after he knew that [the lessee] had misconstrued the deed, to notify [the lessee] of the proper construction…. Where, as in this case, the lessee has in good faith made a mistaken construction of the lessors’ partial conveyance of their interests and lessee has made a payment in accordance with such construction, of which the [lessor] has notice, the duty rests on the [lessor] to notify the lessee of its mistake so that the lessee will have an opportunity to make a proper payment of the delay rentals. Where the [lessor], instead of giving the lessee such notice, remains silent, we hold that the [lessor] is estopped to assert that the lease has terminated as to his interest on the ground that the lessee has failed to pay him a sufficiently large share of the delay rentals.
Id. at 361.
C. The “Rule Against Forfeiture”
1. The 100-Year-Old Rule: Construe Leases Against Termination (or “Forfeiture”)
Most industry lawyers are familiar with the rule of construction that Texas oil-and-gas leases will be construed so as to avoid the forfeiture of a leasehold estate. Texas’s rule of construction disfavoring the termination of leases in the absence of unequivocal language will turn 100 years old next year. See Decker v. Kirlicks, 110 Tex. 90, 216 S.W. 385, 386 (1919). From the outset, the Court reasoned that it would be unfair for a party that had purchased title to real property to have its title dissipate thereafter based on a doubtful or strained construction of the conveyance’s language. Id. Accordingly, the Court concluded that if an oil-and-gas lease’s provision has any reasonable construction that thwarts an effort to terminate it, that construction prevails. See id. The Court explained:
Forfeitures are harsh and punitive in their operation. They are not favored by the law, and ought not to be. The authority to forfeit a vested right or estate should not rest in provisions whose meaning is uncertain and obscure. [Forfeiture] should be found only in language which is plain and clear, whose unequivocal character may render its exercise fair and rightful.
Id. (emphasis added).
More than two decades later, the Court confirmed that the existence of two plausible constructions of a lease’s terms—one for and one against its termination—condemns the construction that would lead to the lease’s termination. See Knight v. Chicago Corp., 144 Tex. 98, 188 S.W.2d 564, 566 (1945). In Knight, the Court was asked to determine whether a lease terminated due to the lessee’s alleged violation of a consent-to-assign clause that prohibited the unapproved assignment of undivided interests “except assignments to bank and oil well supply companies for the purpose of obtaining money.” Id. at 565. The Court rejected the plaintiff’s lease-termination claim because there was a plausible argument that the clause did not prohibit an allegedly improper assignment. Id. at 566-68. In so concluding, the Court reinforced Texas’s rule of construction that an oil-and-gas lease will not terminate in the absence of language that can be given no other meaning:
If the parties to the lease bound themselves by language which can be given no other reasonable construction than one which works [a termination], it is the court’s duty to give effect thereto by declaring a termination, but if there is any uncertainty in the language so as to make it ambiguous or of doubtful meaning, relief should be denied them.
Id. at 566 (emphasis added).
The Court confirmed the rule again in 1966. See Fox v. Thoreson, 398 S.W.2d 88, 92 (1966) (“Another sound rule of interpretation is that language used by the parties to an oil and gas lease will not be held to impose a special limitation on the grant unless it is clear and precise and so unequivocal in nature that it can reasonably be given no other meaning.”).
And in 1989. See Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex. 1989) (“The language used by the parties to an oil and gas lease will not be held to impose a special limitation on the grant unless it is clear and precise and so unequivocal that it can reasonably be given no other meaning.”).
And in 2002. See Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002) (“[W]e will not hold the lease’s language to impose a special limitation on the grant unless the language is so clear, precise, and unequivocal that we can reasonably give it no other meaning.”).
And twice in 2018. See Endeavor Energy Res., L.P. v. Discovery Operating, Inc., 554 S.W.3d 586, 606 (Tex. 2018) (“[W]e will not find a special limitation ‘unless the language is so clear, precise, and unequivocal that we can reasonably give it no other meaning.’”); XOG Operating, LLC v. Chesapeake Expl. Ltd. P’ship, 554 S.W.3d 607, 612 (Tex. 2018) (“[A] retained-acreage provision can impose a special limitation on a general grant of a mineral interest only if ‘the language is so clear, precise, and unequivocal that we can reasonably give it no other meaning.’”).
Thus, it’s fair to say that the Texas Supreme Court has consistently—over the course of a century—favored constructions of oil-and-gas leases that avoid termination of the leasehold estate.
2. Applying the Rule: Classifications
One way that the rule of construction against “forfeiture” has manifested itself in Texas precedent is that, when faced with the issue of classifying a lease clause allegedly violated, Texas courts have favored classifications of the clauses that make it less likely (or impossible) that the lease will terminate.
