TO DRILL OR NOT TO DRILL: THE REPUDIATION DOCTRINE IN TEXAS OIL-AND-GAS LAW
State Bar of Texas, Advanced Oil, Gas & Energy Resources Law CLE, September 2017
by Ryan Clinton
When a lessor challenges the validity of an existing oil-and-gas lease that is not currently being perpetuated by production, the lessee immediately faces a choice between two bad options. Does the lessee continue drilling in the face of the challenge to its title and thereby risk spending money developing a lease it may not own (and an inevitable trespass claim)? Or, does the lessee stop drilling and thereby risk the lease expiring for lack of development during the pendency of any litigation to determine competing claims to title? Little has been written about this lose-lose scenario facing Texas oil-and-gas producers, and Texas precedent on the subject is far from uniform. This paper aims to shed light on the dilemma lessees commonly face, the repudiation doctrine that may save them from making a lose-lose decision, and the questions left unanswered by existing Texas jurisprudence applying the doctrine.
Section II of this paper explains the common-law doctrine of repudiation and the elements of the doctrine’s defense. Section III discusses the remedies that a lessee may receive upon judicial determination of a lessor’s erroneous repudiation of a lease. Section IV describes contract-based repudiation defenses and Section V discusses the interaction between lease notice-and-cure provisions and the repudiation doctrine. Finally, Section VI analyzes important questions that are left substantially unresolved by current Texas repudiation jurisprudence.
II. THE COMMON-LAW REPUDIATION DEFENSE
A. The Basics of the Doctrine
At its core, the repudiation doctrine seems simple enough: a lessor’s repudiation 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) (citing Kothmann v. Boley, 158 Tex. 56, 308 S.W.2d 1 (1957); Cheyenne Res., Inc. v. Criswell, 714 S.W.2d 103, 105 (Tex. App.—Eastland 1986, no writ)). “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, 308 S.W.2d at 4). “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.).
Perhaps the earliest example of the repudiation doctrine in Texas is Tex. Pac. Coal & Oil Co. v. Patton, 238 S.W. 202 (Tex. Comm’n App. 1922, judgm’t adopted). In that case, the lessor filed a motion to dismiss litigation over the validity of an existing lease based on the fact that the lease had expired for lack of development during the pendency of the litigation. Id. at 202. The court didn’t refer to “repudiation” or to the elements of the modern-day repudiation doctrine, but nonetheless denied the motion. Id. at 202-04. The court reasoned: “[W]hen a 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.” Id. at 203.
Some courts have described repudiation as a “variation of the doctrine of estoppel,” Teon Mgmt., 357 S.W.3d at 730 (citing Cheyenne, 714 S.W.2d at 105), although it has also been discussed as being more akin to an affirmative breach, e.g., Tex. Pac. Coal, 238 S.W. at 203. 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).
B. The Elements of the Defense
“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 lessor’s ability to conduct lease operations. See Kothmann, 308 S.W.2d at 4.
In the 1950s, the 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 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).
One half of “unqualified notice” is the “notice” requirement—i.e., that the lessee has received notice of the lessor’s rejection of the lease. See Atlantic Richfield Co. v. Hilton, 437 S.W.2d 347, 355 (Tex. Civ. App.—Tyler 1969, writ ref’d n.r.e.) (lessors “had the affirmative burden of establishing that they had actual notice” of the lessee’s repudiation); Adams, 253 S.W.2d at 951 (lessee must have made claim of repudiation “known to the lessee (or his assignees)”). Thus, the lessor’s signing of a top lease without the lessee’s knowledge of the top lease does not constitute repudiation. Atlantic Richfield, 437 S.W.2d at 355; see also Fike v. Riddle, 677 S.W. 722, 726 (Tex. App.—Tyler 1984, no writ) (rejecting lessor’s repudiation argument based on execution of top leases because the lessees “did not have actual notice of the negotiations or of the execution and delivery of the [top] leases”). The more contested and less clear half of the “unqualified notice” requirement is that the notice be “unqualified” or “unequivocal.” The case law provides us with some, but not conclusive, guidance on what that means.
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 that suspends the lessee’s obligation to develop the lease. 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 did note 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 do 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). Despite the correspondence placing the lessee in the same lose-lose scenario described at the beginning of this paper, 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 did repudiate 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 also 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 lessor’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.
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.
