Face Challenges Confidently

045 Parten v. Cannon

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 some significance to you.
Parten v. Cannon, 829 S.W.2d 327 (Tex. App.–Waco 1992, writ den.), concerns the effect of the failure of the lessee to file a designation of producing unit at the end of the primary term as required by the Pugh clause in the lease. The lease in this case provided:
Lessee must within ninety (90) days after the end of the primary term of this lease as to the leased premises which is not pooled under the provisions of Paragraph 4 hereof, designate in writing and place same of record with the County Clerk in Madison County, Texas, a description of that part of the leased premises which shall be allotted to such well for production purposes, . . . . Production or operations on said allotted area by the Lessee shall maintain this lease in effect only with regard to the land within the described area. This lease shall terminate as to such part or parts of the leased land lying outside the allotted area . . .
This is a fairly common “Pugh-type” clause designed to prevent lessee from indefinitely holding a large tract with a single well. Lessor contended that the clause was a condition and that the entire lease had terminated. Lessee contended that the clause was merely a covenant, and that lessor was entitled to recover only damages or a conditional decree of lease cancellation.
Held: The lease did not terminate. The production-and-allotment provision was a condition and the lease would terminate as to all acreage outside the allotted area. However, the condition on the extension of the primary term depends upon operations or production on the allotted portions of the lease, not upon the filing of the written designation. The filing requirement was merely a covenant. The court distinguished an earlier case which held a similar provision to be conditional by noting that in the prior case the allotment of acreage itself was described in conditional terms. The lease in this case also contained a cure provision that gave lessee a ten-day window after notice to cure all breaches. Lessors repudiated the lease without giving lessee an opportunity to cure. Thus, as an alternative ground for its holding, the court reasoned that lessee was still entitled to a ten-day notice period to file its designation.
The case is significant because it illustrates that the precise wording of the Pugh clause can make a significant difference. If this clause had been phrased to make the filing requirement part of the “special limitation” on the grant, lessee would have lost the entire lease with its multiple wells, which has been the result in other similar cases. Because forfeitures for failure to file are almost inherently unjust, lessees should reject clauses phrased in that manner, or only accept such clauses if protected by an adequate notice-and-cure provision. Obviously, the lessee should act promptly under any lease clause to designate the producing units.