202 First Permian, L.L.C. v. Graham

CASE NOTE

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
First Permian, L.L.C. v Graham, 212 S.W.3d 368 (Tex. App.—Amarillo 2006, pet. denied) holds that a preferential right reserved by the holder of a production payment terminated when the final payment on the production payment was made. Under the assignment in question, the grantors conveyed certain oil and gas leases for $500,000. Payment was in the form of $100,000 in cash and a production payment of $400,000 plus interest. The reserved interest terminated upon the final payment of the production payment. The assignment also contained a preferential right to purchase the leases. Successors to assignor and assignee contested whether or not the preferential  right survived the termination of the production payment. The successor to assignor argued that the preferential right was a separate and independent covenant that was not terminated by payout of the production payment.
 
The court disagreed and held that the preferential right was intended to exist only so long as necessary to protect the interest of assignor and assignor’s successors in the full payment for the lease. It was uncontroverted that the preferential right in this case was a real covenant. The preferential right terminated because (1) a real covenant endures only so long as the interest in land to which it is appended, and (2) it can only be enforced by the owners of the land the covenant was intended to benefit.