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A recent decision handed down by the U.S. Fifth Circuit of Appeals makes it clear that great care should be taken with how the consideration clause of Texas oil and gas leases are drafted. The case of In the Matter of: Goodrich Petroleum Corporation, 894 F3d 192 (5th Cir.) illustrates that you should NOT use the standard verbiage with respect to consideration paid if additional consideration for the lease is due. The additional consideration should be fully described, thereby providing notice of record to third parties of the additional consideration due.

Often, almost as a matter of rote, Texas oil and gas leases use language similar to this:

“NOW, THEREFORE, for the promises and covenants exchanged below, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree …”

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In re Keenan is a recent case where a party was successful in obtaining a review of ballots for a homeowner’s association vote to amend its architectural rules. Keenan was a member of a Homeowner’s Association (HOA) in her neighborhood, and was sued by the HOA over improvements that she had made to her property. According to the HOA, Keenan’s improvements exceeded a limit on impervious cover in violation of an HOA rule amendment enacted by a vote in 2006. Keenan believed the rule was not properly enacted and questioned whether there were a sufficient number of votes to approve the HOA rule amendment.

Keenan requested copies of the votes from the 2006 vote through discovery, but the trial court would not permit her to review them on the grounds that the ballots were confidential under Property Code 209.00594(c) which states that only a person qualified to tabulate votes in a property owners’ association election “may be given access to the ballots.” The court did allow  Keenan’s lawyer to review the ballots, but in order for Keenan’s lawyer to testify about the accuracy of the vote, he would have to be a witness, which is a violation of the Texas Disciplinary Rules of Professional Conduct.

Since Keenan was prohibited by a court order from seeing the 2006 HOA vote ballots and submitting them as evidence to prove there had been an insufficient vote, and her lawyer was prevented by the court from testifying about the ballots by professional ethics, Keenan sought a writ of mandamus from the Texas Supreme Court.

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As many Texas landowners are aware, oil and gas pipelines are being constructed at an almost frantic pace these days. The first time a landowner is aware that they may be asked to sign a pipeline easement is a call from a land man or right-of-way agent requesting permission to conduct a survey on their property.

Many landowners simply give verbal permission or sign the one paragraph form offered to them by the land man or agent. That can be a mistake. If you’re interested in protecting your property, you should consider using an appropriate survey permit to govern the pipeline company’s surveying activities on your property. That is even more true for geophysical or seismic permits.

A pipeline permit should address at least the following issues:

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How the Texas courts construe and interpret unambiguous deeds follows a specific set of rules. In construing an unambiguous deed, the court’s main focus is to ascertain the parties’ true intent regarding the conveyance of real property by the deed. The court reviews the entirety of the deed, which is sometimes referred to as analyzing “the four corners” of the deed, meaning that the court will look to what is written in the deed, and not to outside sources. There are well established rules concerning the interpretation and construction of a real property deed.edge-1563789

For an unambiguous deed, the court will determine the grantor’s intent from the specific language that is used in the deed, and will not make presumptions that are not overtly made clear by the language of the deed. When there is even the slightest doubt about the intent of the grantor, the terms of a deed are often construed in favor of the grantee. This is consistent with Texas contract law, which strongly favors the presumption that contracts, such as deeds, say exactly what they mean.

Does A Grantor’s Failure to Designate Capacity Fatally Flaw A Conveyance?

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As production in Texas’ Permian Basin increases, so does the industry’s need for pipelines to transport production to treatment facilities and markets. Kinder Morgan, EagleClaw Midstream Ventures and Apache Corporation recently announced they have signed a letter of intent to build yet another oil and gas pipeline, to be called the Permian Highway Pipeline Project (PHP Project). The 42 inch pipeline will be designed to carry about 2 billion cubic feet per day and will be about 430 miles long, from Waha hub in Pecos County, Texas to several liquid natural gas facilities on the Texas Gulf coast. (Waha is a West Texas trading hub and pricing point). It appears from news releases that much of the pipeline capacity will be used to transport production by the three partners, but they are apparently also considering adding enough capacity to transport production from other companies.

ExxonMobil and Plains All American Pipeline have also announced that they have signed a letter of intent to build a common carrier pipeline from Wink and Midland, Texas to Webster, Baytown and Beaumont, Texas.

If you get a call from a landman representing a pipeline company, do yourself and your property a favor: do not try to negotiate a pipeline easement without the assistance of an attorney experienced in this area. The truth is that you don’t know what you don’t know, and in all probability you will have to live with your mistakes for many decades.

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In the recent case of Tarr v. Timberwood Park Owners Association Inc. the Texas Supreme Court considered whether a deed restriction that limited use of homes “solely for residential purposes” prevented a homeowner from using his home for short-term rentals. Based on the language of the restrictive covenant, the Court decided that renting the home — even for short time periods — was not a “business purpose.” The rentals were considered to be a “residential purpose” and so the homeowner did not violate the deed restriction. In addition, the Court refused to conflate two restrictions into a ban on use of the home for multi-family units and also held that when a restrictive covenant unambiguously fails to address some particular property use — such as use for short-term rental — Texas courts must not to read such covenants into the deeds.

