Texas Court Evaluates Consent to Assign an Oil and Gas Lease

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In Mayo Found. For Med. Educ. & Research v. BP Am. Prod. Co. a United States District Court considered the circumstances under which a lessor can withhold its consent to assign an oil and gas lease.

The provision 

A lease from Barbara Lips* to Alpar Resources included Section 157 and other lands.  Paragraph 7 reserved to Lips an absolute veto right over any assignment of Alpar’s interest in the Lease.

An amendment to the lease replaced the original Paragraph 7 with this less-restrictive clause:

“The rights and obligations of the Lessee hereunder are not assignable or transferable in any respect by it, except upon the written approval of [Mayo], which approval shall not be unreasonably withheld.”

Lips donated her interest in the land to Mayo. Alpar farmed out acreage, including Section 157, to Amoco. Amoco and Courson Oil & Gas entered into an operating agreement to drill wells on Section 157. The operating agreement granted Courson a preferential right to purchase Section 157 should Amoco sell its interest.

BP America succeeded to the leasehold interest and finalized an agreement to sell Section 157 and other lands and offered Courson its preferential right to purchase Section 157.  Courson accepted. Mayo withheld approval because of its past unpleasant history with Courson. Nevertheless, BP notified Mayo that Courson had elected to acquire BP’s rights in Section 157.

Mayo sued and requested a preliminary injunction. The district court denied the request.

The “Winter Test” for injunctions

A federal court should grant a preliminary injunction only when the plaintiff establishes all of the following:

  • It is substantially likely to succeed on the merits of the underlying case;
  • It is substantially likely to suffer irreparable harm if the injunction is not granted;
  • The threatened injury outweighs any harm that the injunction may occasion for the defendant; and
  • The injunction will not undermine the public interest.

The court discussed the first factor in great detail, the second factor in less detail, and the final two factors not at all.

Substantial likelihood of success

The court was presented with two questions of first impression:

  • Given Texas’ strong presumption against restraints on alienation of property and the presumption that an oil and gas lessee may freely assign its interests, should the court recognize Paragraph 7 as a valid right of Mayo to withhold consent?
  • If Mayo may withhold consent, was such a refusal to consent “reasonable”?

Short answers:

  • The consent-to-assign paragraph was valid.
  • Mayo’s refusal to consent was unreasonable.

Validity

The court found the amended consent-to-assign to be a promissory restraint on alienation of property. Promissory restraints are valid if they permit alienation to at least some possible alienees. By prohibiting “unreasonable” refusals to consent, the provision did not veto assignment to all possible assignees.

Reasonableness

The court looked to sources beyond Texas law to arrive at six factors to determine whether it is “reasonable” for a lessor to refuse to consent to the assignment of an oil and gas lease. In order to hasten your journey to today’s musical interlude, see the factors here only if you choose.

The court concluded that Mayo’s refusal to consent to the assignment to Courson was not reasonable under those factors.

Irreparable harm 

The court reasoned that the second Winter factor, irreparable harm, is arguably the most important, and Mayo failed to satisfy the court that it would suffer the required harm absent the drastic relief of a preliminary injunction.

The result  

Because Mayo failed to establish two Winter factors, its motion was denied without prejudice.

What does it mean?

Injunctions are decided on limited evidence without full development of the underlying facts, and the irreparable harm hurdle is quite high. This result doesn’t mean that Mayo can’t prove at trial that its veto was not reasonable. Texas’ focus on freedom of contract and freedom from retraints on alientation suggest that parties’ past contentious businsess relationships, including litigation, would be a valid reason for refusing to consent to an assignment.

And a story about love and a motorcycle.

* History buffs: The court speaks of the history of the ranch and describes Ms. LIps as one of the biggest landowners in the Panhandle.

[View source.]

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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