In Curry v. Texas Co., for example, the Eastland Court of Appeals analyzed whether a provision providing for an automatic “forfeiture” of a lease for failure to drill a required well was a limitation or condition subsequent. 18 S.W.2d 256, 257-59 (Tex. App.—Eastland 1929, writ dism’d). First, the court noted that “if the contingency” effecting an end to the lease is referred to as “a default by the [lessee], and the continuance of the [lease] involves an obligation upon [the lessee] by way of payment … or otherwise,” the contingency will “be construed as creating an estate on condition subsequent and not one of special limitation.” Id. at 259. And then, applying the rule of construction against terminating leases, the court reasoned that it should treat the disputed provision as a condition subsequent rather than a limitation because “it does not clearly appear to be a limitation rather than a condition subsequent.” Id.
In Henshaw v. Tex. Natural Res. Fd., the Texas Supreme Court likewise explained Texas law’s preference for classifying lease terms as imposing the least severe remedy possible:
Since forfeitures are not favored, courts are inclined to construe the provisions in a contract as covenants rather than as conditions. If the terms of a contract are fairly susceptible of an interpretation which will prevent a forfeiture, they will be so construed.
147 Tex. 436, 216 S.W.2d 566, 570 (1949). The Court continued, “[i]n case of doubt as to the true construction of a clause in a lease, it should be held to be a covenant, and not a condition or limitation, as the law does not favor forfeitures.” Id. at 571 (citation omitted).
And in W.T. Waggoner Estate v. Sigler Oil Co. too, the Texas Supreme Court expressed its rule that whenever in doubt, a lease’s terms should be construed as a covenant rather than a condition subsequent or limitation. 118 Tex. 509, 19 S.W.2d 27, 31 (1929) (“[C]ourts … very uniformly refuse to regard obligations lacking in definiteness and certainty as introducing into grants conditions subsequent or limitations leading to forfeiture or termination of vested estates.”).
3. Applying the Rule: Termination v. Forfeiture
There is no better source on the classification, definitions, and distinctions among lease terms than Professor A.W. Walker’s series in the Texas Law Review. E.g., A.W. Walker, Jr., The Nature of the Property Interests Created by an Oil & Gas Lease in Texas, 8 Tex. L. Rev. 483 (1930). Professor Walker views the three categories of lease terms the same way as described in this paper. “A limitation … is any provision delimiting the duration of an estate.” Id. at 484. Upon the occurrence of the event named in the limitation, “the estate granted automatically terminates without the necessity of any affirmative action on the part of the grantor.” Id. On the other hand, “[t]he happening of the event named in a clause of condition subsequent does not ipso facto terminate the estate granted …, but merely gives the grantor, or lessor, the option of terminating the estate.” Id. at 485. A covenant, finally, is a clause that “imposes a duty” on the lessee. Id. at 489. And “[t]he breach of a real covenant does not terminate the estate, nor does it give to the grantor, or lessor, the option of terminating the estate. It merely affords him the right to sue and recover for the damages resulting from the breach, or for some appropriate equitable relief.” Id. at 486-87.
One observation of Walker’s is that a “condition subsequent is a forfeiture provision,” but a limitation is not. Id. at 486. Because a condition subsequent is a forfeiture provision and forfeitures are disfavored in Texas law, Professor Walker observes:
the breach of a condition [subsequent] is not self-operative in effecting a termination of the estate, it is generally held that substantial compliance with a condition subsequent is sufficient to prevent a forfeiture, and equity will, in a proper case, not only refuse to aid in enforcing the right of forfeiture …, but also will affirmatively assist in relieving against the enforcement of such forfeiture where an award of damages would afford an adequate remedy.
Id. “A special limitation, on the contrary, does not operate to cut short the estate but simply fixes one of the natural limits of the estate beyond which the estate cannot endure.” Id.
This is where it gets interesting. Because a limitation is “self-operative,” Professor Walker reasons that it “is in no proper sense a forfeiture provision.” Id. Therefore, according to Professor Walker, “the ameliorating principles stated above as controlling the enforcement of conditions subsequent as forfeiture provisions are not applicable to clauses of special limitation.” Id.
What exactly does this last part mean? Does it mean that the so-called “rule against forfeiture”—which instructs courts to construe leases against termination—does not apply to special limitations?
In Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419, 429 (Tex. 2008), the Texas Supreme Court made no distinction between the “rule against forfeiture” as it applies to a special limitation or a covenant. The Court wrote,
[I]t is well-settled that “equity abhors forfeiture.” Consistent with that rule, Texas law requires that in construing mineral leases “doubts should be resolved in favor of a covenant instead of a condition” so that forfeiture is avoided.