The Texas Supreme Court had an opportunity to settle the reliance question in Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008). The lessee argued that the lessor repudiated the lease by filing suit; in turn, the lessor argued that the lessee’s continuation of drilling demonstrated the lack of reliance. Id. at 20. But the Court declined to reach the issue because “[t]he parties’ disagreement is legal, not factual,” and according to the Court, Coastal failed to ask the Court to resolve it. Id.
III. ADDITIONAL REMEDIES FOR THE LESSEE
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 even damages.
A. More 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).
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. LEASE-BASED INTERFERENCE DEFENSES
It was no surprise that the court in Caddell v. Threshold Dev. Co. held that the lessor’s death threats constituted a repudiation of the lease excusing the lessee from further performing development obligations to extend the lease. 609 S.W.2d 871, 873 (Tex. Civ. App.—Amarillo 1980, no writ). What is interesting about the case, however, is that the court also concluded that the lessor’s actions suspended the lessor’s obligations pursuant to the lease’s force-majeure provision. Id. The lease’s force-majeure provision covered not only “acts of God and actions of the elements,” but also “strikes” and “lockouts.” Id. at 872. The court reasoned that the lessor’s “actions constituted a ‘lockout’ within the meaning of the force majeure provision, thereby preventing the expiration of the primary term of the lease.” Id. at 873. The court also concluded that the provision’s 90-day extension of the lease after the event ended extended the lease for 90 days following resolution of the litigation: “[T]he unambiguous terms of the force majeure provision continued the lease in full force and effect for a period of ninety days after such force majeure was terminated as evinced by the finality of the judgment settling the controversy.” Id. at 873-74.
The lessee also relied on a lease provision to suspend development operations after a title dispute arose in Stanolind Oil & Gas Co. v. Christian, 83 S.W.2d 408, 410 (Tex. Civ. App.—Texarkana 1935, writ ref’d). The provision stated that if the lessee’s operations are suspended as a result of a cloud upon the lessee’s title, then the time necessary to complete any “court action shall not be counted in computing the term of this lease or the obligations thereunder.” Id. The court held under that provision, litigation by the lessee to remove the cloud of title imposed by the execution of a top lease suspended the running of the original lease. Id.
V. THE INTERACTION BETWEEN THE REPUDIATION DOCTRINE AND NOTICE PROVISIONS
Many Texas oil-and-gas leases include “notice-and-cure” clauses, which require the lessor to give the lessee notice of any alleged breach or default and an opportunity to cure that breach or default before declaring a termination or forfeiture of the lease. A lessee of a lease that includes a notice-and-cure clause who repudiates a lease without first giving the requisite notice can lose its right to terminate the lease.
The lease in Parten v. Cannon, for example, included a provision providing that “if the lessee fails to comply with an obligation under the lease, ‘lessor shall notify lessee in writing, setting out specifically in what respects the lessee has breached this contract.’” 829 S.W.2d 327, 330 (Tex. App.—Waco 1992, writ denied). “The lessees then have ten days after receipt of the notice to satisfy their obligations under the lease.” Id. The lessor, believing the lease had been breached, sent a letter to the lessees alleging “their failure to comply” with a provision of the lease, but in “the same letter repudiated [the lessees’] right to drill additional wells” under the lease. Id. Accordingly, the court concluded that the lessees “were not afforded the requisite [time] to comply with the” provision that they had allegedly breached—precluding termination. Id.
The lease in Wisdom v. Minchen also included a notice-and-cure provision. 154 S.W.2d 330, 334 (Tex. Civ. App.—Galveston 1941, writ ref’d w.o.m.) (“[t]he provision … gives the lessee the right of ten days’ written notice of any default before declaring any forfeiture”). Because the lessor was required to give notice and an opportunity to cure before declaring a default, the court rejected consideration of any evidence purporting to show a “default” prior to the lessor’s notice letter. Id. at 334. Moreover, once the lessee received notice declaring a forfeiture, the lessees “were not bound … to continue after such notice of forfeiture to develop the lease, and the lease will not be held to have expired because they did not continue such development.” Id.
VI. ADDITIONAL ISSUES
A. Question of Law or Fact?
Appellate courts often appear to decide whether a lessor has repudiated a lease based on the facts presented as a matter of law. E.g., Kothmann v. Boley, 158 Tex. 56, 308 S.W.2d 1, 4 (Tex. 1957). But that’s not always how the issue is treated.
In Coastal Oil & Gas Corp. v. Garza Energy Trust, the lessor argued that “the trial court erred in refusing to ask the jury whether by suing to invalidate the leases, [the lessee] repudiated them, thereby suspending [the lessor’s] development obligation.” 268 S.W.3d 1, 20 (Tex. 2008). The Court rejected the argument, however, concluding that “no finding was necessary” because “none of the material facts was in dispute.” Id.
