Addendum Prevails over Form … Again

Gray Reed

Gray Reed

When the form contract says one thing and the addendum says another, which one would you expect to prevail?

The central issue in Tier 1 Resources Partners v. Delaware Basin Resources, LLC was whether one tract that was subject to several identical leases automatically terminated at the end of the primary term. The answer to the question turned on the aforementioned choice.

The leases

The Bush lessors leased Sections 6 and 2, in Reeves County, Texas, to DBR. The leases were made of two parts: a 10-paragraph “Producers 88” form and an 11-paragraph addendum. The interplay between the Producers 88 and the addendum caused disagreement among the parties.

Paragraph 1 defined the land covered by the lease as “said land,” which expressly included Section 6 and Section 2. The habendum clause established a three-year primary term. Upon lease expiration, DBR’s interest would automatically terminate as to all lands and depths except those designated to be within a production unit. DBR could save the lease from automatic termination by conducting a continuous drilling program per the lease specifications.

The lessee’s problem  

The addendum stated that, in the event of a conflict between the Producers 88 and the addendum (i.e., Paragraphs 11-21), the addendum controlled. Paragraph 11 contained a “separate tract lease provision,” stating that each of the separately designated tracts shall be treated for all purposes as a separate and distinct lease.

Specifically: “all of the provisions contained in [the lease] form shall be applicable to each such tract and be construed as if a separate Lease agreement had been made and executed covering each such tract.” The addendum also had a retained-acreage clause, a Pugh clause, and a requirement that DBR file releases of record as to terminated acreage.

During and after the primary term DBR drilled and produced wells on Section 6 but did not drill wells or conduct operations on Section 2. There was no question that the leases were perpetuated as to Section 6.

Question in the litigation: Did the lease terminate as to Section 2 and, therefore, did DBR breach the lease by failing to release Section 2?

All parties filed motions for summary judgment. The trial court granted DBR’s motion and denied the cross-motions of the Bush lessors and another party.

Court of appeals: two leases

In reversing the trial court’s decision and rendering judgment in favor of the Bush lessors and others, the court of appeals engaged in a detailed analysis of both the Producers 88 standard clauses and the addendum. Although Paragraph 1 defined the lands covered by the lease as Section 6 and Section 2, the addendum’s “designated tracts” reference in Paragraph 11 meant that Sections 6 and 2 were to be treated as two separately designated tracts.

According to the court, as a matter of law there was only one reasonable interpretation of the language at issue: Paragraph 11 unambiguously created separate leases over Sections 6 and 2, and Paragraph 2 (in the form) set forth a clear limitation in each lease: If the property (that is, each separately designated tract) was not developed by the end of the primary term, the lease as to that acreage automatically terminated. Because no operations were conducted on Section 2 during the primary term, the lease as to Section 2 expired and DBR was obligated to deliver a release of Section 2.

Your musical interlude.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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