The case of Rippy Interests LLC. v. Nash, LLC is interesting because it examines what type of operations will keep a Texas oil and gas lease in force after the primary term has expired, and also what constitutes a repudiation of an oil and gas lease in Texas.
On January 18, 2006 Range Production I, L.P. acquired a mineral lease (hereinafter the “Range Lease”) on acreage in Leon County owned by Nash LLC. The primary term of the lease was for three years, with an option to extend the lease for an additional two years. Range exercised the option and extended the term of the Range Lease to January 18, 2011. In the fall of 2009, Range assigned its lease to Rippy Interest LLC. A year later, Rippy received a drilling permit to drill a well on the Range Lease.
The same month that Rippy received the drilling permit, Nash LLC granted a top lease for the acreage to KingKing, LLC (hereinafter the “KingKing Lease”), which was expressly subordinate to the Range Lease and would only take effect upon the expiration of the Range Lease. The Range Lease contained the following two clauses, which are fairly standard clauses (in one form or another) in Texas oil and gas leases:
1. Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term,” and as long thereafter as operations, as hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.
2. Whenever used in this lease the word “operations ” shall mean operations for and any of the following drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in search for or in an endeavor to obtain production of oil, gas, sulphur or other minerals, excavating a mine, production of oil, gas, sulphur or other mineral, whether or not in paying quantities.
The Timeline of Events
In early January 2011 Nash informed KingKing that Rippy had begun work constructing the drilling site. On January 7, 2011 Nash signed a damage release, received a payment of $28,650 from Rippy for surface damage, and acknowledged payment for well site pad construction and road use. The release and payment show that Rippy was building a 2.88 acre well site and a 2.9 acre road to the well site. Nash testified that prior to January 17, he observed general construction of the well pad, road, water wells, and setting surface casing/conductor pipe, but that nothing had been completed with the exception of the conductor pipe, which was completed January 12-13, 2011.
On January 18, 2011 Nash locked the gate to the well site to prevent Rippy’s workers from entering the property. When the workers showed up and cut the lock, Nash called the police stating that the workers were trespassing. The police determined that the issue was a civil matter and left without removing the workers or making any arrests. Nash testified that he believed that no operations as defined by the lease had occurred and that the Rippy lease had expired.
Rippy testified that multiple contractors had been hired to perform various operations at the well site and that work began on January 7, 2011 and continued every day without interruption past January 18. By March 2011, Rippy has spent over $849,400 on construction and drilling cost associated with the well. After the vertical section of the well was drilled, the smaller rig was removed and work ceased on the well. Rippy testified that the well had not been completed due to the challenge to the lease by Nash. Rippy testified that Nash challenged the existence of the lease when Nash locked the workers out of the well site and called the police to report the workers for trespassing.
The Lawsuits
Rippy filed suit against Nash on January 24, 2011 seeking injunctive relief, alleging that Nash made attempts to prevent Rippy from performing operations on the land. Nash responded by filing a general denial. Rippy filed an amended petition seeking declaratory judgment in June 2011, seeking to have the Range Lease declared as the valid and controlling lease, and KingKing was added as a defendant.
KingKing filed a counterclaim asserting trespass and seeking declaratory judgment that the KingKing Lease was the only valid lease, alleging that Rippy had not begun “operations” under the terms of the lease by January 18, 2011. Rippy countered that by claiming wrongful repudiation of the Range Lease as an affirmative defense to KingKing’s counterclaim.
Both Rippy and KingKing filed a motions for summary judgment.
The Trial Court’s Conclusion
The trial dismissed Rippy’s claims, and granted KingKing’s motion for summary judgment. Rippy appealed.
Rippy claimed that it had begun “operations for drilling” prior to the Range Lease expiration on January 18,2011. Both parties agreed that prior to the lease expiration, Rippy:
● Obtained a drilling permit.
● Obtained a surface damage release.
● Hired a drilling contractor.
● Prepared the well site.
● Prepared the road.
● Installed surface casing.
● Began construction of the pad at the well site.
The Court of Appeals determined that the minimum physical activities that constitute operations would include staking of the well site plus some act to the land itself such as leveling the site or digging pits. Here, Rippy had begun construction on the land and had successfully installed surface casing at the well site.
Regarding repudiation, the Court of Appeals cited Texas law that “lessors who wrongfully repudiate the lessees title by unqualified notice that the leases are forfeit 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.” In other words, when a lessor repudiates the lease, the lessee is relieved from obligation to conduct any further operations on the land to maintain the lease until there has been a judicial determination of the validity of the lease.
In this case, Rippy was engaged in continuous operations until Nash locked the workers out on the January 18, 2011 and called the police, although KingKing claimed the repudiation by Nash was irrelevant because Rippy continued operations until March 2011, indicating that perhaps Rippy did not rely on Nash’ attempt to repudiate the Range Lease.
The Appellate court notes that reliance is an element of repudiation under contract law, and that Texas law regarding repudiation of oil and gas leases focus on the relief from an obligation to perform, not a bar to further performance and that lessors who repudiate cannot complain if operations are suspended pending a determination of validity.
The Holding
The Court of Appeals held that the Rippy operations were sufficient to maintain the Range Lease was still in effect, that the lock out by Nash was a repudiation that excused further work by Rippy and that that fact that Rippy did some work for a brief period after Nash locked it out did not void the repudiation of the lease by Nash.
As you can surmise from this case, Texas courts determine claims of lease termination and repudiation on a case-by-case basis. The specific facts of an individual case are usually critical. If you are involved in a situation where you think your oil and gas lease may have terminated, it is always best to seek the assistance of an experienced Texas oil and gas attorney to evaluate your situation.