In the Field: Current Land and Operational Issues

In the Field: Current Land and Operational Issues

Matthew J. Randazzo, III

Joseph C. Giglio, III

Christopher B. Bailey

Gordon, Arata, McCollam, Duplantis & Eagan, LLP

400 East KalisteSaloom Road, Suite 4200

P.O. Box 81829 (70598-1829)

Lafayette, LA 70508-8517

(337) 237-0132

Sparks v. United Title & Abstract, LLC, 45,766 (La.App. 2 Cir. 12/15/10), 56 So.3d 302, writ denied, 57 So.3d 337 (La. 2/18/11); recording of the exercise of a lease option to renew is not required as long as the option is included in the previously recorded lease

The purchasers brought negligence and breach of title insurance contract claims against the title company alleging an error in the deed prepared by the title company that incorrectly stated the purchasers had only 25 percent interest in mineral rights, rather than 75 percent, thereby depriving the purchasers of $150,000, the amount they would have received for their 75 percent ownership if the energy company had not withdrawn its offer of $20,000 per acre for a lease, after it conducted a title search. The district court granted summary judgment in favor of the title company and the purchasers appealed. The Second Circuit affirmed the district court’s decision holding that purchasers who had no mineral rights to lease could not attribute damages to the title company that were allegedly incurred when the potential lessee withdrew its offer to lease on the basis of the title company's error.

Relying heavily on its holding in Thomas v. Lewis, 475 So.2d 52 (La.App. 2 Cir. 1985), the Court reasoned that a recorded document that contains an option, such as an option to renew a lease, suffices to put third persons on notice of a potential adverse claim against the property arising from the possible exercise of the option. In the case sub judice the lease was recorded and in effect when the purchasers bought the property. Included in the recorded lease was the option to renew for an additional two years. The recorded lease and option to renew contained therein sufficed as notice of the possibility that the lease had been or would be extended. The exercise of the option to renew did not have to be recorded to be effective as to third persons so long as the option to renew was included in the recorded lease. The lease was in fact extended for an additional two-year term pursuant to the option and the purchasers therefore had no mineral rights to lease and were thereby prevented from attributing the damages complained of to error on the part of the title company.

Ferrara v. Questar Exploration and Production Co., 46,357 (La. App. 2 Cir. 6/29/11); --- So.3d ----; would deny rehearing, 46,357 (La. App. 2 Cir. 8/4/11) --- So.3d ----;Duty to develop as a prudent operator

Plaintiff landowners brought suit against Questar Exploration and Production Company (“Questar”) seeking dissolution of a mineral lease on the grounds that Questar failed to develop and operate the leased property as a reasonably prudent administrator. The lease at issue was entered into in 1988 and covered lands in Desoto Parish (the “Lease”). Factually significant, Plaintiffs received royalties through the Lease from three wells on unitized lands since 1989 and in 1994 Plaintiffs made demand on the operator for further exploration and development, which resulted in a partial release of the lease. Then, in 2008, only one week after the Commissioner of Conservation dispensed with the production test requirement for proposed units in the Haynesville Shale, Plaintiffs sent a letter to Questar demanding that it release the lease below the Hosston formation or, alternatively, explore and develop the deeper zones. Questar did not respond to the demand letter and forty-six (46) days later, Plaintiffs filed suit.

The district court, after trial on the merits, dissolved the Lease as to all depths below the Hosston formation. The district court based its decision on evidence of exploration activities that occurred after suit was filed. The Second Circuit Court of Appeal, looking at the totality of the circumstances, reversed the trial court and found that Questar did not breach its duty because Plaintiffs failed to prove that Questar persistently failed to reasonably investigate the leased premises for potentially profitable oil and gas deposits. The Court found significant the following facts: (1) Plaintiffs did not present any evidence that a prudent administrator utilizing geological data would have drilled on Plaintiffs’ property to the Haynesville Shale depth on the date of trial, (2) Plaintiffs received royalties continuously from 1988 and made no demand for further exploration since 1994, and (3) Plaintiffs sent its demand letter only one week after the Commissioner dispensed with testing wells and filed suit 46 days after the letter was sent.

Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., L.L.C., 46,153 (La. App. 2 Cir. 3/23/11); 63 So.3d 159;most favored nations clauses: assignors beware

Hoover concerns the enforcement of a most favored nations clause contained in a Lease covering property within the Haynesville Shale play. More specifically, the Lease with Plaintiff provided that “no lessor of either Lessee or Goodrich Petroleum or their successors and assigns shall receive a higher royalty and/or bonus than the Lessor under this Lease.” (emphasis supplied). The original Lease granted Plaintiff a 25% royalty and a $1,000 per acre lease bonus. Goodrich later entered into an “Assignment, Conveyance and Bill of Sale” by which Goodrich transferred to Chesapeake an undivided 50% interest in the Lease and various other leases as to all depths below the Cotton Valley formation. After the agreement between Goodrich and Chesapeake was signed, Chesapeake obtained oil and gas leases which provided for a 30% royalty and $25,000 per acre lease bonus.

