401 Royalco Oil & Gas Corp. v. Stockhome Trading Corp.

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.
 
Royalco Oil & Gas Corp. v. Stockhome Trading Corp., 361 S.W.3d 725 (Tex. App.–Fort Worth 2012, no pet.) held that a salt water disposal lease was not a mineral lease and not subject to oil and gas law.  Stockhome leased a salt water disposal well to Triad for a ninety-nine year term (“Lease”).  The Lease allowed Triad to assign or sublet up to 50% of its interest in the Lease.  A few months after entering into the Lease, Triad entered into a Services Agreement with Royalco.  Under the Services Agreement, Royalco would complete and operate the disposal well, and, in exchange, Triad “assigned” 50% of its interest in the Lease to Royalco.  After Triad and Royalco entered into the Services Agreement and assigned the 50% interest in the Lease, Triad stopped making the Lease payments to Stockhome.  Stockhome terminated the Lease and asserted that Royalco’s interest in the Lease was a sublease that terminated immediately upon Stockhome’s termination of the Lease and that Royalco had no standing under the Lease.
 
The issue was whether the Services Agreement was an assignment or a sublease, because Royalco admitted that if it was a sublease, then Royalco would have no privity of contract or estate with Stockhome and no contractual right to enforce the Lease against Stockhome.  Royalco contended that under Texas oil and gas law the Services Agreement was an assignment rather than a sublease.
 
In determining whether a transfer of a lease is an assignment or a sublease, it is the substance of the instrument that is controlling, and the use of the words “assign” and “assignment” is not controlling.  The court stated:
 
If the lessee transfers his entire interest in part or all of the premises without retaining any reversionary interest, the transfer is an assignment.  The assignee becomes the tenant in place of the original lessee and is in privity of estate with the lessor.  If the lessee retains any reversionary interest, the transfer is a sublease, and the transferee is not in privity of estate or privity of contract.
 
“Because this Lease was not a lease for the production of minerals, the trial court correctly applied the law relating to leases generally, not the law governing oil and gas leases.”
 
The court stressed that the purpose of the Lease was for the drilling and operating of a disposal well rather than for mineral extraction.  The court was also unconvinced by Royalco’s argument that the role of the Railroad Commission was relevant.  The Railroad Commission issues permits for oil and gas wells and permits for disposal wells.  The court underscored that in addition to mineral production, the Railroad Commission is responsible for activities associated with waste water disposal resulting from production.  It reasoned that the fact that mineral production and wastewater disposal resulting from mineral production are related, and the fact that permits for both are issued by the same body, does not mean they are the same under the law.
 
The significance of the case is the holding that salt water disposal leases are governed by the law applicable to leases generally and not by the unique law applicable to oil and gas leases.  There was some specific language that arguably may make this a fact-specific decision, but the opinion broadly concludes that salt water disposal leases are not governed by the law applicable to oil and gas leases.