Face Challenges Confidently

203 Chesapeake Operating, Inc. v. Denson

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.
Chesapeake Operating, Inc. v. Denson, 201 S.W.3d 369 (Tex. App.—Amarillo 2006, pet. denied) construes a lease amendment affecting leases previously owned by Texoma Natural Gas Company. Texoma acquired division orders which expressly amended the underlying lease and provided as follows:
It is understood that at this time you are subject to and are paying an occupation or production tax of two per cent (2%) of the market value of gas produced and saved. If hereafter there shall be any increase in the amount of said tax, or there shall be levied any new occupation, production, severance or other excise tax, one-eighth (1/8) of such increase shall be deducted from the above agreed royalty value of the gas which is then applicable.
At the time the division order amendment was signed, the producer was obligated by statute to pay the production tax. The production tax statute was later amended to obligate both producers and royalty interest owners to pay their pro rata share of the tax. The issue was whether the producer had the continuing obligation to pay all of the first two percent of the tax, or whether the royalty owner’s obligation to bear a proportionate part extended to and included the first two percent.
The court held that the royalty owner was obligated to bear a proportionate part of the tax only to the extent it exceeded the threshold of two percent. The court reasoned that the amendment clearly provided that the sharing arrangement was only applicable to an increase in the tax, and subsequent statutory changes had no effect on the pre-existing contractual arrangement.