One of the most common and difficult questions asked of oil and gas attorneys concerns maintenance of oil and gas leases that are beyond their primary terms. Most modern-day lease forms contain a continuous development clause, which requires the lessee to drill multiple wells within specified time periods in order to maintain the entire leased premises in the secondary term. If the lessee does not comply with the drilling requirements, the lease will automatically terminate as to the portions of the lease premises that have not been developed.
Although there are some commonalities among continuous development clauses in various lease forms, they differ in subtle but important ways, which makes interpreting them with a high degree of confidence especially challenging. An example of this difficulty was the subject of Endeavor Energy Resources, LP vs. Energen Resources Corporation, — S.W.3d —, 2020 WL 7413727, 64 Tex. Sup. Ct. J. 230 (Tex. 2020).
The lease in this case allowed Endeavor to perpetuate its lease, which affected approximately 11,300 acres in Howard County, Texas, if it drilled a new well every 150 days. It also contained the following provision that allowed Endeavor to accumulate unused days if a well was drilled in less than 150 days:
Lessee shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.
Endeavor drilled 12 wells on the lease without controversy. The 13th well was drilled 320 days after the 12th was completed. The parties disagreed about whether Endeavor could accumulate unused days and use them for only the immediately following term (i.e., use them in the next term or lose them), or whether it could accumulate unused days across multiple terms (i.e., use accumulated days in any future term). Endeavor argued that because many of the first 12 wells were drilled before the 150-day deadline, it had accumulated a total of 337 days to begin the 13th well. In contrast, Energen, who obtained a new oil and gas lease covering the non-developed portions of the original leased premises, argued that because Endeavor drilled its 12th well 36 days before the deadline, it was required to drill the 13th well no later than 186 days (150 plus 36) after completion of the 12th.
The trial court agreed with Energen and granted its motion for summary judgment, holding that the lease terminated as to the non-developed portions of the leased premises 186 days after completion of the 12th well. The court of appeals affirmed.
The Supreme Court engaged in a lengthy analysis of the arguments put forth by both sides, and discussed the operative text in great detail. It found that the clause was ambiguous, so it analyzed the relevant extrinsic evidence, but found that it was not “sufficient to break the tie created by the Lease’s ambiguous language.” Id. at 8.
Having found that the language was ambiguous even after taking into account extrinsic evidence, the Court then turned to a longstanding rule of contractual interpretation applicable in the context of real property interests, which is that language will not be held to automatically terminate a leasehold estate unless that language is clear, precise and unequivocal, and cannot be given any other reasonable construction. If all other available means of interpreting contractual language are exhausted, the remaining ambiguity will be resolved against the imposition of a special limitation.
Using this rule, the result is obvious. Because the language was held to be ambiguous, it cannot act as a special limitation. The Court held, therefore, that the lease did not terminate before Endeavor drilled its 13th well.