Plaintiff landowner sued Petroleo, Goodrich’s broker, Goodrich and Chesapeake claiming that payment of higher royalties and lease bonuses by Chesapeake triggered the most favored nations clause. The district court granted Plaintiff’s motion for summary judgment finding that the most favored nations clause was triggered and awarded Plaintiff $7.6 million. The district court also granted Chesapeake’s motion for summary judgment and found that Goodrich was the sole party responsible for the higher bonus payments and royalties under the terms of the most favored nations clause.

The Second Circuit Court of Appeal after discussing in detail Louisiana’s law regarding assignments and subleases, affirmed the judgment in favor of Plaintiff and reversed the judgment finding that Chesapeake was not liable with Goodrich under the most favored nations clause. More specifically, the Court found that the transfer from Goodrich to Chesapeake was not a sublease but an assignment of an undivided interest in the Lease. Thus, reasoned the Court, the partial assignment of leasehold rights to Chesapeake made Chesapeake responsible directly to the original lessor for performance of the lessee’s obligations, including royalty and bonus payments resulting from the most favored nations clause. Moreover, the Court found that Chesapeake was an “assigns” of Goodrich under the clear language of the Lease.

Alyce Gaines Johnson Special Trust v. El Paso E&P Co., L.P., 2011 WL 759631 (La. W.D. 2/24/2011), 773 F.Supp. 2nd 640; where lease contains no limitations as to mineral rights lessee has right to explore at all depths

At issue in Alyce Gaines Johnson Special Trust v. El Paso E&P Co., L.P., 2011 WL 759631 (La. W.D. 2/24/2011) was a 1950 mineral lease executed by the plaintiff-landowner's ancestors in title in favor of the defendant-mineral lessee's ancestor in title, covering approximately 1,230 acres located in the Bethany/Longstreet Field in DeSoto Parish, Louisiana. The mineral lease was on a standard form 14-BRI-24 with a typical granting clause, without any special language restricting it as to depth either originally or after a certain period. At the time the lease was executed, 7,500 feet was the deepest well drilled in the field. After receiving multiple offers in 2009 from third parties who wished to lease the plaintiff's rights in the Haynesville Shale, the plaintiff sought a release from the defendant stating that neither the Haynesville Shale nor other deeper mineral formations were intended by the parties to be covered by the lease. When the defendant refused to grant such a release, the plaintiff filed suit, contending that the lessors never intended to lease their Haynesville mineral rights, and seeking a declaration that such rights were not covered by the lease and other related relief. In response, the defendant filed a motion to dismiss for failure to state a claim, which the court denied, suggesting discovery should be conducted and evidence presented as to the intent of the parties. Upon denial, the defendant filed a motion for reconsideration, which was the subject of the February ruling.

In its motion for reconsideration, the defendant sought a ruling from the court that (1) the granting clause of the Bath Form Lease at issue is clear and unambiguous; and (2) since there was no depth limitation in the lease, it extends to all depths underlying the surface. In addressing the defendant's motion, Judge Hicks acknowledged that the court would be applying Louisiana law. He noted that the lease was correctly described as a standard Bath Form Lease, and that Louisiana courts have consistently found the "granting clause" of the various Bath Form Leases to be broad and unambiguous. Judge Hicks stated that his "previous ruling [was] in tension with and not in keeping with longstanding, consistent Louisiana jurisprudence." The lease did not include any limitations regarding the grant of mineral rights to the lessee. Since, as Judge Hicks commented, Louisiana property law embraces the Latin maxim of cujus est solum ejus est usque ad coelum et ad inferos ("for whoever owns the soil, it is theirs up to Heaven and down to Hell"), the unambiguous language of the unmodified Bath Lease Form granting clause conveyed to the lessee the right to "investigate, explore, prospect, drill, mine for, and produce" minerals as to all depths. The court therefore granted the defendant's motion to dismiss and dismissed the plaintiff's claims.

Neumin Production Co. v. Tiger Bend, Ltd., 2010-1307 (La. App. 3 Cir. 3/9/11), 58 So.3d 1088; separate servitudes created by partition deed

While landowners of different contiguous tracts can create a single mineral servitude affecting the entire property, their intent to do so must be explicit in the instrument. The property at issue in Neumin was subject to two separate mineral leases, one of which was executed by the surface owner, and the other executed by several individuals who claimed to own the mineral rights by virtue of a mineral servitude created by an Act of Partition and Exchange executed in 1983.

