467 Cmty. Bank of Raymore v. Chesapeake Exploration, L.L.C.

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.
 
Cmty. Bank of Raymore v. Chesapeake Exploration, L.L.C., 416 S.W.3d 750 (Tex. App.—El Paso 2013, no pet.) construes the operation and relationship of the habendum clause, continuous development clause, horizontal Pugh clause, and a clause severing the oil and gas lease into separate leases as to each proration unit.  In 2005, Community Bank of Raymore (“Lessor”) conveyed an oil and gas lease to Chesapeake Exploration, L.L.C. and Anadarko Petroleum Corp. (“Lessee”).  Lessee drilled and completed thirteen producing wells, and it was stipulated that these operations satisfied the continuous development clause in the lease.  The base of the deepest-producing formation was located 5,672 feet below the surface.  When the primary term expired, Lessor requested that Lessee release the deep rights, and Lessee refused.  Lessor sued for declaratory judgment and breach of contract.
 
Lessor argued that the horizontal Pugh clause operated at the end of the primary term to terminate Lessee’s deep rights.  Alternatively, Lessor argued that the clause severing the lease into multiple leases based on proration units had been triggered, the continuous development clause applied independently to each proration unit lease, and because there was no continuous development on these proration unit leases, the proration unit leases each terminated as to the deep rights.  Lessee argued that its continuous development program prevented the horizontal Pugh clause and the severance clause from taking effect.
 

The horizontal Pugh clause read in part:

At the expiration of the Primary Term or the conclusion of the continuous development program, this Lease shall terminate as to [the deep rights below] the base of the deepest formation from which the Lessee is then producing Oil and/or Gas in paying quantities from a well or wells located on such proration or producing unit.  [Emphasis added]

 
According to the court, Lessor argued that “or” should be given the conjunctive meaning of “and.”  The court noted that when the term “or” is accorded its “plain, grammatical meaning as a disjunctive expressing a choice between two mutually exclusive possibilities, the Pugh clause operates at two mutually exclusive stages:  either ‘the expiration of the Primary Term’ or ‘the conclusion of the continuous development program.’”  Although the primary term had ended, the parties had stipulated that Lessee had complied with the requirements of the continuous development clause; therefore, the horizontal Pugh clause did not take effect to terminate Lessee’s deep rights.  Lessor contended that such a construction would render the horizontal Pugh clause moot.  The court held that its reading did not render the Pugh clause moot because it could operate at the end of the primary term, if production in paying quantities existed, but no continuous development program was in place.  Furthermore, Lessor’s argument made no commercial sense because Lessee would be required to drill every possible unit well before the expiration of the primary term.  In summary, the court held that the horizontal Pugh clause was triggered at the expiration of the primary term, or the expiration of the continuous development program, whichever occurred last.
 

            The lease also provided:

Notwithstanding anything to the contrary contained herein:  . . . (ii) from and after the expiration of the Primary Term . . . and any extension of the Primary Term as provided in [the continuous development clause], the provisions of this Lease shall be separately applicable to each proration unit . . . and each such proration unit shall be considered as being covered by a separate lease for all purposes herein.  [Emphasis added]

Lessor contended that the severance was triggered by the expiration of the primary term, and because there was no continuous development on the separate proration unit leases, each of them terminated as to the deep rights.
 
The court held that the participle “and” is conjunctive.  It “‘expresses the general relation of connection or addition, especially combination . . . and signifies something to follow, expressing the idea that what follows is added and taken along with the first.’”  Therefore, the court held that severance would not occur until after the expiration of the primary term as extended by the continuous development clause.
 
The significance of this case is that it highlights the importance of the simple words—“and” and “or”—when linking the operation of complex lease provisions.  “And” will almost always be given the conjunctive meaning.  “Or” is far less certain.  “Whichever occurs first” or “whichever occurs last” frequently makes the intent clear.