Can other parties’ leases help you win your case?
Tier 1 Resources Partners v. Delaware Basin Resources
By Christopher Hogan, Trial Attorney & Founding Partner, Hogan Thompson LLP
Oil and gas operators in Texas are, for the most part, not one-time players. They have many leases with different lessors across a particular play or even across the entire state. Often the same is true when it comes to lessors, who may lease multiple properties to different operators and negotiate different terms. So it is not necessarily surprising when you see the same lessors or lessees with different lease forms. But can parties use those other lease forms as evidence against you in other case? I’ve certainly used other parties’ leases to support my argument and had the same used against me.
But the El Paso Court of Appeals’ decision in Tier 1 Resources Partners v. Delaware Basin Resources LLC, 08-20-00060-CV, 2021 WL 4260793 (Tex. App.—El Paso Sept. 20, 2021, no pet. h.) rejected the use of such evidence. In that case, an oil and gas lease[1] included two 640-acre sections (“Section 2” and “Section 6”) in Reeves County, Texas, which is prime country for Delaware Basin leases. The two sections, however, were not contiguous. Instead, they were about one mile apart from each other. Delaware Basin Resources (“DBR”) was the lessee, and the “Bush Lessors” were the lessors.
The lease had a typical combination of a three-year primary term, retained acreage clause, and continuous development clause. The last of these clauses allowed for the lessee to hold the lease in full force and effect so long as it began drilling a new well within 180 days of its completion of the last well on the lease. The lease also contained an important provision (Paragraph 11) that essentially split the lease into separate tracts:
Notwithstanding any other provisions in this Lease or any wording contained herein ... each of the separately designated tracts described shall be treated for all purposes as a separate and distinct Lease. All of the provisions contained in this Lease form shall be applicable to each such tract and be construed as if a separate Lease agreement had been made and executed covering each such tract.
Id. at *2. Notably, the lease did not have a definition of “tract.”
DBR drilled six wells on one section (Section 6) of the lease but did not drill any wells on the other section (Section 2). A few months after the expiration of the primary term (but while development of Section 6 was still underway), the Bush Lessors leased Section 2 to Tier 1 Resources. This resulted in a lawsuit between Tier 1 and DBR about whether the DBR Lease had, in fact, terminated as to Section 2.
The court succinctly framed the issue: “The dispute in this instance centers on whether [the] lease created two separate leases: one covering Section 6 and one covering Section 2.” Id. at *6. The parties had differing interpretations of how to read Paragraph 11:
Bush Lessors interpret Paragraph 11 to treat Section 6 and Section 2 as two separately leased tracts of land. In their view, the language “each of the separately designated tracts described” demonstrates that multiple, separately designated tracts were described in the lease. Because Paragraph 1 describes two non-contiguous, standard sections of land, the Bush Lessors contend the two sections are separately designated. DBR argues Section 6 and Section 2 were not separately designated tracts; and the language in Paragraph 11 merely “gave the parties the option of severing the lease into multiple separate and independent leases.” In their view, nowhere in the lease did the parties explicitly exercise the option.
Id. (ellipses omitted).
The court noted that Paragraph 11 of the lease expressly referred to “separately designated tracts,” and thus the rest of the lease needed to be harmonized to include multiple tracts. Because “tract” was not defined in the lease, the court used dictionary definitions to determine that it must mean an “individual parcel described that does not share a common border with another parcel under common ownership.” Id. at *7. Because Section 2 and Section 6 did not have a common border and they were the only specific land described in the lease, it must be that each of them was a separately designated tract. Logically, under Paragraph 11 of the lease, operations on Section 6 would then not hold Section 2.
DBR proposed a different reading of Paragraph 11. Under DBR’s reading, the paragraph gave the option only to designate separate tracts, and to exercise that option “the parties would have needed to attach a separate exhibit designating multiple tracts in order for the land to be split.” Id. at 8. DBR had evidence showing that the Bush Lessors had done this in the past:
DBR does provide evidence, in the form of several oil-and-gas leases between the Bush Lessors and other lessees, where such exhibits were attached. DBR argues this evidence shows that the Bush Lessors knew how to separately designate tracts, but chose not to in their lease with DBR.
Id. But the court disregarded DBR’s evidence. It noted that those leases “were the result of unknown negotiations between the Bush Lessors and different lessees.” Id. Thus, they showed nothing about the intent of the parties before the court. The court also noted that the lease language was unambiguous on its face and thus it “will not consider extrinsic evidence”—like the other leases— “to create an ambiguity where none exists.” Id. Thus, the Bush Lessors ultimately prevailed in the case.
Does this mean other leases are worthless as evidence going forward? I doubt it. If the court finds that the agreement is ambiguous, then the Tier 1 Resources ruling suggests that such evidence might be permissible. And under recent Texas Supreme Court cases that focus more on context in interpreting agreements, the lines of what is and is not permissible evidence may be getting a bit hazier under Texas law.
[1] Technically, there were multiple leases at issue that were identical except for the name of the lessor, but for ease of reference I have grouped them together here.