Id. at 429 (citation omitted). The Court continued by noting that a provision of the lease—that it had already acknowledged effected automatic termination of the leasehold estate—“leaves no room for doubt that the operators forfeited the lease,” but that the lease “says nothing about whether they forfeited drilling costs too on that basis.” Id. So at least in that case, the Court seemed to communicate that a lease could be “forfeited” for violation of a limitation, and that the rule of construction against forfeiture always applies.
More recently, in two consecutive paragraphs of an oil-and-gas opinion, the Court seemed to say that the “rule against forfeiture” both does, and doesn’t, apply to the construction of special limitations. In Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 554 S.W.3d 586, 606 (Tex. 2018), the Court said:
Although we have noted that “[f]orfeitures are not favored in Texas, and contracts are construed to avoid them,” we agree with the court of appeals that its construction does not result in a forfeiture, but rather a partial termination of the leases under their own terms. This result arises from the fact that the retained-acreage clauses operate as special limitations on [the] leasehold interests.
… [A]lthough whether a lease has terminated “’is always a question of resolving the intention of the parties from the entire instrument,’” we will not find a special limitation “unless the language is so clear, precise, and unequivocal that we can reasonably give it no other meaning.”
Id. at 606 (citations omitted).
So where does that leave us? Do courts construe special limitations “against forfeiture” or do they not? It seems that the rule disfavoring constructions of oil-and-gas leases that dispossess the lessee of leasehold rights does apply to special limitations; we just don’t call it a “rule against forfeiture” when applied to special limitations. Special limitations do not involve “forfeiture” because once triggered, the leasehold estate ends automatically and by operation of law; the lessor need not act to enforce it. Perhaps the difference is a mere matter of semantics, but it is one the Court continues to recognize.
III. SUSPENSION OF LEASEHOLD DUTIES: REPUDIATION & TEMPORARY CESSATION
The Texas Supreme Court has consistently held that the cessation of production under a traditional “so long as oil and gas is produced” lease will automatically terminate the leasehold estate without any further action of the lessor. E.g., Endeavor Energy Res., L.P. v. Discovery Operating, Inc., 554 S.W.3d 586, 606 (Tex. 2018) (lease will “automatically terminate upon … the cessation of production”); Amoco Prod. Co. v. Braslau, 561 S.W.2d 805, 808 (Tex. 1978) (“if ‘production’ ceases, the interest terminates by its own terms”); Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290, 295 (1923) (grants under an oil-and-gas lease “were to be enjoyed only while such use continued and were to immediately terminate on cessation of the use”).
Two notable exceptions are the “temporary cessation of production” rule and the “repudiation” doctrine.
A. Temporary Cessation
The Texas Supreme Court noted—but did not apply—the “temporary cessation of production” rule in Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783, 784 (Tex. 1941). There, the Court wrote:
It appears to be very well settled that under the terms of the lease, upon cessation of production after termination of the primary term, the lease automatically terminated. [However,] [t]he strictness of the above rule has been modified where there is only a temporary cessation of production due to sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith, or the like. Under such circumstances there are authorities which hold that the lessee is entitled to a reasonable time in which to remedy the defect and resume production.
Id. But, the Court concluded, a cessation of production for “two years and seven months” due to market conditions “did not prevent a lapsation of the lease when production ceased.” Id.
Later, the Court fully embraced the “temporary cessation of production” doctrine—even after admitting it is inconsistent with the plain language of a traditional determinable-fee contract. In Midwest Oil Corp. v. Winsauer, the Court wrote:
Although the [contract] under consideration does not expressly provide that the [estate] will not terminate because of temporary interruptions, we hold that such a provision is necessarily implied. … The respondents contend that the petitioners are bound by the express terms of the contract, and that when cessation of production has been established …, the contract term expired by its own terms…. With this contention we do not agree.
159 Tex. 560, 323 S.W.2d 944, 946 (1959). The Court then explained its view of the “temporary cessation of production” doctrine:
[W]here oil or gas is produced in paying quantities within the primary term of an oil and gas lease, and the cause of cessation of production was thereafter necessarily unforeseen and unavoidable, and where the lessees in good faith used reasonable diligence to resume production, and at great outlay of money, and did, within reasonable time, in view of the conditions disclosed by the record, resume production, the estate did not terminate, as a matter of law, because of temporary cessation of production.
Id. at 947 (citation omitted).
