Face Challenges Confidently

039 Marifarms Oil & Gas, Inc. v. Westhoff

Thursday, September 3rd, 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.
Marifarms Oil &Gas. Inc. v. Westhoff, 802 S.W.2d 123 (Tex. App.–Fort Worth 1991, no writ), involved a producing lease with one gas well which ceased production for 84 days. The lease had a 60-day cessation-of-production clause and a 90-day shut-in well clause. The shut-in clause was a typical provision that provided if a well is shut-in, the lessee may pay a shut-in royalty, and if such shut-in royalty is paid, it is considered that gas is being produced in paying quantities. The well was shut-in, and no shut-in royalty was ever paid.
Held: The lease terminated. The optional character of payment coupled with the provision that it will be considered that gas is being produced if such payment is made indicates that advance payment is required to keep the lease alive. If a lease contains both a cessation-of-production clause and a shut-in well clause, then to preserve the lease, it is necessary to make the shut-in royalty payment within the time period stated in the shorter cessation-of-production clause. The lease expires automatically at the end of the primary term or the later date when there is neither production nor a substitute therefore.
The case is a restatement of existing Texas law, but in these times of depressed prices and voluntary shut-ins, it is an important reminder of the risk inherent in relying upon the shut-in clause to preserve the lease. The shut-in clause as a lease-saving clause is usually a cheap form of insurance. When in doubt, the lessee should pay, pay early, pay all possible owners, and pay the largest amount that could possibly be claimed. The case also illustrates the risk in the common optional form of shut-in royalty clause and the advantages of the mandatory form of shut-in royalty clause (i.e. lessee must pay shut-ins and the lease is preserved).