Face Challenges Confidently

100 Lee M. Bass, Inc. v. Shell Western E&P, Inc.

Monday, September 7th, 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.
Lee M. Bass, Inc. v. Shell Western E&P, Inc., 957 S.W.2d 159 (Tex. App. – San Antonio 1997) reviewed a lease clause that provided that Lessee would reimburse Lessor for “all production, severance, gathering, sales, excise and similar taxes imposed upon or assessed with respect to or measured by or charged against the production or value of production or proceeds of the sale of production attributable to [Bass’] royalty interest.” Bass contended that Shell should reimburse Bass for ad valorem taxes assessed against Bass’ royalty interest.
Held: Shell did not have to reimburse Bass. The Court ruled that ad valorem taxes existed at the time the lease was executed, and if the parties intended to include ad valorem taxes, then ad valorem taxes should have been listed. Therefore, Bass lost under the express wording of the lease. Moreover, the Court reasoned that ad valorem taxes are not “similar taxes” within the meaning of the lease. The “value of production” refers to oil and gas that has actually been severed from the ground.  Ad valorem taxes are assessed against minerals still in the ground, not on production.
It is unusual for language such as this to be in an oil and gas lease, so that the decision is not likely to affect many leases. However, it is quite common for conveyances of overriding royalty to expressly place the burden of paying certain taxes on either the owner of the overriding royalty or on the owner of the working interest. The significance of the case may be more important in its effect on the construction of the language creating various overriding royalty interests in which there is a list of taxes followed by a dragnet clause, such as “and other similar taxes assessed against the value of production.”