In Scarborough v. New Domain Oil & Gas Co., 276 S.W.331, 335 (Tex. Civ. App.—El Paso 1925, writ dism’d w.o.j.)—which was positively cited in Winsauer—the court of appeals was less forthcoming about the lack of textual support for “temporary cessation of production” doctrine. There, the court wrote that it wasn’t the lack of textual support for the doctrine that mattered, but rather the lack of textual support for the absence of the doctrine:
It is only by implication that continuous production of oil or gas is required here. There are no express terms of forfeiture of the lease should a continuous production be not maintained. Nor is there any provision in the lease that temporary cessation of production should operate a forfeiture, and we do not, from the nature of the undertaking, believe such construction of the lease was reasonably within the contemplation of the parties in the execution of the lease. The evident intention and motives of both lessors and lessee … [were] that, if reasonable efforts were not used to maintain production when paying quantities of either gas or oil had been discovered, the lease could be forfeited for nonperformance of the condition subsequently contained in the lease.
Id. at 335-36 (emphasis added).
B. Repudiation
A second doctrine that operates to suspend leasehold requirements during the pendency of the lease is Texas’s repudiation doctrine. At its core, the repudiation doctrine holds that a lessor’s rejection of a lease “relieves the lessee of any obligation to conduct any operation on the land in order to maintain the lease in force pending a judicial resolution of the controversy between the lessee and the lessor over the validity of the lease.” Teon Mgmt., LLC v. Turquoise Bay Corp., 357 S.W.3d 719, 730 (Tex. App.—Eastland 2011, pet. denied) (citations omitted). “Lessors who … wrongfully repudiate the lessee’s title by unqualified notice that the leases are forfeited or have terminated cannot complain if the latter suspends operations under the contract pending a determination of the controversy and will not be allowed to profit by their own wrong.” Ridge Oil Co., Inc. v. Guinn Invs., Inc., 148 S.W.3d 143, 157 (Tex. 2004) (quoting Kothmann v. Boley, 158 Tex. 56, 308 S.W.2d 1, 4 (1957)). “A lessor’s repudiation of a lease relieves the lessee ‘from any obligation to conduct any operations, drilling, re-working, or otherwise, on said land in order to maintain the lease in force pending the judicial determination of the controversy … over the validity of the lease.” Ridge Oil, 148 S.W.3d at 157 (quoting Morgan v. Fox, 536 S.W.2d 644, 650 (Tex. Civ. App.—Corpus Christi 1976, writ ref’d n.r.e.)).
Some courts have described repudiation as a “variation of the doctrine of estoppel,” Teon Mgmt., 357 S.W.3d at 730, although it has also been discussed as being more akin to an affirmative breach, e.g., Tex. Pac. Coal & Oil Co. v. Patton, 238 S.W. 202, 203 (Tex. Comm’n App. 1922, judgm’t adopted). It is “in the nature of an avoidance or affirmative defense which is not available to the defendant unless specifically pleaded.” Ramsey v. Grizzle, 313 S.W.3d 498, 507 (Tex. App.—Texarkana 2009, no pet.); see also Grubstake Inv. Ass’n, Inc. v. Worley, 116 S.W.2d 472, 474-75 (Tex. Civ. App.—San Antonio 1938, writ dism’d) (repudiation must be pleaded and proved; conclusory allegations are insufficient).
“The elements of repudiation of an oil-and-gas lease are: (1) [a] subsisting lease (i.e., a lease that has not expired) [and] (2) [t]he lessor’s ‘unqualified notice’ that the lease has been forfeited or terminated.” Rippy Interests, LLC v. Nash, 475 S.W.3d 353, 363-64 (Tex. App.—Waco 2014, pet. denied) (citations omitted). In addition, some courts have held that the lessee must prove reliance on the repudiation—i.e., that the lessee suspended development operations because of the lessor’s repudiation of the lease. E.g., Rippy Interests, 2014 WL 4114328, at *8.
1. The Existence of a Subsisting Lease
A lessor’s repudiation of a lease ordinarily “relieves the lessee from any obligation to … maintain the lease in force while a judicial resolution of the controversy … is pending.” Exploracion De La Estrella Soloataria Inc. v. Birdwell, 858 S.W.2d 549, 554 (Tex. App.—Eastland 1993, no writ) (citing Kothmann, 308 S.W.2d at 4; Cheyenne Res., Inc. v. Criswell, 714 S.W.2d 103 (Tex. App.—Eastland 1986, no writ)). “However, for the doctrine of repudiation to apply, the lease must be subsisting” at the time of the lessor’s repudiation of the lessee’s rights under the lease. Exploracion, 858 S.W.2d at 555; see also Rippy Interests, 475 S.W.3d at 363; Adams v. Cannan, 253 S.W.2d 948, 951 (Tex. Civ. App.—San Antonio 1952, writ ref’d) (“it is necessary that the lease be subsisting”). Accordingly, a lessor’s repudiation of a lease after the lease has already terminated or expired under its own terms will not revive or perpetuate the lease. Exploracion, 858 S.W.2d at 555.
