Face Challenges Confidently

708 Fort Worth 4th Street Partners, L.P. v. Chesapeake Energy Corp., 882 F.3d 574 (5th Cir. 2018)

Monday, July 8th, 2019

Richard F. Brown

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

Fort Worth 4th Street Partners, L.P. v. Chesapeake Energy Corp., 882 F.3d 574 (5th Cir. 2018) held that the surface use damages payment provision in a Surface Use Agreement was a covenant running with the land. Fort Worth 4th Street Partners (“FWP” as “Lessor”) leased mineral rights in the “FWP Lands” to “Lessee.” The parties also entered into a contemporaneous Surface Use Agreement (“SUA”), which governed Lessee’s use of the FWP Lands while Lessee conducted oil and gas operations. Paragraph 17 of the SUA included a provision for a surface damages payment due on or before six years from the date of the SUA. The amount due was based on the number of square feet used by Lessee. The SUA also stated that “[t]he terms, provisions and conditions hereof shall be covenants running with land and shall be binding upon and inure to the benefit of the Working Interest Owner, the Surface Owner, and each of their respective successors, legal representatives, heirs, assigns, lessees, and sublessees.” Prior to the “Damage Payment Date” described in Paragraph 17, FWP sold the surface of the FWP Lands to Lessee’s affiliate. With that sale, FWP and Lessee also entered into a Master Amendment to amend the lease and the SUA. The amendment eliminated surface use restrictions and restated that the covenants of the SUA ran with the land. FWP sued Lessee for the damage payment after it became due and claimed that the damages covenant did not run with the land.

“In Texas, a covenant runs with the land when four requirements are met: (1) it touches and concerns the land; (2) it relates to a thing in existence or specifically binds the parties and their assigns; (3) it is intended by the original parties to run with the land; and (4) the successor to the burden has notice.” FWP only contested elements (1) and (3).

The court stated that there is no absolute test for the analysis of the “touch and concern” requirement. However, the Texas Supreme Court has held that a covenant touched and concerned the land when it “affected the nature, quality or value of the thing demised, independently of collateral circumstances, or if it affected the mode of enjoying it,” or “if the promisee’s legal relations in respect to that land [we]re increased—his legal interest as owner rendered more value by the promise—the benefit of the covenant touches or concerns the land.” The court determined that “[u]nder either of these tests, the benefit of Paragraph 17 touche[d] and concern[ed] the land because it affect[ed] the value of the surface of the FWP Lands and specifically render[ed] its owner’s legal interest in the land more valuable.” Additionally, Paragraph 17 also provided a method of calculating the amount of the payment due which incentivized Lessee to disturb as little of the FWP Lands as possible. Therefore Paragraph 17 made the surface more valuable.

The court also analyzed whether the parties intended for the covenant to run with the land. The SUA explicitly stated that the covenants of the agreement ran with the land. FWP wanted the court to consider an affidavit from a beneficial owner of FWP that supported the claim that the covenant was intended as a “beneficial personal covenant.” However, that was inadmissible parol evidence, because the agreement was unambiguous. Therefore, the Paragraph 17 benefit was intended by the parties to run with the land.

This is a contract interpretation case which finds that the surface damages provision of a SUA is a covenant that touches and concerns the surface and thus follows the assignment of the surface estate.