In BP Am. Prod. Co. v. Laddex Ltd., the lessor argued that a letter from the lessee’s counsel repudiated the lease. 513 S.W.3d 476, 486 n.11 (Tex. 2017). The Court rejected that argument, however, because the jury had decided that the letter did not repudiate the lease and the Court reasoned that it could not “say that [the] letter … conclusively establishes the ‘unqualified notice’ of termination required to support a repudiation defense.” Id. (citing Adams v Cannan, 253 S.W.2d 948, 951 (Tex. Civ. App.—San Antonio 1952, writ ref’d). This was the Court’s conclusion even though it appears—as in Coastal—that no material facts were in dispute.
B. Impact on Trespass Damages?
Another unresolved issue related to the repudiation doctrine is its potential impact on the calculation of damages should the lessee be found to have trespassed on the leasehold estate after electing to continue development in the face of a letter from the lessor challenging title.
1. Good-Faith v. Bad-Faith Trespassing
An oil-and-gas producer that develops a lease without permission or right is a trespasser, and the measure of damages for such trespassing “depends on whether the producer’s actions are in good faith.” Moore v. Jet Stream Investments, Ltd., 261 S.W.3d 412, 428 (Tex. App.—Texarkana 2008, pet. denied). “If a producer trespasses in good faith, the measure of damages is the value of the minerals [produced] minus [the trespasser’s] drilling and operating costs.” Id. (citing Mayfield v. de Benavides, 693 S.W.2d 500, 506 (Tex. App.—San Antonio 1985, writ ref’d n.r.e.); Bender v. Brooks, 103 Tex. 329, 127 S.W. 168, 171 (1910)). Generally, a “good faith trespasser” is one that has “both an honest and a reasonable belief in the superiority of [his] title.” Moore, 261 S.W.3d at 428 (citing Mayfield, 693 S.W.2d at 504; Gulf Prod. Co. v. Spear, 125 Tex. 530, 84 S.W.2d 452, 457 (1935)).
A “bad faith trespasser,” on the other hand, is one who enters land without “an honest and reasonable belief in the superiority of [his] title.” See Moore, 261 S.W.3d at 428. If a producer trespasses in bad faith, the measure of damages is “the value of the things mined at the time of severance without making deduction for the cost of labor and other expenses incurred in committing the wrongful act … or for any value he may have added to the minerals by his labor.” Id. at 428-29 (emphasis added) (quoting Mayfield, 693 S.W.2d at 506; Cage Bros. v. Whiteman, 139 Tex. 522, 163 S.W.2d 638, 642 (1942)). This measure “is intended to both compensate the owner and to punish the trespasser” for his willful misconduct. Moore, 261 S.W.3d at 429 (citing 1 Kuntz, The Law of Oil & Gas § 11.3 at 309 (1987)).
2. Trespassing With Notice of Adverse Assertion of Title
The test for determining whether a trespasser has acted in “good faith” is ordinarily a fact-specific inquiry based on the “totality of the circumstances” involved in any given case. Mayfield, 693 S.W.2d at 505. However, there is conflicting Texas precedent on whether a trespasser’s development of a lease with notice of an adverse title claim (but in the absence of a pending lawsuit advancing the adverse claim) is automatically bad faith in nature or merely a circumstance to be considered in determining the nature of the trespass.
In Gulf Prod. Co. v. Spear, the Texas Supreme Court held that a second oil-and-gas lessee’s entry upon a lease despite a prior recorded lease on the property left a fact question as to whether the entry was in good or bad faith. 125 Tex. 530, 84 S.W.2d 452, 457 (1935); see also Mayfield, 693 S.W.2d at 505 (“Acting with notice of an adverse claim does not prohibit a finding of good faith. However, it is an additional consideration for the court in viewing the totality of the circumstances.”) (citations omitted); Lowder v. Schluter, 78 Tex. 103, 14 S.W. 205, 206 (1890) (“Good faith is the question, and it is a question of fact to be determined by the jury under the law. There may be title in another superior to that of defendant, and such title may be known to him; yet he might believe, and have good grounds to believe, in his own claim to the property.”), withdrawn on reh’g on other grounds, 78 Tex. 103, 14 S.W. 207, 207 (1890).
