021 Trafalgar House Oil & Gas, Inc. v. De Hinojosa

Tuesday, September 1st, 2015

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Trafalgar House Oil & Gas Inc. v. De Hinojosa, 773 S.W.2d 797 (Tex. App.–San Antonio 1989, no writ), was a suit for damages brought by the lessor against the lessee for the lessee’s failure to give notice of lease assignments to the lessor. The lease contained a notice provision which read as follows:
 
. . . In the event of assignment, LESSEE, its successors and assigns, shall give notice of the fact of such assignment and the name and address of the assignee within thirty (30) days after such assignment; and LESSOR shall likewise be notified upon each subsequent assignment. Upon each failure of the LESSEE, its successors and assigns to comply with the foregoing “notice of assignment,” said LESSEE, his successors and assigns shall jointly and severally forfeit and pay unto the Lessor the sum of One Thousand and No/100 ($1,000.00) Dollars as liquidated damages.
 
A contractual provision for liquidated damages is enforceable if the amount provided for is a reasonable estimate of harm that would be caused by a future breach, and the anticipated damages resulting from a breach are difficult to ascertain. If, however, the clause for liquidated damages is merely a penalty to induce performance of the contract, it is unenforceable.
 
Held: The damages provision was enforceable and De Hinojosa recovered a judgment for $20,000. Absent knowledge of assignments, the lessor would not know who was entitled to be on the land or who was responsible for damages to lessor’s property. Lessor was able to establish that the damages for failure to give notice are difficult to ascertain because the costs of hiring landmen and/or lawyers to search courthouse records are unpredictable and because not all assignments are filed for record. Apparently, the landowner also established that $1,000.00 per assignment was a reasonable estimate.
 
The significance of the case is that many lessors are frustrated by the difficulties inherent in determining who has succeeded to the interest of the original lessee. A notice-of-assignment clause with a liquidated-damages provision may provide some relief to the lessor. On the other hand, such a provision may impose a significant burden on the lessee, particularly on larger companies who make or accept multiple lease assignments. Reviewing all of the leases in such a transaction is sometimes impossible, and unless there are good internal document controls in the office of the assignor, a mistake can easily be made. It is also not uncommon for many small investors in a lease to receive individual assignments. If the notice provision is overlooked at the time the assignment. are prepared, that single mistake could result in a significant liability.