2. Unqualified Notice of Forfeiture or Termination
The core requirement of the repudiation doctrine is that the lessee, in fact, rejects the lessor’s rights under a lease by asserting termination or by otherwise interfering with the lessee’s ability to conduct lease operations. See Kothmann, 308 S.W.2d at 4.
In the 1950s, the Texas Supreme Court adopted the modern-day description of the doctrine as requiring repudiation “by unqualified notice that the leases are forfeited or have terminated.” Id. (emphasis added). That repudiation requirement—that the repudiation be “unqualified”—does not appear in earlier Texas Supreme Court opinions discussing or applying the doctrine, and only one of the four cases cited in Kothmann for that proposition—Adams v. Cannan—makes any reference to a lessee’s repudiation having to be “unqualified” to be effective. See Kothmann, 308 S.W.2d at 4; see also Adams, 253 S.W.2d at 951 (“[T]he notice of claim asserted against [the lessee must] be a clear, unequivocal challenge to the lessee’s title in and to his interest created by the lease.”). And although Adams does characterize the doctrine as requiring “unequivocal notice,” none of the cases the Adams opinion cites for that characterization of the doctrine’s requirements appear to support it. See 253 S.W.2d at 951. Nevertheless, it appears that the industry is stuck with this “unqualified” or “unequivocal” notice requirement because the Supreme Court since the 1950s has continued to recite and rely upon it in repudiation disputes. E.g., BP Am. Prod. Co. v. Laddex, 513 S.W.3d 476, 486 n.11 (Tex. 2017) (“we cannot say that” lessor’s correspondence “conclusively establishes the ‘unqualified notice’ of termination required to support a repudiation defense”) (citing Adams, 253 S.W.2d at 951); Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1, 20 (Tex. 2008) (quoting Ridge Oil, 148 S.W.3d at 157); Ridge Oil, 148 S.W.3d at 157 (citing Kothmann, 308 S.W.2d at 4).
3. Reliance
Whether the repudiation doctrine includes a reliance element appears to be an open question in Texas law. In Stitz v. Nat’l Producing & Ref. Co., the court of appeals reasoned that reliance is a requirement of the repudiation doctrine. 247 S.W. 657, 662 (Tex. Civ. App.—San Antonio 1922, no writ). The court wrote that repudiation was not “available to the lessees … since they disregarded it, and proceeded to arrange for further operations under the lease in spite of it.” Id. According to that court, the defense is available only if the lessees are “deterred from pursuing their purpose to develop” the lease. Id.
In Rippy Interests v. Nash, the court of appeals noted that reliance has sometimes been listed as a requirement of the repudiation doctrine. 475 S.W.3d 353, 363 (Tex. App.—Waco 2014, pet. denied). But the court nonetheless reasoned that “the mere fact of a lessee’s continuing operations after an alleged repudiation of the lease is not a waiver of the repudiation defense; it does not negate as a matter of law the lessee’s reliance on the alleged repudiation.” Id. at 365-66.
4. Examples
a. Filing Suit
It appears safe to conclude that the filing of a lawsuit to terminate a lease constitutes a repudiation of the lessor’s rights under the lease and suspends the lessee’s obligation to develop. That was first decided—albeit in less-than-clear terms—in Tex. Pac. Coal & Oil, in which the court rejected a motion to dismiss a lease-termination suit on the grounds that the lease had expired pending resolution of the suit. 238 S.W. at 203 (“[W]hen the party granting an option himself prevents its exercise during the time limited therefor, he must give a reasonable time for its exercise after any obstruction which he has interposed has been removed.”).
Two cases followed shortly after Tex. Pac. Coal & Oil that more clearly stated and applied the rule. In Lane v. Urbahn, the court of appeals held that a suit to cancel an oil-and-gas lease based on a purported violation of an assignment clause suspended the lessee’s drilling obligations: “[W]hen the lessor declared his purpose of enforcing a forfeiture, or of testing in the courts the right of assignment, appellant was justified in suspending development until lessor yielded, or the courts decided the controversy.” 265 S.W. 1063, 1064 (Tex. Civ. App.—San Antonio 1924, writ dis’m w.o.j.). And in Johnson v. Montgomery, the court wrote that the lessees’ failure “to continue with the development work … is excused by the plaintiffs filing this suit. Under these conditions and circumstances, the plaintiffs were not in a position to demand diligence in the further development of the property for oil or gas by the continued drilling of the well.” 31 S.W.2d 160, 165 (Tex. Civ. App.—Amarillo 1930, writ ref’d); see also NRG Expl., Inc. v. Rauch, 671 S.W.2d 649, 652 (Tex. App.—Austin 1984, writ ref’d n.r.e.) (“A suit brought by a lessor to have the lease terminated constitutes a repudiation.”); Edgar v. Bost, 14 S.W.2d 364, 366 (Tex. Civ. App.—Amarillo 1929, no writ) (filing of suit following notice of termination suspended lessee’s “obligation to exercise further diligence in continuing the drilling of the well”).
