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In the recent case of Tarr v. Timberwood Park Owners Association Inc. the Texas Supreme Court considered whether a deed restriction that limited use of homes “solely for residential purposes” prevented a homeowner from using his home for short-term rentals. Based on the language of the restrictive covenant, the Court decided that renting the home — even for short time periods — was not a “business purpose.” The rentals were considered to be a “residential purpose” and so the homeowner did not violate the deed restriction. In addition, the Court refused to conflate two restrictions into a ban on use of the home for multi-family units and also held that when a restrictive covenant unambiguously fails to address some particular property use — such as use for short-term rental — Texas courts must not to read such covenants into the deeds.

Facts of Case

 Tarr involved a homeowner’s use of his home for short-term rentals in San Antonio’s Timberwood Park subdivision. Two years after Mr. Tarr bought his home, his employer transferred him to Houston. Thereafter, he began advertising the home for rent on websites such as Vacation Rentals by Owner. Tarr also formed a limited-liability company to manage the rental of the home. Between June and October of 2014, Tarr entered into 31 short-term rental agreements, ranging from one to seven days each. He rented his home to various-sized rental parties up to 10 people. For example, nearly one quarter of the rentals were to two adults accompanied by as many as six children.

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Economists at IHS Markit  recently issued a report (summarized here) that predicts that oil production in the Permian Basin will almost double by 2023, increasing by 3 million barrels per day (mbd) to 5.4 mbd.  That level of growth will account for more than 60% of net global oil production. As Daniel Yergin, vice-chairman of IHS Markit indicates, “(i)n the past 24 months, production from just this one region—the Permian—has grown far more than any other entire country in the world. Add an additional 3 mbd by 2023—more than the total present-day production of Kuwait—and you have a level of production that exceeds the current production of every OPEC nation except for Saudi Arabia.”

In a separate report, summarized here, IHS Markit predicts that natural gas production will rise in the United States by almost 8 billion cubic feet per day (bcf/d) or more than 10 percent in 2018 alone. Altogether, U.S. production is expected to grow by another 60 percent over the next 20 years, the report says. In the Permian Basin alone, production of both natural gas and natural gas liquids (NGLs) are  expected to double from 2018 to 2023, reaching 15 bcf/d and 1.7 mbd, respectively.

The_West_Texas_Permian_Basin

The Permian Basin

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When preparing and executing any type of contract, it is important to be clear on all important terms in the contract. Ambiguities lead to uncertainty, and uncertainty can turn into disputes down the road. Even so, there are times when an oil company has been known to claim an ambiguity, and create a dispute, where none exists. Recently the Texas Supreme Court  considered such a case and had occasion to emphasize that interpretation of contract language should always be reasonable. When the plain language of the contract expressly excludes a portion of land, then that portion of land is not subject to the contract.

In North Shore Energy v. John James Harkins, et al., the Court applied this principle to a gas option contract. In North Shore, the Harkins family signed an option contract with North Shore Energy.   A lease was attached to the contract. North Shore got to choose from among several tracts within a designated tract of land in Goliad County, Texas. The contract had an exhibit that described the land subject to the option as being the land identified in an earlier lease. The land in the earlier lease did not exclude what the parties called the 400.15 acre Hamman lease land. However, the option itself specifically excluded the Hamman lease land.

When North Shore Energy sought to exercise its option contract, it chose a 169.9 acre tract on which to drill. The tract selected by North Shore Energy contained a large portion of the Hamman lease land. A third party, Dynamic Productions Inc., approached the Harkins and requested to lease the Hamman lease land, which included a North Shore Energy well that had been drilled into that Hamman lease land, and the Harkins family obliged and executed a lease for the 400 acre Hamman lease land to Dynamic.

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The oil and gas production industry operates in a tough position. On the one hand, oil and gas production are critical economic drivers in the United States. Oil and gas generates hundreds of thousands of jobs and contributes 8% of the U.S. Gross Domestic Product, according to the American Petroleum Institute.

On the other hand, the Texas oil and gas  industry is constantly grappling with environmental concerns and the threat of even more regulation of their activities by the Texas Railroad Commission and the federal Environmental Protection Agency. The oil and gas industry is already highly regulated, and yet state and federal government agencies consistently add more regulations on top of those that already exist. One of the recent set of regulations that the industry is facing are rules issued by the EPA concerning reducing methane emissions.

The reasons behind state and federal regulations are often good ones, for instance, concerns about air quality. On the other hand, some regulations are too far-reaching and overly aggressive. For example, where regulations require the adaptation of new technology designed to be cleaner and more environmentally conscious, the high cost of implementing those regulations can force smaller oil and gas producers out of business. That means fewer jobs and a decrease in taxes on oil and gas production that are paid to local governments. Another problem, with federal regulations in particular, is that they are often based on faulty (and sometimes nonexistent) science and take a one-size fits all approach that does not take into account local conditions, technologies and regulations. We end up with a mess!

