Face Challenges Confidently

605 Anadarko Petroleum Corporation v. TRO-X, L.P., No. 08-15-00158-CV, 2016 WL 1073046 (Tex. App.—El Paso Mar. 18, 2016, pet. filed)

Monday, November 7th, 2016

Richard F. Brown

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

Anadarko Petroleum Corporation v. TRO-X, L.P., No. 08-15-00158-CV, 2016 WL 1073046 (Tex. App.—El Paso Mar. 18, 2016, pet. filed) (Top leases) recognized a presumption that a lessor’s execution of a new lease terminated an old lease, and therefore the delay between the execution of the new lease and the execution of a written release of the old lease did not support a claim that the new lease was a “top lease”. In 2007, Lessor leased multiple tracts (“2007 Leases”), and the 2007 Leases were eventually acquired by Anadarko. In 2009, Anadarko failed to drill an offset well, and that failure may or may not have terminated the 2007 Leases. In 2011, Lessor demanded a release of the 2007 Leases. Lessor and Anadarko negotiated for leases on different terms (“2011 Leases”). On June 17, 2011, Lessor and Anadarko signed the 2011 Leases. On June 30, 2011, the 2011 Leases were recorded and Anadarko executed a release of the 2007 Leases. On August 4, 2011, the release of the 2011 Leases was recorded. Anadarko’s interest in the 2007 Leases was acquired subject to a Participation Agreement under which TRO-X owned a 5% backin after payout, which also applied to “top leases.” TRO-X contended that the 2011 Leases were top leases and therefore subject to TRO-X’s 5% backin. The 2011 negotiations took place by email, and although it was clear Anadarko intended to acquire new leases, there was no direct evidence of Lessor’s intent as to the 2011 Leases. The issue was whether Lessor intended to terminate the 2007 Leases at the moment the 2011 Leases were executed, or whether Lessor intended that the 2007 Leases would continue in effect until Lessor obtained a release of the 2007 Leases from Anadarko (thirteen days later). The parties agreed that a top lease is a contingent propriety interest in a mineral estate “whose existence is . . . triggered by the failure of the underlying original Lease.” The parties also agreed that Lessor could terminate the 2007 Leases and replace them with new leases, if Lessor entered into the 2011 Leases “with the intent and understanding that, by doing so they would effect a release of the [prior] Lease.”

TRO-X contended that the after-the-fact release created a fact issue as to Lessor’s intent which was resolved in favor of TRO-X in the trial court. On this record, the court held that the execution of the release after the 2011 Leases was insufficient evidence that Lessor intended for the 2011 Leases to function as top leases until the release was executed and recorded.

The court also considered Sasser v. Dantex Oil & Gas, Inc., which held that “by signing a new lease with the intent to terminate a prior lease, a lessor waives strict compliance with a surrender clause and effectively terminates or releases the prior lease.” This court reasoned that Sasser makes clear that the presence or absence of a written release is not outcome determinative. The focus is on the intent of the parties at the time of execution of the new lease.

Using this reasoning, the court focused on the facts surrounding the execution of the 2011 Leases to determine the intent of Lessor and Anadarko. The negotiations between Lessor and Anadarko were done through email. The email records showed that the parties characterized the 2011 Leases as “new leases” with new terms such as a higher bonus, a shortened primary term, and a 240-day drilling commitment. TRO-X was unable to point to any language in the 2011 Leases that suggests the 2011 Leases would not be effective until there was a written release from Anadarko. Anadarko proposed and executed the release on its own initiative.

TRO-X also contended that Lessor believed the 2007 Leases had already lapsed, and therefore Lessor could not have executed the 2011 Leases with the specific intent to terminate the 2007 Leases. The court determined that the record evidence was not sufficient to support this conclusion and held that “a jury may not reasonably infer an ultimate fact from meager circumstantial evidence which could give rise to any number of inferences, none more probable than another”. The trial court’s decision was reversed in favor of Anadarko.

The facts of the case are unusual, and it ultimately turns on insufficiency of the evidence. The significance of the case is probably limited to the narrow issues of the importance of lessor’s intent in executing leases and the presumptions of termination as to base leases when new ones are executed.