Facts of Case

 Tarr involved a homeowner’s use of his home for short-term rentals in San Antonio’s Timberwood Park subdivision. Two years after Mr. Tarr bought his home, his employer transferred him to Houston. Thereafter, he began advertising the home for rent on websites such as Vacation Rentals by Owner. Tarr also formed a limited-liability company to manage the rental of the home. Between June and October of 2014, Tarr entered into 31 short-term rental agreements, ranging from one to seven days each. He rented his home to various-sized rental parties up to 10 people. For example, nearly one quarter of the rentals were to two adults accompanied by as many as six children.

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The Houston Court of Appeals in Bauder v. Alegria  issued a decision that a text message can be used to establish the last known address of a borrower for the purposes of delivering a foreclosure notice when it is unclear if the address on the deed of trust is the borrower’s last known address.

In the Bauder case, a woman named Sara Alegria purchased a home at 1825 Neuman Street in La Marque, Texas in 2010 from Gerald Bauder. When Alegria signed a promissory note and the deed of trust, she indicated that her mailing address was 704 Roosevelt Street in La Marque. Over time as Alegria made payments to Bauder, sometimes she delivered her mortgage payments to Bauder, other times Bauder’s son (who was authorized to act for Bauder) would come to the property on Neuman Street to pick up the payments, and sometimes Bauder’s son would pick up the payments from the Roosevelt Street address.

In 2013, the loan was in default due to nonpayment of taxes and failure to maintain insurance, and a notice to cure was sent to the Roosevelt address. The notice indicated that a failure to cure would result in an acceleration of the payments due on the promissory note.

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A Texarkana Court of Appeals case, Petrohawk Properties, L.P. v. Jones offers some insight into how changes to an oil and gas agreement are analyzed in terms of the statute of frauds. Material changes to the agreement require documentation in writing, but what constitutes a material change to the initial agreement will depend on the circumstances and the specific language used in the agreement. Contracting parties who are concerned about the impact that a modification to a contract can have should take precautions to ensure that the modification of the contract is well documented.

In this case, the Jones family owned some land in Harrison County in East Texas and the family was approached in 2008 by Petrohawk Properties about leasing the oil and gas mineral interests for their property. The parties entered into an agreement that if the Jones could deliver their interests to Petrohawk Properties free and clear of title defects by a closing date of August 15, 2008, the Jones family would be entitled to a leasing bonus of $23,500 per acre. The agreement also provided that Petrohawk would be released from the Agreement if the Jones’s were unable to provide free and clear title to enough acreage to warrant payment of ten million dollars worth of leasing bonuses, which Petrohawk was holding in escrow.

Due to unforeseen delays in preparing the title work, the parties agreed to delay the closing date of the Agreement to August 27, 2008, then to September 17, 2008, then to October 9, 2008, and then to November 6, 2008. Coincidentally, the fall of 2008 was also the time of the United States financial crisis, which prompted Petrohawk to refuse to pay bonus on any acreage supported by title work that was produced by the Jones family more than thirty days after an August 29th closing date on some of the Jones family properties, and terminated the contract. The Jones sued for breach of contract.

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Economists at IHS Markit  recently issued a report (summarized here) that predicts that oil production in the Permian Basin will almost double by 2023, increasing by 3 million barrels per day (mbd) to 5.4 mbd.  That level of growth will account for more than 60% of net global oil production. As Daniel Yergin, vice-chairman of IHS Markit indicates, “(i)n the past 24 months, production from just this one region—the Permian—has grown far more than any other entire country in the world. Add an additional 3 mbd by 2023—more than the total present-day production of Kuwait—and you have a level of production that exceeds the current production of every OPEC nation except for Saudi Arabia.”

In a separate report, summarized here, IHS Markit predicts that natural gas production will rise in the United States by almost 8 billion cubic feet per day (bcf/d) or more than 10 percent in 2018 alone. Altogether, U.S. production is expected to grow by another 60 percent over the next 20 years, the report says. In the Permian Basin alone, production of both natural gas and natural gas liquids (NGLs) are  expected to double from 2018 to 2023, reaching 15 bcf/d and 1.7 mbd, respectively.

The_West_Texas_Permian_Basin

The Permian Basin

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When preparing and executing any type of contract, it is important to be clear on all important terms in the contract. Ambiguities lead to uncertainty, and uncertainty can turn into disputes down the road. Even so, there are times when an oil company has been known to claim an ambiguity, and create a dispute, where none exists. Recently the Texas Supreme Court  considered such a case and had occasion to emphasize that interpretation of contract language should always be reasonable. When the plain language of the contract expressly excludes a portion of land, then that portion of land is not subject to the contract.

In North Shore Energy v. John James Harkins, et al., the Court applied this principle to a gas option contract. In North Shore, the Harkins family signed an option contract with North Shore Energy.   A lease was attached to the contract. North Shore got to choose from among several tracts within a designated tract of land in Goliad County, Texas. The contract had an exhibit that described the land subject to the option as being the land identified in an earlier lease. The land in the earlier lease did not exclude what the parties called the 400.15 acre Hamman lease land. However, the option itself specifically excluded the Hamman lease land.

When North Shore Energy sought to exercise its option contract, it chose a 169.9 acre tract on which to drill. The tract selected by North Shore Energy contained a large portion of the Hamman lease land. A third party, Dynamic Productions Inc., approached the Harkins and requested to lease the Hamman lease land, which included a North Shore Energy well that had been drilled into that Hamman lease land, and the Harkins family obliged and executed a lease for the 400 acre Hamman lease land to Dynamic.

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