Yesterday we discussed aspects of PPC Acquisition Co., LLC, et al. v. Delaware Basin Res., LLC, et al. Today we consider whether the retained-acreage clauses created a special limitation or a covenant and the relationship between the clauses and Field Rules in place at several different times. Did Field Rules establishing 640-acre units expand  acreage each lessee could retain? (The clauses are highlighted in the opinion and facts are in yesterday’s post.)

What’s the difference?

Texas distinguishes a special limitation in an oil and gas lease (a “condition”) from a covenant. Under a special limitation the lease will automatically terminate upon the happening of a stipulated event. On the other hand, a covenant is a promise made by the lessee to perform a certain action, which if not performed subjects the lessee to a lawsuit for damages and/or specific performance.  It does not automatically terminate the lease.  A court will not find a special limitation unless the language is so clear, precise, and unequivocal that it can reasonably have no other meaning.

Northern Trust Lease

• The clause did not create a special limitation, but rather a covenant by the lessee to release acreage upon a triggering event.
• The clause providing that the lessee “shall release” acreage that has not been dedicated to a proration unit prior to cessation of continuous operations does not establish automatic termination in the event of a breach.
• The lease did not automatically terminate in 2003 when the retained-acreage clause was first triggered.

Lowe Lease

• This clause was a special limitation, triggered in 2003 when Tom Brown failed to continuously develop the lease after completing the Colt #1.
• Under the retained-acreage clause, the lease “shall terminate…,” is a special limitation terminating the lease automatically. BUT …
• The D.A. (Devonian) Field Rules applied to the well and “prescribed” a 640-acre proration unit, which is larger than the 160 acres specified in the retained-acreage clause.
• Because the Field Rules “prescribed” the larger unit, when the retained-acreage clause was first triggered in 2003, lessees were entitled to retain 640 acres around the Colt #1.
• The lease did not partially terminate in 2003.
• Because of the “rolling” clause, the 160-acre proration unit resulted in termination of 480 acres in 2010.

 Colt Lease

• The requirement to dedicate a proration unit did not create a special limitation that would cause the lease to terminate if the lessee failed to timely designate.
• The clause provided, “Lessee shall . . . designate and be entitled to retain only …”. Because it was not expressly stated that failure would automatically terminate the lease, it was a covenant, for which Colt could sue the lessee only for damages and/or specific performance.
• Tom Brown’s failure to timely designate a unit for the Colt #1 did not cause the lease to terminate in whole or in part.
• Although the designation provision was not a special limitation, the last part of the retained-acreage clause, “…the rights of Lessee hereunder shall ipso facto terminate . . . except as to those portions of the leased premises which Lessee may be permitted to retain under [the retained-acreage clause]” was clear and precise language paramount to a special limitation.
• The Field Rules applied to the Colt #1 at the time the retained-acreage clause was triggered in 2003. As such, Tom Brown was “permitted to retain” the acreage established by the Field Rules, i.e. 640 acres for a gas well.
• Accordingly, the lease did not terminate, in full or partially, in 2003.

Little-known fact: Last Saturday was the vernal equinox.

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