Face Challenges Confidently

148 Oakrock Exploration v. Killam

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.
Oakrock Exploration Co. v. Killam1 considers whether an offer to lease accepted by the landowner constituted an enforceable contract. Oakrock was attempting to lease a tract that was still subject to an unreleased lease owned by an operator in bankruptcy.2 Oakrock sent an offer letter to the landowners as follows:

Oakrock Exploration Company (“Oakrock”) proposes to offer you, and all of the remaining members of your family who own mineral interest under the 154 acre Oscar Ramirez tract in southern Zapata County, a bonus of $300 per acre for a one- year Oil, Gas & Mineral Lease with a [twenty-five] percent [25%] royalty on the acreage described and shown on the attached plat and lease description. (This lease is just south of the El Tigre Chiquito bridge approximately 20 miles south of Zapata, Texas).

* * *

It is Oakrock’s understanding that the operator of the existing well which is perpetuating the present Oil, Gas & Mineral Lease, Mustang Oil & Gas, has filed for Chapter 11 bankruptcy in Federal Bankruptcy Court. From the $300 per acre bonus, we will pay a non-refundable bonus consideration of $50.00 per acre until such time as a Release of the existing Oil, Gas & Mineral Lease is obtained from Mustang Oil & Gas ….

Oakrock will pay all legal expenses for Mr. George Person … to represent you and the rest of your family concerning the drafting of a new Oil, Gas & Mineral Lease to Oakrock, file all the proper motions, orders and a lawsuit, if necessary, to obtain Release of the existing Oil, Gas & Mineral Lease …. Additionally, Oakrock will pay for all legal expenses for a federal bankruptcy attorney, if necessary, to force this issue through Bankruptcy Court.

It is our recommendation that a[n] Oil, Gas & Mineral Lease will be drawn up by Mr. Person (the “Oakrock Lease”) and submitted to you for your review and approval….

* * *

Should the basic terms of this proposal be acceptable to you at this time, subject to your final review and acceptance of the terms and conditions of an acceptable Oil,

Gas & Mineral Lease, then we would appreciate you signing and returning one (1) copy of this letter to my attention3
The letter was signed by the landowners and the non-refundable fee was paid.4  The landowners did not sign the lease.5
The court held that the subject matter of the offer letter was an oil and gas lease, and therefore, the offer letter had to contain the essential terms descriptive of the lease.6 Among the essential terms to an oil and gas lease are the term of the lease, the drilling commencement date, time and amount of payments in lieu of drilling operations, amounts to be paid for produced gas, pooling, offset well obligations, and warranties.7  Because the letters lacked these essential terms, the letters did not sufficiently identify the subject matter of the contract, and therefore, the letter was not enforceable as a contract.8 The opinion is silent as to the effect of the partial performance represented by the payment of the non-refundable bonus.
The holding in the case suggests that an offer letter that does not include the complete form of the lease is not likely to be construed as an enforceable contract. The opinion is silent as to the effect of the language in the letter which made acceptance subject to “your final review and acceptance of the terms and conditions of an acceptable Oil, Gas & Mineral Lease ….”

1. 2002 WL 1465756 (Tex. App.–San Antonio 2002, pet. filed).
2. Id. at *2.s
3.  Id. at *1-2.
4.  Id. at *2.
5. Id.
6. Id. at *5.
7. Id.
8. Id.