Face Challenges Confidently

386 Allegiance Hillview, L.P. v. Range Tex. Prod., LLC

Wednesday, September 2nd, 2015

Richard F. Brown
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Allegiance Hillview, L.P. v. Range Texas Production, LLC, 347 S.W.3d 855 (Tex App.—Fort Worth. 2011, no pet.) held that a city’s failure to issue a drilling permit was an event of force majeure.  Rayzor Investments, Ltd. (“Rayzor”) owned the mineral interest underlying two tracts in Denton, Texas.  In February 2008, Rayzor leased its mineral interests to Range Texas Production, LLC (“Range”).  The terms of the lease were subject to a Surface Use Agreement (“SUA”) between the surface owner (“Allegiance”) and Rayzor. The SUA provided that Rayzor’s right to access the drill sites would terminate if it did not commence drilling by July 11, 2009, and the force majeure clause read as follows:
“Force Majeure” as used herein shall mean . . . the City of Denton’s (or other governmental authority’s) failure to issue permits (provided that the Permit Seeker has timely submitted permit applications and thoroughly prosecuted such applications to attempted completion) . . . so long as such event is beyond the reasonable control of the Party claiming the benefit of such Force Majeure and only in the event such Party is taking all reasonable action to remedy such Force Majeure.
In order to commence drilling, Range needed City approval for, “(1) a SUP [Surface Use Permit], which is similar to a zoning ordinance; (2) a gas well permit, which is administratively approved by City staff; and (3) a permit from the fire department . . . .” During the permitting process, some confusion arose over whether a SUP application was required as part of the well plat application.
Due to this misunderstanding, Range filed a well plat application on April 3, 2009, that did not include a SUP.  On April 6, the City Planning Supervisor informed Range that a SUP would be required.  Accordingly, Range re-filed its application on April 16.  The new SUP application would have to be considered by the City planning and zoning commission prior to its approval by the City, and the application was tentatively scheduled for review on May 14.  While this review was pending, the City engineering department identified a problem with a proposed driveway that would have to be remedied prior to the May 14 planning and zoning review.  Range did not resolve the issue in time, forcing the planning and zoning hearing to be postponed until May 20.  The City published notice of the proposed May 20 hearing on May 7; however the notice publication erroneously listed a RCC-D zoning classification, for which no SUP is required, rather than the correct NRMU classification.  This error was not discovered until May 26, and the error resulted in a further delay of the planning and zoning commission hearing until June 17, and the City Council hearing was scheduled for July 21 — ten days after the drilling deadline.
Range sought approval of a three-month deadline extension from Allegiance.  On June 29, after Allegiance declined to extend the deadline, Range sent Allegiance a letter notifying it that the City’s failure to issue a permit before the deadline triggered the force majeure clause.  Allegiance insisted on enforcement of the development deadline.
Allegiance contended that there was no event of Force Majeure.  Under the SUA, “force majeure” was defined to include “the City of Denton’s (or other governmental authority’s) failure to issue permits . . . .”  According to Allegiance, the City was never given an opportunity to approve the permit before the drilling deadline, and therefore did not fail to issue one.  The court noted that the SUA does not require that the City be given an opportunity to consider the permit in order to fail to issue one.  Accordingly, the court held that the City’s failure to issue a permit was an event of force majeure.
Next, the court considered the timeliness of Range’s conduct.  Under the SUA, Range could not evoke the force majeure clause for the City’s failure to issue permits unless it had “timely submitted permit applications . . . .”  Allegiance argued that “timely” should be interpreted, “‘in the context of an agreed-to hard and fast drilling deadline, which, if not met, would cause the “immediate” termination of Rayzor’s and Range’s right to drill at all.’”  The court rejected this argument, noting that the SUA did not establish a deadline for Range to submit permit applications, and in the absence of a deadline, Range was only required to make its filings “within a reasonable time based on the facts and circumstances of the case.”
According to Allegiance, there was ample evidence that Range could have met the applicable deadlines, but instead it made a “‘conscious and informed business decision to delay filing its applications in order to try to increase its profits.’”  The court acknowledged that Allegiance’s argument was supported by evidence in the record (Range attempted to maximize the possible locations), which caused some delays.  Yet, the court said Range was under a “duty to act as a reasonably prudent operator under the same or similar circumstances and to reasonably develop the premises,” and found sufficient evidence that Range acted reasonably under the circumstances.
Courts will strictly adhere to the terms of a force majeure clause, but, in the absence of specific deadlines, a “timeliness” obligation will be construed as allowing a reasonable time under the circumstances, and a lessee will be in compliance with that requirement if the lessee acted as a reasonably prudent operator would act.