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Chesapeake Backing Out on Texas Oil and Gas Leases?

A few recent cases involving Chesapeake Energy Corporation backing away from potential oil and gas leases are raising alarms. Obviously a contract is only as good as its enforceability. It goes without saying that landowners need to be diligent so that they are not taken advantage of by large oil companies. Many complex legal issues are involved in contract disputes, and experienced legal help is always crucial. For example, in one case from earlier this year, Kantner v Chesapeake Energy Corp., a Texas Court of Appeals found that individual landowners lacked standing to bring a breach of contract claim when the contract was between Chesapeake and a landowners committee.

In this particular case, the plaintiffs were owners of property in Deer Creek Estates in Crowley, Texas. In 2007 and 2008, a Deer Creek Estates Residents Oil and Gas Lease Committee was formed to negotiate oil and gas leases with Chesapeake. The Committee and Chesapeake negotiated and agreed to two documents, a Supplemental Agreement Regarding Gas Leases and a “form lease.” However, the Committee did not have the authority to bind any of the landowners to the terms of either document. The form lease actually stated that none of the landowners were required to sign it, allowing each landowner the right to negotiate his or her own lease.

Because of its own financial issues, Chesapeake decided not to proceed with leases in Deer Creek Estates, and the landowners sued for specific performance of what they claim was a contract negotiated between their Committee and Chesapeake. The documents negotiated by the Committee provided for a $27,000 per net mineral acre signing bonus, a 25.25% royalty, and a three year term with no renewal option. The signing bonus was to be paid by a thirty day bank draft at signing.

In the lawsuit, the landowners admit they did not execute the Supplemental Agreement or the form lease, but claim they have standing as third party beneficiaries of the agreement between their Committee and Chesapeake. The trial court granted Chesapeake’s motion for summary judgment, and found that there was no evidence that the landowners were third party beneficiaries.

The Court of Appeals for the Second District of Texas in Fort Worth agreed with the trial court and found that the purported contract between the Committee and Chesapeake did not sufficiently identify the landowners as third party beneficiaries. In doing so, the Court cited a similar case, Maddox v. Vantage Energy LLC, in which the appellants also attempted to claim third party beneficiary status on a contract but failed to provide sufficient evidence of that status. As in Maddox, in Kantner the landowners are not specifically named as third party beneficiaries in the agreement with Chesapeake. The landowners were not identified by address and no map was attached to show which lot numbers or addresses were affected by the contract. The purported contract contains no defined limited group as intended beneficiaries. Taken together, all this led that Court to find the landowners were not third party beneficiaries.

The Court also considered whether the landowners were “donee” beneficiaries. However, if specific performance on the contract were to be granted, there would be no donation, but rather an exchange for mineral rights. Therefore, the landowners weren’t donee beneficiaries either.

These cases have obvious implications for future oil and gas leases in our area. Many neighborhoods and subdivisions have this type of committee to negotiate efficiently for larger groups, and Texans should be aware of how the law in the area works to be informed of their rights. The lessons from these cases should be incorporated into future agreements with oil companies so that landowners are protected in the event the oil company tries to back away from its leases.

See Our Related Blog Posts:

Texas Landowners’ Groundwater Rights Revisited

Texas Landowners’ Easement Rights Case Clarified by Texas Supreme Court

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