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Environmental groups in a number of states are pushing for ballot initiatives to ban or limit drilling for oil and gas. Most reasonable people, and I believe many oil and gas companies, agree that regulations are appropriate, especially for drilling in environmentally sensitive areas or near residential developments. But few people proposing outright bans or overly restrictive regulation discuss or even acknowledge the unintended consequences of such a course of action.

For one thing, many people do not realize that the vast majority of mineral owners are just regular individuals, some of whom depend on royalty income for retirement. A drilling ban or overly restrictive regulation can deprive some people of much needed income. Are the proponents of drilling bans prepared to replace that income or to pay additional taxes to support welfare payments to those people who need their royalties so they can pay their rent and eat?

Secondly, according to the U S and state constitutions and the legal principle of inverse condemnation,  if government regulation deprives someone of their property, then the government is required to pay the owner the market value of that property. Individuals in this country own billions of dollars worth of mineral interests. A recent study in Colorado estimated the value of unproduced oil and royalties to mineral owners in that state to be $26 billion. Are taxpayers ready for higher taxes when their local or state government has to start paying these claims?

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In two recent cases, the Texas Supreme Court reviewed what are called “retained acreage” clauses in gas and oil leases. Consistent with recent precedent, the Court instructs that these clauses are to be interpreted based on the language used and that the intent of the parties is to be the guiding principle.

In Endeavor Energy Resources, L.P. v. Discovery Operating Inc., the conflict involved the interpretation of so-called “retained acreage” clauses where the parties intended the retained-acreage definition to be based on the plats filed with the Texas Railroad Commission (“RRC”). The Court also decided a companion case,  XOG Operating LLC v. Chesapeake Exploration LP, that came to a different conclusion. The difference between the cases hinges on the language in the leases. We will discuss XOG separately.

Regulatory Background

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In the case of ConocoPhillips Co. v. Koopmann the Texas Supreme Court held that the Rule Against Perpetuities (“the Rule”) did not void a 15-year non-participating royalty interest that was reserved in a deed. In doing so, the Court changed the way the Rule applies to oil and gas deeds.

The Rule is a complicated legal subject and this case makes significant changes in how the Rule applies in Texas. Note that the Supreme Court explicitly limited the holding of this case to “future interests in the oil and gas context.” The case is significant for these reasons:

  • The Supreme Court rejected the long-held distinction of a future interest created via reservation versus one created via grant in the oil and gas context.
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In the recent opinion of Knopf v Gray, the Texas Supreme Court instructs as to the essence of a life estate under Texas law. Whatever specific words are used to create a life estate, a testator must express three ideas:

  • Any land granted is subject to the limitations that it not be sold;
  • That the grantee take care of the land; and
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A January 2018 case from the Texas Supreme Court, JP Morgan Chase Bank, N.A. v. Orca Assets GP, LLC, the Court dealt with justifiable reliance which is an element of a common law fraud and negligent misrepresentation claim. In this case, there were too many “red flags” for the plaintiff to show justifiable reliance with respect to certain oil and gas leases.

Background

This case involved mineral interests in various tracts throughout the Eagle Ford Shale adding up to about 40,000 acres owned by The Red Crest Trust. JP Morgan Chase Bank was the trustee. A  JP Morgan employee, Phillip Mettham, was responsible for leasing the trust’s Eagle Ford interests.

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The recent case of Hardaway v. Nixon, decided by the San Antonio Court of Appeals, provides an example of the doctrine of adverse possession as it relates to co-tenants. The trial court granted summary judgment in favor of the landowners claiming adverse possession. The Court of Appeals reversed and held that a presumption of ouster could not be affirmed on summary judgment merely on proof of long-continued possession — 75 years — even in the absence of a claim of ownership by the non-possessory co-tenants. According to the Court, no evidence was presented in the summary judgment record that the owners undertook “unequivocal, unmistakable, and hostile acts” and mere possession and lack of a claim of ownership by non-possessory co-tenants was not sufficient to “disseize” the non-possessory co-tenants.

Texas Property Law: Adverse Possession Against a Cotenant

Under Texas law, adverse possession with respect to a co-tenant requires proof of “ouster” or “repudiation” of the co-tenant’s claim to ownership. Ouster/repudiation is generally shown by various “unequivocal, unmistakable, and hostile acts” taken by the tenant in possession to oust or disseize the non-possessory co-tenant, but can also be shown by long continued possession. Aside from actually fencing, locking, and taking other “hostile” acts to repudiate a co-tenant, there are two other circumstances in which Texas courts have recognized ouster/repudiation and notice: