Face Challenges Confidently

407 Jones v. Clem

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.
Jones v. Clem, 11-10-00123-CV, 2012 WL 1069168 (Tex. App.—Eastland Mar. 29, 2012, no pet.) (mem. op.), held that the only lessee entitled to notice under the change in ownership clause of a lease is the lessee at the time the change in ownership occurs.  The facts as summarized in the opinion are not entirely clear.  Evans owned a mineral interest that was leased for oil and gas.  In 1991, Clem acquired Evans’ interest through a bankruptcy proceeding, and Clem recorded the deed into Clem.  Although Clem gave no notice of assignment to anyone, Clem immediately began receiving royalty payments from the purchaser, Western Gas.  In 1999, for some reason, payments to Clem stopped.  In 2002, someone assigned the lease on Clem’s interest to Jones.  Jones received some document (possibly a paydeck) from a predecessor lessee which showed Evans as the owner.  When Jones tried to pay Evans, Jones discovered that Evans had died, and Jones then began paying Evans’ daughter.  In 2008, Clem discovered the lease was still producing and sued Jones and Evans’ daughter for unpaid royalties.  Judgment was entered for Clem against Jones for $27,160.38 and against Evans’ daughter for $11,376.15.  Judgment was entered for Jones against Evans’ daughter for $27,166.38.  There is no explanation as to the reason for the splits in liability, and Evans’ daughter did not appeal.  Jones relied upon the change of ownership clause in the lease as an affirmative defense.
The change of ownership clause relied upon by Jones was a typical lease clause which expressly permitted assignments, but expressly limited lessee’s obligations in part as follows:
No such change or division in the ownership of the land, rentals or royalties shall be binding upon lessee for any purpose until such person acquiring any interest has furnished lessee with the instrument or instruments, or certified copies thereof, constituting his chain of title from the original lessor.
These clauses “relieve a lessee from liability for the mispayment of royalty or delay rentals, when the mispayment is caused by a change in ownership and no notice is given to the lessee of such change . . . .”  “Where such a provision is included in the lease, the lessee is not charged with constructive notice from the record of a subsequent transfer by the lessor.”  The opinion identifies Western Gas as the “purchaser” and as the “lessee” at the time Clem first acquired the interest, so the capacity in which Western Gas acted is not clear.  Nevertheless, Clem apparently conceded that Western Gas was the lessee at the time and could have invoked the clause against Clem.  The opinion is silent as to whether Jones made the same concession.  The court then assumed a waiver of the change in ownership notice by Western Gas based on the payments made by Western Gas.  Obviously, if Western Gas was only the purchaser, and not the lessee, payments by Western Gas would not necessarily be a waiver of the change in ownership clause in the lease.
The court held that Jones was not entitled to notice under the change of ownership clause because it applies only when there has been a change or division of ownership during the lease term, and there was no such change during Jones’ “tenure” as lessee.  However, the lease did not say anything about a change during any particular lessee’s “tenure,” only that lessor must give notice to lessee.  Perhaps the court is relying upon the presumed waiver by Western Gas; perhaps the court actually means that only changes during the “tenure” of a particular lessee trigger the protection of the change of ownership clause.  The court comments that Jones could have examined the record or obtained a title opinion, but of course avoiding that obligation is exactly why a change of ownership clause is included in a lease.  The lessee can obtain one title opinion, put division orders in place, rely on the change of ownership provision, maintain a lease file with any transfer of ownership notice received, and never examine title again.
Here, the court relied on the doctrine of constructive notice.  Jones was charged with constructive notice because the deed to Clem was on file when Jones took the leasehold interest.  The filing of the deed was notice to all persons, and “[t]he doctrine of constructive notice creates an irrebuttable presumption of actual notice” in certain situations.
Jones also tried to rely on a “division order” document that was unsigned by Clem, which also had a disclaimer of any warranty that it reflected the correct title.  The opinion was unclear about the exact nature of this document, but it was clearly not a division order, and we can only assume that it was some kind of paydeck.
Because there is so little precedent on the change in ownership clause, the case could be significant, but the facts are so unclear that it is difficult to analyze.  A holding that the change of ownership clause is only triggered by a change which occurs during the “tenure” of a particular lessee seems unsupportable.  Given that properties are frequently sold today without a title opinion and often with very poor (or no) lease files, the allocation of risks in the purchase and sale agreement becomes very important.  Allocating risk based on the effective date of a sale may not be effective to limit purchaser’s risk, because purchaser could pay the wrong party going forward, just as Jones did in this case.