Face Challenges Confidently

532 Petrohawk Properties, L.P. v. Jones 455 S.W.3d 753 (Tex. App.—Texarkana 2015, pet. dism’d)

Friday, June 16th, 2017

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Petrohawk Properties, L.P. v. Jones 455 S.W.3d 753 (Tex. App.—Texarkana 2015, pet. dism’d) (Oral amendment extending agreement to lease) held that breach of contract claims under oral modifications that extended the closing date under an agreement to lease for oil and gas were not barred by the statute of frauds. In 2008, oil and gas companies rushed to East Texas seeking to acquire leases in the Haynesville Shale. The extended Jones family (“Jones”) owned unknown interests in unknown tracts (perhaps 100 tracts). On July 11, 2008, Petrohawk Properties, L.P., et al. (“Petrohawk”), entered into an Agreement to Lease Oil and Gas Mineral Interests (“Agreement”) with Jones to lease all of the unleased mineral interests owned by Jones in a certain large area, subject to a limit of 8,500 acres at $23,500 per net mineral acre leased. There were various conditions to closing, including approval of title, but until closing or abandonment, Petrohawk held an exclusive option to lease the Jones mineral acres. Petrohawk escrowed $10 million, which would be applied against the price payable at closing, or, if Jones met his conditions as lessor, but Petrohawk failed to close, Petrohawk would forfeit the $10 million as liquidated damages. The Agreement provided for the “Closing” of the sale to occur on August 15, 2008, once Petrohawk had completed the required title examination. However, because there were 100 landmen trying to examine title at the county clerk’s Office, it was impossible to timely finish the title search. Petrohawk and Jones agreed to extend the “Closing” date to August 27, 2008. On August 27, leases amounting to $51 million in bonus were executed between Petrohawk and Jones, and the $10 million in escrow was applied toward the purchase price. Insofar as there still remained property that had not been included in the August closing, the parties agreed to carry them over to an extended closing date set for September 17, 2008. Further delays in title verification prompted the parties to extend the September closing date to October 9, 2008. However, when the October closing deadline arrived, Petrohawk declined to close on the remaining property, citing the collapse in the capital markets. Jones sued for damages for breach of the Agreement and Petrohawk contended that any oral agreements to extend the closing date were not enforceable under the statute of frauds.

The issue presented was whether the extension of the closing date was a material alteration of the Agreement and, therefore, unenforceable under the statute of frauds. “The statute of frauds applies to oil and gas leases and contracts to acquire the same.” If an agreement is subject to the statute of frauds, it will not be enforceable unless the “agreement, or a memorandum of it, is (1) in writing; and (2) signed by the person to be charged with the promise or agreement or by someone lawfully authorized to sign for him.” Further, the statute of frauds requires that a “memorandum of an agreement . . . must be complete within itself . . . so that the contract can be ascertained from the writings without resorting to oral testimony.” Moreover, “any modification to an agreement subject to the statute of frauds must also be in writing.” However, modifications to the original agreement need not restate all the essential terms to satisfy the statute of frauds, because the modification leaves intact those terms which it does not modify.

There is an exception to the general rule as to modifications, if the modification to the agreement is not material, and an extension to closing may not be material if the oral extension is made before the written contract expires. “However, an oral extension of time to perform is enforceable only if it does not materially alter the underlying written contract.” “When the extension of time changes other contractual rights or duties, it materially affects the written contract and must itself be in writing.” To determine whether a modification is material, courts “must determine the intent of the parties as expressed in the underlying contract.”

The extension to August 27 was uncontested, but Petrohawk contended the extension to a second closing was unenforceable. The court held that the oral extension was not a material alteration of the Agreement and, thus, was not barred by the statute of frauds.

Petrohawk first argued that the written Agreement only contemplated one closing which included the option for Petrohawk to either accept the leases or forfeit the $10 million escrow deposit as liquidated damages and walk away. Because the escrow was applied to the August 27 closing, the “walk-away” option was unavailable for the second closing, and, thus, constituted a material change as it would have subjected Petrohawk to “unlimited and indeterminate liability.” The court disagreed for several reasons. First, the court found that the obligations created under the Agreement for both parties were not altered by the oral modification, nor did Petrohawk claim that the second closing operated to change those obligations in any way. Next, the closing extension was caused by Petrohawk’s own delay on its due diligence title checks. Therefore, Petrohawk was in position to determine what mineral interests it was obligated to lease and, thus, “[its] lease obligations were neither unlimited, nor indeterminate, nor unseen.”

The $10 million walk-away provision was still available to Petrohawk after the oral agreement to extend the initial closing date, because no lease agreements had been entered into at that time. Petrohawk chose to fulfill its obligations under the Agreement by entering into the August 27 lease agreements and by applying the $10 million to the purchase price. Therefore, “it was not the modification that caused the liquidated damages clause to become a nullity after the first closing, but rather, Petrohawk’s partial performance of its obligations under the Agreement.”

Of course any amendment to an agreement involving the transfer of oil and gas leases should be in writing. Although this case illustrates that it is not always necessary, the occasions when it is not necessary are likely to be rare.