687 Apache Deepwater, LLC v. Double Eagle Development, LLC, No. 08-16-00038-CV, 2017 WL 3614298 (Tex. App.—El Paso Aug. 23, 2017, pet. filed)

Tuesday, August 7th, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Apache Deepwater, LLC v. Double Eagle Development, LLC, No. 08-16-00038-CV, 2017 WL 3614298 (Tex. App.—El Paso Aug. 23, 2017, pet. filed) construed a retained acreage clause to operate as of the end of the primary term and not as a rolling termination clause operating at any time after the end of the primary term. The parties aligned as successors to Lessor and Lessee under a printed form oil and gas lease with several typewritten provisions that covered all of Section 43. The lease defined “leased premises” to include all 640 acres of Section 43. The habendum clause provided that the leased premises would be held for so long as there was production from the leased premises.1 A typewritten retained acreage clause provided:

Notwithstanding anything to the contrary in the foregoing, Lessee covenants to release this lease after the primary term except as to each producing well on said lease, operations for which were commenced prior to or at the end of the primary term and the proration units as may be allocated to said wells under the rules and regulations of the Railroad Commission of Texas. . . .2

Prior to the expiration of the primary term, Lessee timely designated a proration unit for each quarter section and completed a producing well on each quarter section.3 Eventually, production ceased from all of the wells, except the well on the southwest quarter. Lessor contended that the lease terminated as to all but the southwest quarter; Lessee contended the lease continued in effect as to the entire section.4 Lessor contended that the retained acreage clause provided for “rolling terminations” at any time following the primary term, if production ceased as to a quarter section. Lessee contended the retained acreage clause was only effective on the date of the expiration of the primary term.5

It was uncontested that the habendum clause would ordinarily operate so that a single well anywhere on Section 43 would hold all of Section 43.6 However, Lessor claimed that because the retained acreage clause begins with “notwithstanding anything to the contrary,” it negates and modifies the clear wording of the habendum clause.7 The court held that “the retained acreage clause does not express a clear intent to negate the habendum clause. Instead, it can be read to mean that at the end of the primary term, the lessor could insist that any part of the leasehold that was not within a proration unit which had either a producing well, or a well under development that later came into production, must be released.”8 This reading, the court noted, harmonizes the retained acreage clause with the habendum clause and the related drilling operations clause, giving effect to each.9

The retained acreage clause used the phrase “after the primary term.” Lessor contended that the phrase “after the primary term” is synonymous with “secondary term” in industry terminology.10 The court disagreed, pointing out that “if the parties had intended ‘after the primary term’ to really mean ‘during the secondary term’ they could have said so, as they chose to define ‘leased premises.’ They did not, and we will not re-define a word’s ordinary meaning absent some indication that the parties meant otherwise.”11 The court concluded that Lessee retained the acreage in Section 43 by virtue of the operating well in the southwest quarter proration unit. The court also noted that the “retained acreage clause ties the release ‘after the primary term’ to all land except those with a producing well, ‘operations for which were commenced prior to or at the end of the primary term.’”12

The court refused to give any additional weight to the retained acreage clause because it was typewritten, because the habendum clause was also “typewritten,” given that there was an insert for the term of years.13 The court also was unpersuaded by Lessor’s arguments that the court’s construction discouraged development. There were other clauses, express and implied, which could provide remedies for failure to develop, and there was also a horizontal Pugh clause as to the deep rights, which had already been given effort.14

The significance of the case is the holding that this particular retained acreage clause operates only upon the expiration of the primary term, and not as a “rolling termination” during the secondary term. It also illustrates the power of defined terms and that a “notwithstanding” provision will not necessarily eliminate other contractual provisions.

  1. Id. at *2.
  2. Id. at *3.
  3. Id. at *1.
  4. Id. at *2.
  5. Id. at *3.
  6. Id. at *4-5.
  7. Id. at *5.
  8. Id. at *6.
  9. Id.
  10. Id. at *7.
  11. Id.
  12. Id. at *6.
  13. Id. at *2, *7.
  14. Id. at *7.