b. Communications & Sign Posting
The idea that a lessor’s correspondence notifying the lessee of a lease’s termination or forfeiture constitutes repudiation of the lease was first fully embraced by the Texas Supreme Court in Kothmann v. Boley, 158 Tex. 56, 308 S.W.2d 1 (1957). In that case, the Court wrote that “[l]essors who … wrongfully repudiate the lessees’ title by unqualified notice that the leases are forfeited or have terminated cannot complain if the latter suspend operations under the contract pending a determination of the controversy and will not be allowed to profit by their own wrong.” 308 S.W.2d at 4 (citations omitted). Although the contents of the lessors’ repudiation letter was not recited in the opinion, the Court noted that “[b]y letter …, respondents through [their attorney] notified petitioners that the leases had terminated.” Id. We cannot tell from the opinion exactly how “unqualified” the repudiation letter was or how “unqualified” such a letter needs to be. Cases that have followed Kothmann do begin to flesh out what “unqualified” means.
Many cases hold that a notice of termination without ambiguity or qualification constitutes repudiation of the lessee’s development rights. Kothmann, for example, speaks of a letter that “notified petitioners that the leases had terminated.” 308 S.W.2d at 4. Likewise, in Morgan v. Houston Oil Co., repudiation was found when the lessors—“long before” filing suit—“evidenced their intention to terminate the lease [and] gave defendants formal notice of such termination.” 84 S.W.2d 312, 314 (Tex. Civ. App.—San Antonio 1935, no writ). In Cheyenne Res., Inc. v. Chriswell, the court concluded that the lessor repudiated the lease by posting signs on the leased property stating that the lease had terminated and that the lessee should “contact the Sheriff of Eastland County.” 714 S.W.2d 103, 104-05 (Tex. App.—Eastland 1986, no writ). And in Morgan v. Fox, a lessor was found to have repudiated a lease by going to the lessee’s office and telling the lessee’s secretary “that the lease had expired because of non-production, and that he wanted a release of the ‘lease.’” 536 S.W.2d 644, 648-50 (Tex. Civ. App.—Corpus Christi 1976, writ ref’d n.r.e.).
But at least one case holds otherwise on similar facts. In Fike v. Riddle, the lessor “drove up in a pickup truck” on the lease, “identified himself as the owner” of the leases, “challenged [the lessee’s] authority to put” signs on the lease, and said that “as far as he was concerned [the lessee] didn’t have any interest in [the] leases.” 677 S.W.2d 722, 726 (Tex. App.—Tyler 1984, no writ). Surprisingly, the court rejected the lessee’s argument of repudiation, reasoning that “the statements of [the lessor], if made in the form as testified to …, did not constitute an unqualified notice to appellants that appellants’ lease had terminated.” Id. at 726.
The case law is more inconsistent when it comes to claims of termination that are not quite as “unqualified” as those analyzed above. In Adams v. Cannan, the lessor’s attorney sent the lessee a letter asking the lessee to release the lease and stating that “it would seem that the lease has terminated for failure to produce oil and gas, or either of them.” 253 S.W.2d 948, 951 (Tex. Civ. App.—San Antonio 1952, writ ref’d). The court concluded that the letter did not repudiate the lease and therefore did not justify the lessee suspending lease operations. Id. at 951-52. The court wrote: “We have found no case that … predicat[es] an estoppel upon a letter similar to that involved here. … We hold, under the facts of this case, that appellees ... were not justified in their failure to commence operations” following receipt of the letter. Id. at 952. Likewise, in BP Am. Prod. Co. v. Laddex, Ltd., the Texas Supreme Court held that the evidence did not conclusively establish repudiation where a letter from the lessors’ counsel stated that “[i]t appears that this lease has terminated.” 513 S.W.3d 476, 486 n.11 (Tex. 2017).
On the other hand, the court in Wheelock v. Batte held that the lessor repudiated a lease by notifying the lessee’s driller that the lessor considered the lessee “‘a little late’ in commencing drilling operations.” 225 S.W.2d 591, 594 (Tex. Civ. App.—Austin 1949, writ ref’d n.r.e.). The court wrote: “Having advised the well driller … that he was too late, which information was relayed to appellants, it seems to us that equity and good conscience should require that this false and misleading information be retracted before forfeiture of the lease could be declared.” Id. at 595. Likewise, the court in Teon Mgmt. v. Turquoise Bay Corp. found repudiation where—among other things—the lessors’ attorney sent the lessee a letter stating that “it is the contention of [his] clients that this lease has terminated.” 357 S.W.3d 719, 730 (Tex. App.—Eastland 2011, pet. denied). Perhaps the attorney’s letter alone would not have been deemed sufficient to show repudiation, however, as other facts also played into the court’s decision. Id.
c. Executing Another Lease
It isn’t clear whether a lessee’s execution of a second lease on a property constitutes a repudiation of the first lease. In two cases, courts have held that the taking of a top lease without the original lessee’s knowledge does not constitute repudiation. Fike v. Riddle, 677 S.W.2d 722, 726 (Tex. App.—Tyler 1984, no writ); Atlantic Richfield Co. v. Hilton, 437 S.W.2d 347, 355 (Tex. App.—Tyler 1969, writ ref’d n.r.e.).
