128 North Central Oil Corp. v. Louisiana Land and Exploration Co.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
North Central Oil Corporation v. The Louisiana Land and Exploration Company, 22 S.W.3d 572 (Tex. App.—Houston [1st Dist.] pet. filed), construes an area of mutual interest agreement within a farmout agreement. North Central Oil Corporation (“North Central”) and The Louisiana Land and Exploration Company (“LL&E”) each claimed under almost identical farmout agreements. LL&E acquired another farmee’s interest in existing leases. North Central sued LL&E, asserting that LL&E was required to offer a proportionate share of its newly acquired interests to North Central.
 
The farmout agreements contained the following provision:
 

In the event that either party acquires an interest in oil and gas leases within the area delineated by the solid heavy line on the map attached hereto as Exhibit “F,” it shall promptly offer an interest therein by notice in writing, describing the terms and conditions applicable to such acquisition, to the other party and any third parties owning interests in the Exhibit “A” and “B” leases in proportion to the ownership of each such party in said leases. Such interests shall be offered on the basis of actual costs of acquisition. Any offeree hereunder shall have ten (10) days in which to elect by written notice to offeror to participate in such acquisition. Failure to respond within said period shall be deemed an election not to participate. Each party electing to participate shall have the right to acquire an interest in the proportion that its interest assigned hereunder bears to the interest of all electing parties and shall tender its proportionate share of the acquisition cost within fifteen (15) days after receipt of a formal assignment of such interest. Wolf Exploration Company shall, as to such leases, be entitled to the same overriding royalty, provided for hereinabove in paragraphs 1.1.1 through 1.1.5. [emphasis in original]

 
LL&E contended that this provision applied only to after-acquired leases, and not existing leases. North Central contended that this provision gave North Central the right to purchase a share of any interest in leases acquired by LL&E in the area.
 
Although neither party had asserted that the farmout agreements were ambiguous, the court concluded that the farmouts were ambiguous and remanded because the farmout agreements were capable of two meanings that were directly opposed but equally credible. In other words, a jury will now determine if a transfer of existing leases triggers the right to acquire an interest.