As opposed to the usual manner in which property is partitioned, where several co-owners each receive a smaller portion of the larger co-owned tract in full ownership, the 1983 partition was structured differently. The mineral servitude claimants traced their title to the liquidation of two companies: the Haas Land Company, which had 18 shareholders and was liquidated in 1979; and the Haas Investment Company, which had eight shareholders and was liquidated in 1983. When the companies were liquidated, the respective shareholders became the owners of the property formerly owned by each of the companies. In the 1983 partition, the group that owned the Haas Land Company lands came together with the group that owned the Haas Investment Company lands and "combined all the land that they owned." The mineral servitude claimants contended that a single mineral servitude was created on a contiguous tract through the 1983 partition; therefore, production from a well in Avoyelles Parish, located more than six miles away from the Evangeline Parish well at issue, maintained the entire servitude.

The court cited the Mineral Code Articles with respect to the creation of mineral servitudes, in particular Article 66, which provides that "the owners of several contiguous tracts of land may establish a single mineral servitude in favor of one or more of them or of a third party." It also cited Whitehall Oil Co. v. Heard, 197 So.2d 672 (La. App. 3 Cir.), writ refused, 250 La. 924, 199 So.2d 923 (1967), which it referred to as the leading case on the creation of a single servitude as opposed to multiple servitudes when land is partitioned, and which stated that "[d]etermination of whether a landowner reserving or granting mineral servitude or mineral royalty rights intends to create a single servitude or royalty interest or instead multiple interests is ... dependent upon construction of particular conveyance."

The court then looked at the structure of the 1983 partition, noting that an initial paragraph therein set forth the intention of the parties was for one group of individuals to receive certain properties and another group of individuals to receive certain other properties, "in each case subject to complete mineral reservation." The court then noted that a later paragraph included a stipulation by all parties that the conveyances made therein were made "by the transferor with full and complete reservation of all oil, gas and other fugacious or similar mineral, of whatever nature, located in, on or under any property transferred." Apparently, the parties reserved the minerals for each of their respective tracts, then combined their lands, and then partitioned the lands. Under the Mineral Code, therefore, separate mineral servitudes were created. A different result would have occurred had the parties combined their interests prior to reserving the minerals, in which case the court should have been compelled to find that a single mineral servitude was created covering the larger, contiguous tract. Thus, the case serves as a reminder to pay particular attention when interpreting or drafting a mineral reservation created in a partition deed or exchange such as this. Both the language used in the reservation or creation of the mineral servitude as well as the location of where the reservation is placed in the instrument vis-a-vis other conveyance language should be closely examined.

H & K Limited of LA, LLC v. Martin Producing, LLC and Chesapeake Energy Corporation, 46,338 (La.App. 2 Cir. 5/18/11), ___ So.3d ___, 2011 WL 1880289; maintenance of a mineral lease beyond the primary term by continuous operations

H & K Limited of LA, LLC concerns whether a mineral lease was maintained beyond the primary term by continuous operations. The lease at issue is dated March 14, 2005, has a paid-up primary term of three (3) years, and came to be acquired by Chesapeake Energy Corporation. In August 2007, Chesapeake commenced vertical drilling operations in a well identified as the Chiggero 14-1. On December 6, 2007 the leased premises was included in a drilling and production unit. On February 17, 2008, Chesapeake drilled the horizontal portion of the well, with continuing operations reflected by the well activity report. On May 14, 2008, the last day of the primary term, the Court noted that drilling of the Chiggero 14-1 horizontal well continued. The well was completed on June 18, 2008, and began production on July 19, 2008, and at the time of the judgment was still producing in paying quantities.

The issue in this case was whether the ninety (90) day provision for termination of the mineral lease (found in paragraph 6 of this mineral lease) was applicable during the primary term. The pertinent language of the mineral lease interpreted by this Court is as follows:

2. Subject to the other provisions herein contained, this lease shall be for a period of three (3) years from the date hereof (called “primary term”) and as long thereafter as (1) oil, gas, sulphur or other minerals is produced from said land hereunder or from land pooled therewith, or (2) it is maintained in force in any other manner herein provided.

6. If within ninety (90) days prior to the end of the primary term, Lessee should complete or abandon a well on the lands described above or on land pooled therewith, or if production previously secured should cease from any cause, this lease shall continue in force and effect for ninety (90) days from such completion or abandonment or cessation of production. If at the expiration of the primary term or at the expiration of the ninety (90) day period provided for in the preceding sentence, oil, gas, sulphur or other mineral is not being produced on said land or on land pooled therewith, but Lessee is then engaged in operations for drilling, completion or reworking thereof, or operations to achieve or restore production, or if production previously secured should cease from any cause after the expiration of the primary term, this lease shall remain in force so long thereafter as Lessee either (a) is engaged in operations for drilling, completion or reworking, or operations to achieve or restore producing, with no cessation between operations or between such cessation of production and additional operations of more than ninety (90) consecutive days, or (b) is producing oil, gas, sulphur or other mineral from said land hereunder or from land pooled therewith.

The heart of the Plaintiff’s argument is whether the first sentence of paragraph 6 of this lease was applicable before the end of the primary term. The Plaintiff’s claimed that the original vertical well was “abandoned” on October 8, 2007, and that, Chesapeake did not move back onto the site until mid-February 2008, which is more than 90 days from October 8, 2007.