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Texas Supreme Court Sheds Light on Duty of Owner of Oil and Gas Leasing Rights

It is incumbent upon a Texas oil and gas lawyer to keep abreast of all relevant decisions from appellate courts and the state’s highest court. Proper advocacy demands that attorneys understand changes in the law and be able to incorporate those changes in their legal representation. Lawyers must have an awareness of all the legal tools at their disposal so they can provide zealous advocacy and competent representation for a client, whether in a dispute, guiding a landowner through the negotiation process for a lease, preparing a mineral deed or a number of other tasks.

There remain many areas of Texas oil and gas law with questions that are unanswered, and our courts are frequently providing guidance on those issues. For example, the Texas Supreme Court recently handed down a decision in Lesley v. Texas Veterans Land Board that provided further clarification on the rights and responsibilities that executive rights holders owe to mineral owners.

A mineral estate is basically a bundle of various property rights. One of those rights is known as the “executive right”, which is the ability to enter into an oil and gas lease. This is distinct from other rights of mineral ownership, such as the right to collect royalties, bonus or delay rentals pursuant to an oil and gas lease. More often than not a single owner will possess all of these rights, meaning they can choose to lease and will receive payment for royalties due under that lease. However, these rights can be split between one or more persons or entities. When those rights are split, the holder of the executive right owes a duty of “utmost fair dealing” to other owners of a mineral interest.

In the Lesley decision, the Texas Supreme Court elaborated on what that duty actually encompasses.The case involved a mineral estate that had been split between several parties with each owning part of the mineral estate but only one having the executive right. In other words, several parties would receive royalties upon the lease of the minerals, but only one party had the power to actually negotiate and sign the lease. The executive right holder was a land developer who had turned the property involved into a subdivision of over 1,200 lots. When those lots were sold to others, the deeds included restrictive covenants which prohibited “commercial oil drilling, oil development operations, oil refining, quarrying or mining operations.” Evidence was presented in the case which suggested that the subdivision was sitting on $610 million worth of minerals that cannot be reached from outside the subdivision. The non-executive interest holders sued the executive interest holder because the restrictive covenants essentially made it impossible for the land to be leased and for mineral owners to develop their minerals and receive royalties.

The original plaintiffs argued that the use of restrictive covenants amounted to a breach of the duty they were owed by the executive interest holder. Put more succinctly, the Court was presented with the question of whether inaction by the executive interest holder was a breach of any duty to the mineral owners. In answering this question, the Court did not provide a general rule, but instead explained that under certain circumstances, the failure to lease would constitute a breach of the executive holder’s duty of utmost fair dealing to the mineral owners. In this case, the Court ruled that the restrictive covenants included in each deed when a person bought land in the subdivision were unnecessarily restrictive, because they essentially prohibited all future leases. In the Court’s view, this was a step too far that unfairly harmed non-executive mineral rights owners.

The Court did not go so far as to declare that all inaction on the part of the executive rights holders amounted to a breach of duty, just that the restrictive covenants in this case went too far. This is an interesting decision in another sense, for this reason: the buyers of land in the subdivision were given a copy of the restrictive covenants before they bought their land, as is required by law. However, the deeds from the developer to each buyer did not contain a reservation of the executive rights! Since a grant of minerals ordinarily conveys all the rights in the mineral estate, the failure of the developer to reserve the executive rights, in writing, in the deed to each buyer, was a big reason why the buyers won.

The Lesley decision may be important to you if you own minerals, but not the right to lease them.

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