But later in Cage Bros. v. Whiteman, the Texas Supreme Court reasoned in dicta that if a second gravel lessee trespassed on a property with knowledge of a prior lease on the same property, his trespass would be deemed willful as a matter of law and therefore the measure of damages for bad-faith trespass would apply. 139 Tex. 522, 163 S.W.2d 638, 642-43 (1942).
Texas precedent is uniform (although not particularly current) in holding that a trespasser who enters upon and develops a lease with knowledge of a pending lawsuit contesting title is deemed in bad faith as a matter of law. Mayfield, 693 S.W.2d at 504 (“When one enters into possession of land and makes improvements thereon with full knowledge of the pendency of an action to enforce an adverse claim to the premises, one is conclusively considered a trespasser in bad faith.”). In Henderson v. Ownby, for example, the Texas Supreme Court wrote that when a party makes improvements to land with notice of a pending lawsuit contesting title to the land, the party does so at his own peril:
A defendant in trespass to try title who makes improvements pending the suit does so at the peril of losing those improvements should the suit be determined against him, no matter what may have been his intention in regard to their removal. … After suit [is] brought[,] he is no longer allowed any greater claim that he acts in good faith in continuing to place fixtures on the land than would be accorded to a mere trespasser.
56 Tex. 647, 651 (1882).
Later, the court in Houston Prod. Co. v. Mecom Oil Co. held that when an oil-and-gas company develops a lease with knowledge of pending litigation over ownership of the property, if the company is ultimately determined to be a trespasser, its trespassing is deemed to be bad faith. 62 S.W.2d 75, 77 (Tex. Comm’n App. 1933, judgm’t adopted). The court said:
We are inclined to adhere to the well-established rule that, where one enters into possession of land and makes improvements thereon with full knowledge of the pendency of an action to enforce an adverse claim to the premises, he cannot be considered a trespasser in good faith so as to entitle him to recover the cost of his improvements.
Id. (citations omitted).
3. Interaction With Trespass Damages
We don’t yet have precedent to tell us how these two doctrines interact. But the Supreme Court’s Laddex decision—and the Court’s continued reliance on an “unqualified notice” requirement to deem a communication repudiation—should concern oil-and-gas producers. For example, is notice of a lessor’s contest to the lessee’s title that is not “unqualified” enough to be deemed repudiation nonetheless sufficient for the lessor’s continued development to be deemed “bad faith”? Should that be the law? It would seem incredibly unfair—and bad for the Texas oil-and-gas industry—if an “unqualified” notice does not suspend development obligations but does deem continued development to merit a damages measure that is punitive in nature. We will have to see how the courts deal with this untenable dilemma for producers.
C. Interference by Non-Lessors?
In Ridge Oil Co., Inc. v. Guinn Investments, Inc., the Texas Supreme Court held that the repudiation doctrine applies only if the interference with the lessee’s working interest is by the lessor. 148 S.W.3d 143, 157 (Tex. 2004). But again, should that be the answer? What if another party puts the lessee in the same lose-lose scenario that justifies the suspension of development pending resolution of the dispute? And what if another party physically prevents the lessee’s development?
In Davis v. Devon Energy Prod. Co., L.P., for example, the lessor sought injunctive relief against a surface-estate owner (who owned no interest in the minerals) that interfered in multiple ways with the lessee’s development of the leased lands. 136 S.W.3d 419, 425-26 (Tex. App.—Amarillo 2004, no writ). Among other things, the surface owner forced the lessor’s crew to leave the property, “threatened to ‘whip’” the lessor, ordered the lessor’s employee off the property “while clutching a ballpeen hammer,” and told another employee “that he was willing to die for his farm and asked if the employee was willing to die for his company.” Id. at 425. The court of appeals held that this evidence was factually and legally sufficient to demonstrate that the surface owner interfered with the lessor’s production of minerals. Id. at 426. Perpetuation of the lease during such interference was not at issue in Davis, however.
And in Ball v. Dillard, the lessee sought both injunctive relief and damages against a surface lessee that denied the lessee “access to the lease property by locking the gate to the only usable road into the property.” 602 S.W.2d 521, 523 (Tex. 1980). The Texas Supreme Court held that “the evidence conclusively established” that the surface lessee “unreasonably exceeded his rights by denying [the lessee] access to the property for development purposes.” Id. In addition, the Court allowed the lessor to recover damages for the interference—measured by the increase in development costs resulting from the interference. Id. at 523-24. But again, perpetuation of the lease during the surface lessee’s interference was not at issue.