Lease Division in Louisiana – “The Times They Are A-Changin’”

Under the Louisiana Mineral Code and caselaw, a mineral lease is generally not divisible by assignment.  Nonetheless, courts have long held that a lease contract can be rendered divisible if it contains certain language.  The consequences of the interpretation of this language are of critical importance for oil and gas lessees and their successors and assigns in the context of lease maintenance.  This article examines and reviews some of the earlier cases on the issue and compares them to some more recent cases that are in tension, and perhaps even overrule, these earlier cases.

One of the earliest notable cases on lease division by assignment is Swope v. Holmes, 169 La. 17, 124 So. 131 (1929).  On March 17, 1925, Swope leased approximately 2500 acres of land to McCurry. By mesne conveyances, Holmes became the sole owner of the mineral lease insofar as it affected approximately 440 acres.  The chief reason urged for partial cancellation of the lease was the non-exploration and non-development of some 400 of the relevant 440 acre tract.  The lease contract contained the following provision:

It is hereby agreed in the event this lease shall be assigned as to part or as to parts of the above described lands, and the assignee or assignees of such part or parts shall fail or make default in the payment of the proportionate part of the rents due from him or them, such default shall not operate to defeat or affect this lease in so far as it covers a part or parts of said lands upon which said lessee or assignee thereof shall make due payment of said rental.

The Supreme Court of Louisiana held that the lease was divisible based on the above quoted language, and upheld partial cancellation of the lease.

In Roberson v. Pioneer Gas Co., 173 La. 313, 137 So. 46 (1931), the lessors filed suit to declare an oil and gas lease expired as to 85 of the 125 acres of land leased.  The district court granted judgment for the lessors; and the defendant appealed.  The lease covered 125 acres and was assigned to Pioneer Gas Company, which later assigned the lease to George D. Pipes and W. T. Mack only insofar as it covered 40 acres.  Before the primary term expired, Pipes and Mack completed a profitable gas well on the 40 acres assigned to them.  The well continued to produce in paying quantities and up through at the time of the trial of the case.  But no well was drilled or attempted to be drilled on the 85 remaining acres of land that Pioneer retained.  Just after the primary term expired, the lessors sued Pioneer for partial cancellation of the lease.  Pioneer argued that the gas drilled by Pipes and Mack on their 40 acres kept the entire lease in force including for the remaining 85 acres that Pioneer retained.  The relevant assignment provision in the lease read as follows:

[I]t is hereby agreed in the event this lease shall be assigned as to part or as to parts of the above described lands, and the assignee or assignees of such part or parts shall fail or make default in the payment of the proportionate part of the rents due from him or them, such default shall not operate to defeat or affect this lease in so far as it covers a part or parts of said land upon which said lessee or assignee thereof shall make due payment of said rental.

The district court ruled that the effect of the assignment of the 40 acres to Pipes and Mack was to divide the original lease into two leases, by making a separate lease between the plaintiffs, as lessors, and Pipes and Mack, as their lessees, under the terms and conditions stipulated in the original lease.  What Pipes and Mack did, or failed to do, to keep the lease in force on their 40 acres could not affect the lease as to the remaining 85 acres of land that Pioneer retained.  Relying on this same lease language, the Supreme Court of Louisiana affirmed and thus upheld partial cancellation of the lease as to Pioneer’s 85 acres.

A review of two recent decisions on this issue, specifically Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., L.L.C. in 2011 and Guy v Empress, L.L.C. in 2016, suggest that, at least insofar as geologic lease division is concerned, Louisiana courts—or at least courts in the Louisiana Second Circuit—are not so inclined to follow these decisions of the past.

In Guy v. Empress, L.L.C., 50,404 (La. App. 2 Cir. 4/8/16), 193 So. 3d 177, reh’g denied (May 12, 2016), the plaintiffs, owners of a 140–acre tract, and defendant Long Petroleum, L.L.C. entered into a mineral lease on March 23, 2004, with a primary term that was extended to March 23, 2009. The lease included a typical habendum clause and continuous drilling provision for maintaining the lease without a 90-day gap in production or operations and also included both horizontal and vertical Pugh clauses as well as the following provision regarding assignment of the lease:

[I]f Less[ee] or assignee of part or parts hereof shall fail to comply with any other provisions of the lease, such default shall not affect this lease insofar as it covers a part of said lands upon which Lessee or any assignee shall comply with the provisions of the lease.