And in three cases, courts have held that the taking of a top lease along with additional conduct constituted a repudiation of the primary lease. In Teon Mgmt., the court of appeals held that the lessors’ “signing of new leases …, [their] demand [that the primary lessee] vacate the premises, and the letter from the lessors’ attorney plainly stating that the lease ‘has terminated’ constituted an unqualified notice to [the prior lessee] of the lessors’ repudiation.” 357 S.W.3d at 730. In Walker v. Walker, the court reasoned that the act of drilling pursuant to a new lease constituted repudiation of the prior lease for statute-of-limitations purposes. 602 S.W.2d 582, 585 (Tex. Civ. App.—El Paso 1980, writ ref’d n.r.e.). And in Shell Oil Co. v. Goodroe, the court of appeals held that “the act and conduct of appellees in executing the top lease … together with the letter of appellees’ attorney … repudiating [the prior] lease and demanding the execution of a release of same while said lease was in effect … relieved appellants of the duty of operating the gas well located on [the] lease until the controversy between them and appellees respecting the title to the lease was settled.” 197 S.W.2d 395, 400 (Tex. Civ. App.—Texarkana 1946, writ ref’d n.r.e.). But none of the three opinions analyzed whether the subsequent lease’s execution alone would have constituted repudiation of the prior lease.
The closest case on whether a top lease alone constitutes repudiation is Ridge Oil Co., Inc. v. Guinn Invs., Inc., in which the Texas Supreme Court suggested in dicta that a second lease of oil-and-gas interests may constitute repudiation of a prior lease. 148 S.W.3d 143, 157 (Tex. 2004). The Court reasoned that a subsequent lease did not constitute repudiation of a prior lease in that case because the second was signed only after production had ceased under the first. Id. But in so holding, the Court described the execution of the second lease as an “action that cast [the first lessee’s] title into doubt [and] would have justified cessation of operations.” Id.
d. Interference & Denial of Access
It seems simple enough that denying a lessee access to a lease should be deemed a repudiation of the lease excusing future performance of development obligations. In Flato v. Weil, the court held that the lessee was excused from lease obligations after the lessors “prevented appellees from operating on the premises” and gave notice that the lease was terminated. 4 S.W.2d 992, 994-95 (Tex. Civ. App.—San Antonio 1928, no writ). In Casey v. W. Oil & Gas, Inc., the court noted that the lessor was “justified in suspending operations pending a judicial determination of the controversy” after being “ejected from the lease.” 611 S.W.2d 676, 680 (Tex. Civ. App.—Eastland 1980, writ ref’d n.r.e.). And the Texas Supreme Court held in Gwynn v. Wisdom that a lessee was “released from the obligation to drill a well” after the lessor “in writing denied [the lessee] the right to go on the land for the purpose of drilling a well.” 119 Tex. 320, 30 S.W.2d 298, 300 (Tex. 1930).
Perhaps the most obvious denial-of-access case in Texas oil-and-gas jurisprudence is Caddell v. Threshold Dev. Co., 609 S.W.2d 871 (Tex. Civ. App.—Amarillo 1980, no writ). The court’s recitation of facts speaks for itself:
On 19 June 1980, the day before the primary term of the lease was to expire, Threshold prepared to go upon the leased property to commence drilling. Being notified, Delton Caddell, accompanied by his son, each of whom carried a firearm, met his armed employee at the site. Once there, Caddell was informed by Threshold’s agent that he had court papers to allow entrance on the property. At that time, Caddell told the agent that “if he went on that property he was going to need an undertaker to get off.” Threshold did not go onto the property.
609 S.W.2d at 872. Unsurprisingly, the court held that Caddell could not “complain if Threshold suspended operations under the lease and resorted to the court for a determination of the controversy.” Id. at 873.
