Oil and Gas Land Use Agreements

Oil and Gas Land Use Agreements

Enforcement of Lease Renewal Options

Texas landowners with oil and gas development operations on their property may have agreements with oil and gas operators and other third parties (separate from an oil and gas lease) regarding the use of their land for activities ancillary to the exploration, development, and production of oil and gas. These land use agreements, or leases, may concern the excavation and use of caliche, saltwater disposal, groundwater production, or right-of-way access.

Oil and gas land use agreements typically allow an operator to conduct a specific operation on the landowner’s property for a defined amount of time referred to as the lease term. After expiration of the lease term, some agreements may include language that grant the operator an option to renew the lease/agreement for an additional term subject to specific qualifications, this is known as an option. In exercising an option to renew a lease, operators must strictly adhere to the terms of the option language or risk termination of the agreement.

The following is a brief discussion on how strictly a party to an option contract must adhere to the terms of the option language in order to renew the lease/agreement for additional terms.

ISSUE PRESENTED:

How strictly have Texas courts enforced contractual deadlines related to lease renewal options?

SHORT ANSWER:

Lease renewal options are strictly construed by Texas courts and equitable relief may only be granted in rare circumstances.

DISCUSSION:

It is well settled in Texas courts that strict compliance with the provisions of an option contract is mandatory, save and except for rare circumstances where equitable relief is granted. According to the San Antonio Court of Appeals in Crown Construction Company Inc. v. Huddleston, 961 S.W.2d 552, at 558, (Tex. App. – San Antonio 1997), “acceptance of an option, unless excused in rare cases of equity, must be unqualified, unambiguous, and strictly in accordance with the terms of the agreement.” “A failure to exercise an option according to its terms, including untimely or defective acceptance, is simply ineffectual, and legally amounts to nothing more than a rejection.” “To extend the power to exercise an option for a day is to compel the giving of something for nothing.”

Crown Construction Company: (equitable relief denied)
In Crown Construction Company v. Huddleston, 961 S.W.2d 552 (Tex. App. – San Antonio 1997), the Lessee, Crown Construction Company, attempted to renew a lease on commercial property for an additional 5 year term by taping a letter to the door of Lessor’s office (Huddleston’s office) on the day the option to renew was set to expire. Huddleston was not in the office on the day the Lessee taped the letter
to the door, and Lessor claims that he did not receive Lessee’s letter until the same was mailed to him 15 days later. Lessor claimed the option expired because it did not receive the notice by the date of the deadline. On appeal from a summary judgment in favor of the Lessor, the Appellate Court held the Lessee’s attempt to renew the lease was not proper as the lease required notice to be actually delivered to Huddleston (in person or by certified mail) on or before the option renewal deadline. Because Huddleston did not receive the notice of the renewal until the same was mailed to him 15 days later, the court held that the option period expired, and Lessor was within his rights to terminate the lease at the end of its term. Lessee attempted to argue that it should be entitled to relief in equity, but the Appellate Court denied said relief under the doctrine of unclean hands*.

* The doctrine of unclean hands is applied to one whose own conduct in connection with the matter at issue has been unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing. Because Crown Construction was in breach of the lease it was attempting to extend (failed to timely pay common area maintenance fees), it may not seek relief from the provisions of that lease based on claims of equity.

Eldercare Properties Ltd. v. Valley Educational Foundation Inc.: (equitable relief granted)
In Eldercare Properties Ltd. v. Valley Educational Foundation Inc., 568 F.3d 506 (US 5th Circuit Court of Appeals 2009), Lessee and Debtor, Eldercare Properties Ltd., filed for bankruptcy in connection to its operation of a nursing home facility in Texas. During bankruptcy proceedings, the Bankruptcy Court forced Lessee and Lessor (Valley Educational Foundation Inc.) into mandatory mediation to rework the provisions of the lease pertaining to the nursing home property. Prior to the date of the scheduled mediation, the option period for Lessee’s renewal of the lease expired. Upon discovering the passage of the option renewal date, 30 days after it expired, Lessee attempted to notify Lessor of its intent to renew the lease, Lessor declined to renew. On appeal of the District Court’s denial of equitable relief to Lessee, the United States 5th Circuit Court of Appeals reversed the lower Court’s holding and found in favor of Lessee and granted it equitable relief for its failure to renew the option, thus extending the lease for another 5 year term. In granting equitable relief (equitable intervention) the court cited the rule established in Jones v. Gibbs, 133 Tex. 627 (1939), which states Texas law provides for equitable intervention to excuse a technical failure to renew an option “when the delay in fulfilling the condition precedent in a lease has been slight, the loss to the lessor small, and the failure to grant the relief to the lessee would result in such hardship as to make it unconscionable to enforce literally the condition precedent.” Following the rule established in Jones v. Gibbs, the Court held that the Lessee’s participation in the mediation over lease terms implied its intent to renew the lease and that Lessee had incurred over $300,000 in attorney fees and other expenses in the bankruptcy proceeding and negotiating the lease. Therefore, to terminate the lease due to Lessee’s failure to strictly comply with the option notice would be unjust.

FINAL OPINIONS:

Lease renewal options are strictly construed by Texas courts unless equitable relief is warranted under the rule established in Jones v. Gibbs: (1) the delay has been slight; (2) the loss to the lessor small; and (3) not granting relief would result in such hardship to the tenant as to make it unconscionable to enforce the condition precedent in the lease.

Equitable relief, such as that granted in Jones v. Gibbs, may not be warranted if the party pleading for equitable intervention has “unclean hands.” The doctrine of unclean hands is applied to one whose own conduct in connection with the matter at issue has been unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing. [Example: Lessee is already in breach of the lease terms.]

DISCLAIMER: The foregoing information is not legal advice and is general in nature and not applicable to all situations. The reader should not rely on these general statements and should consult with knowledgeable persons before taking any actions.

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