In an assignment to Empress, L.L.C., Long retained the “shallow rights” in the lease, while conveying the “deep rights.”  More specifically, the assignment provided that it was a conveyance, assignment and transfer of “[a]ll of Assignor’s right, title, and interest in and to all oil gas leases and subleases and further including working interests, mineral interests, royalty interests, rights of assignment and reassignment, net revenue interests and undeveloped locations under or in oil, gas or mineral leases and interest in rights to explore for and produce oil, gas and other minerals[,]save and except” the formations and depths between the surface and the base of the Cotton Valley formation (the “shallow rights”).

Before the primary term of the lease expired, Long entered into an Operating Agreement with Pinnacle, which spud a Hosston well in the “shallow rights” before the expiration of the primary term and thereafter successfully completed the well, which produced until December 31, 2011.  As to the “deep rights,” preparatory activities for the drilling of the Yarbrough No. 1 well commenced on August 10, 2009 (months after expiration of the primary term); the well was spud in September 2009 and then completed with continuous production thereafter.

The lessors argued that the partial assignment from Long to Empress divided the Lease into two separate and independent leases.  Specifically, they argued that the deep rights expired on March 23, 2009 since the Yarbrough No. 1 was not spud until after expiration of the primary term and that, as to the shallow rights, since the Edwards No. 1 ceased production on December 31, 2011, and thereafter, no drilling, reworking or other operation was undertaken for the shallow rights, the entire lease terminated as of that date.

The Court of Appeal in Louisiana concluded first that the original lessee’s assignment of the deep rights did not divide the lease into two separate leases and second that the lessee and its assigns timely drilled and produced from both shallow and deep formations within the time required by the habendum clause without a 90 day gap.  The court explained that the Edwards No. 1 continued in production until December 31, 2011, by which time the Yarbrough No. 1 had been drilled and was producing.  Therefore, on March 23, 2009—the date upon which the primary term would have expired—defendants were “engaged in operations for drilling, completion or reworking, or [in] operations to achieve or restore production, with no cessation between operations or between such cessation of production and additional operations of more than ninety (90) consecutive days.”

The Supreme Court reached a similar result in Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., 2011-1225 (La. 9/23/11), 69 So. 3d 1161.  In Hoover Tree Farm, a lessor sued its original lessee and a transferee to enforce a favored nations provision in the lease.  The lease agreement between the plaintiff, Hoover Tree Farm, and its original lessee, Petroleo, as agent for Goodrich Petroleum Co., included a provision guaranteeing that as to the “Lease Area”  no lessor of either lessee or Goodrich or their successors and assigns shall recieve a higher bonus and/or royalty than lessor.  Thereafter, Goodrich transferred an undivided 50% of its interest in the lease to Chesapeake Louisiana, LP limited as to depths below the Cotton Valley formation.  After the agreement with Goodrich, Chesapeake obtained oil and gas leases of lands located within the “Lease Area” paying bonuses and royalties higher than what Goodrich paid to plaintiff.  Plaintiff filed suit against Goodrich and Chesapeake seeking to enforce the favored nations provision.

The Hoover Tree Farm court analyzed in great detail the difference between a sublease and an assignment and the related Mineral Code articles. The relevant assignment provision in the lease mirrored the lease assignment language in Empress.  The court pointed to the allusion to geographic rights in the assignment language as distinguishing from the other line of cases on the issue, “the specific assignment of rights which this default provision addresses concerns the assignment to another of all rights of the lessee in a particular geographical area of the Lease.”  And without expounding on the distinction, the court found that the lease assignment did not divide the lease.

So what does this mean for lessees and lessors, when the longstanding interpretation of a simple assignment provision in a contract appears to have suddenly been turned on its head?  Perhaps it means that things are as they should be.  In the words of Bob Dylan: “Keep your eyes wide- The chance won’t come again- And don’t speak too soon-For the wheel’s still in spin-And there’s no tellin’ who- That it’s namin’- For the loser now- Will be later to win- For the times they are a-changin’.”  Be aware of the distinctions that may be read into these assignment provisions should litigious issues arise, and be diligent in drafting these contract provisions.  As our industry and all the things that go along with it develop, progress and advance, so will our judges and their analysis and interpretation of the meaning and intent of the parties to a contract involving these ever-changing issues.

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