And in Webb v. Martin, the lessor sent the lessee a letter stating: “We DEMAND that no one touch, operate, or work on the Hart #5 well. TRESPASSING charges will be filed on anyone violating this demand or stepping on the property in which the Hart #5 well is located.” No. 11-93-069-CV, 1994 WL 16189647, at *4 (Tex. App.—Eastland Feb. 24, 1994, writ denied) (not designated for publication). The court concluded that the letter “constituted a repudiation of the … lease” and “permitted [the lessee] to suspend operations as to the well pending the judicial determination of the controversy.” Id.
Surprisingly, however, there is some authority to the contrary. In Rippy Interests, LLC v. Nash, the lessor “placed a lock on the gate to the [well]site,” and “called the police” when the lessor cut the lock to enter the premises. 475 S.W.3d 353, 356 (Tex. App.—Waco 2014, pet. denied). Although the court reversed summary judgment in favor of the lessee, it did not hold that the lockout and police call conclusively demonstrated repudiation. Id. at 364. Rather, the court held that “there is conflicting summary judgment evidence on the issue” and that “a genuine issue of material fact exists on whether the Nashes gave unqualified notice that the Range Lease was terminated.” Id.
Likewise, in Atkinson Gas Co. v. Albrecht, the lessor “turn[ed] off the valve to the gas well,” “informed [the lessee] that the well had … been shut in,” and sent a letter to the lessee saying “No Pay—No Gas!” 878 S.W.2d 236, 238 (Tex. App.—Corpus Christi 1994, writ denied). Rejecting the repudiation defense, the court of appeals reasoned that the lessor’s “shut-in did not imply that the lease had then terminated,” that the “dispute between the parties at that time did not concern title to the lease but merely the timely payment of royalties,” and that the lessee’s actions did not “amount to a ‘lock-out’ situation” because the lessor “was generally free to turn the well back on at any time.” Id. at 239.
5. Remedies
Although repudiation is described as a defense, it is more than that. If proven, repudiation may entitle the lessee to additional time to conduct operations and possibly damages.
a. Additional Time to Develop
If a lessee successfully defends against a challenge to its title and prevails on its repudiation argument, the question arises as to how much time the lessee has to recommence operations after the litigation becomes final. In an opinion adopted by the Texas Supreme Court, the court wrote that the lessee must be afforded “a reasonable amount of time after termination of the litigation … in which to perform the conditions required of him.” Miller v. Hodges, 260 S.W. 168, 172 (Tex. Comm’n App. 1924, judgm’t adopted). The court of appeals in Flato v. Weill gave more guidance, writing that because the lessees “were compelled by the acts of appellants to cease operations,” “the time consumed by appellants in endeavoring to compel abandonment of the lease … should not be deducted from” the time the lessee had to develop the lease. 4 S.W.2d 992, 995 (Tex. Civ. App.—San Antonio 1928, no writ). The court continued: “Appellees would be entitled to use the time remaining” on the lease, and “should proceed under the terms of the contract as though operations thereunder had not been interrupted by appellants.” Id. In Kothmann v. Boley, the Texas Supreme Court extended the lease by an additional eight months to account for the lessee’s lost time. 158 Tex. 56, 308 S.W.2d 1, 4 (1957). And in Cheyenne Res., Inc. v. Criswell, the court of appeals rendered judgment that the lease would remain “in full force and effect for a 60-day period after all litigation herein becomes final to enable [lessee] to perform operations necessary to extend the lease beyond the primary term.” 714 S.W.2d 103, 104 (Tex. App.—Eastland 1986, no writ).
b. Damages
In addition to adding lost time back to a lease, it is theoretically possible that a lessee may incur and recover damages as a result of a lessor’s wrongful claim of lease termination. In Webb v. Martin, the trial court had awarded the lessee $104,415.25 in actual damages and $10,000.00 in punitive damages for having been prevented from entering the leased property to conduct oil-and-gas operations. No. 11-93-069-CV, 1994 WL 16189647, at *3 (Tex. App.—Eastland Feb. 24, 1994, writ denied) (not designated for publication). The court of appeals reversed the award, however, concluding “that there is no evidence to support the trial court’s various [damages] findings.” Id. at *4. The court reversed the punitive-damages award because there were no recoverable actual damages and because there was no evidence of malice to sustain exemplary damages. Id. at *5.
IV. CONCLUSION
The rules established by the Texas Supreme Court nearly 100 years ago continue to define our understanding of the oil-and-gas leasehold estate. The distinctions among lease terms and the differences between how they will be construed and applied are pivotal to understanding oil-and-gas leasehold rights—including when and how those rights are “forfeited” or “terminated.” Although the courts have not always been consistent in determining how and when leasehold rights end, the fundamental rules have remained largely constant: the triggering of a special limitation will effect automatic termination of the lease; the breach of a condition subsequent gives the lessor the right to demand the lease’s forfeiture, but he may waive that right by inaction; and the violation of a covenant will ordinarily effect only a right to recover damages.