December 2011 Legal Update by Lauren L. Garner
LOUISIANA LEGAL UPDATE
By Lauren L. Garner
Dennis, Bates & Bullen, L.L.P.
Drilling Permit Obtained by Lessee During the Primary Term of a Current Lease is Not a Title Defect as to a Top Lease Sufficient to Reject the Bonus Draft.
Pilkinton v. Ashley Ann Energy, LLC, et al, 46, 650 (La. App. 2 Cir. 11/2/11), 2011 WL 5170296. NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
In June 2008, Ashley Ann Energy, LLC, (“AAE”), on Chesapeake’s behalf, contacted the plaintiffs, Amy and Roy Pilkinton, about the possibility of obtaining an oil, gas, and mineral lease on 86.20 acres in Bossier Parish. The Pilkintons informed AAE that their property was currently leased to KCS Resources (“KCS”). The parties discussed the possibility of a top lease to become effective after the primary term of the KCS lease expired on December 1, 2008 (the “Top Lease”).
On August 7, 2008, the Pilkintons executed the Top Lease in favor of AAE, which was on a standard printed Bath form with an additional Exhibit “A” attached. The primary term was listed as three years, but was not to commence until December 2, 2008. Exhibit “A” contained two pertinent provisions:
1. This lease is expressly made subject to that Oil and Gas Lease dated December 1, 2005 from Roy L. Pilkinton and Amy H. Pilkinton to KCS Resources, Inc., ... and Lessee herein accepts this Lease subject to the terms of the Prior Lease.... It is not the intent of the Lessor and Lessee to cloud or in any way to impair any rights, titles, and interests, if any, of the parties arising under the Prior Lease....
2. Lessor makes no express or implied warranty of title whatsoever, and Lessor shall have no obligation to return any bonus consideration or benefits received under any of the terms hereof, including, but not limited to royalties, shut-in payments, or other monies paid to Lessor on account of a failure of title. Lessee takes this lease at his own risk and peril.
In consideration of the Top Lease, the parties agreed that the Pilkintons would initially receive one-fourth of the total bonus payment. The other three-fourths of the bonus would be paid in the event that KCS’s lease terminated. Upon signing of the lease, the Pilkintons were given a draft for $431,000. On the face of the draft, AAE included a provision that stated “upon approval of title but not later than 20 banking days after sight.”On August 21, 2008, the Louisiana Department of Natural Resources issued KCS a permit to drill an oil and gas well. The permit was for a neighboring tract, but the tract was within the same unit containing the Pilkintons’ property. AAE considered this permit as a title defect and ordered their bank to dishonor the draft. On September 22, 2008, AAE recorded a release of the Top Lease.
Due to Chesapeake and AAE’s failure to pay the draft, the Pilkintons filed suit. The Pilkintons filed a motion for summary judgment to determine the validity of the Top Lease, and later filed for leave to amend their petition to seek recovery of the additional three-fourths bonus payment ($1,293,000) since the KCS lease had expired. The defendants filed a cross-motion for summary judgment and opposed the plaintiffs’ request to amend. The trial court granted the plaintiffs’ motion for summary judgment, denied the defendants’ cross-motion for summary judgment, and granted plaintiffs’ request to file their amended petition. The defendants appealed the rulings on the summary judgments. The appellate court affirmed the trial court.
A mineral lessor impliedly warrants title to the interest leased unless such warranty is expressly excluded or limited. The liability of the lessor for breach of warranty is limited to recovery of money paid or other property or its value given to the lessor for execution or maintenance of the lease and any royalties delivered on production from the lease. La. Mineral Code art. 120. As a legal right, the top lease exists at its inception as a mere hope or expectancy in the extinction of existing superior leasehold rights, which extinction will confer upon the top lease owner the essence of a mineral lease, i.e., the right to explore for and produce minerals. Patrick G. Tracy, Jr., The Effects of Top Leasing in the Louisiana Law of Oil and Gas, 43 La. L. Rev. 1189 (1983).
Both parties cited Texas General Petroleum Corp. v. Brown, 408 So. 2d 288 (La. App. 2d Cir. 1981). In that case, the lessors expressly excluded any warranty against pre-existing mineral leases still in effect, “not even for return of bonus monies.” The drafts for the bonus payments were conditioned “upon approval of title ... by drawee not later than 60 days.” The drafts were paid at the end of the 60-day period, but the lessee brought suit claiming the payments were made in error. The court rejected these claims, finding that there was no conflict in the non-warranty provision of the lease and the lessee’s 60-day period to determine the existence of any title issues. After the end of the 60-day period, the non-warranty provision was given effect.
The court distinguished this matter from Texas General because this dispute concerns a third provision in the parties’ lease contract in addition to its non-warranty provision and the 20-day Draft Provision. The court considered the effect of the KCS lease provision contained in paragraph 1 of Exhibit “A” to the Top Lease. Exhibit “A” noted that “this lease is subject to a Prior Lease and Lessee recognizes that thisLease ... will cover and affect the lands and depths described in the Prior Lease only following the termination of the Prior Lease. The parties acknowledged that the Agreement was not intended “to cloud” the title of the KCS lease. An important corollary of that understanding is that the continued existence of the KCS lease, at least during its primary term, was not a cloud on the agreement executed in August 2008.
Exhibit “A” shows that the parties’ agreement was clearly a prospective agreement for a lease that might become effective on December 2, 2008. They agreed to become bound by this executory contract in August, and they might later become bound as lessor and lessee in a new lease. The KCS lease had a primary term of three years that ended December 1, 2008. The lease also contained the typical habendum clause. KCS’s permitting of a proposed unit well affecting the Pilkintons’ property in August was not an event by itself having any relevance to the maintenance of the KCS lease under the terms of the habendum clause. The act of permitting a well, even if it had occurred on December 1, was insufficient to extend the KCS lease beyond its primary term. Therefore, the defendants were obligated to pay the $431,000 draft.
The defendants argued the 20-day Draft Provision released them of that obligation, but the court disagreed. Just as the KCS well permit did not have any bearing in August 2008 upon whether the KCS lease might be extended beyond its primary term on December 1, the KCS well permit was not a flaw in the Pilkintons’ title. The parties had agreed that (1) the property was subject to the KCS lease; (2) the Pilkintons’ land would become leased on December 2 if the KCS lease terminated; and (3) AAE would pay $431,000 to obtain the executory contract and an additional payment if the KCS lease terminated. None of these tenets of the agreement was altered by the KCS permit, and AAE’s conditional right to acquire the December 2 lease remained the same after the permit. Accordingly, the KCS well permit is not a title flaw falling within the meaning of “approval of title” of the 20-day Draft Provision when the overall context of the parties’ contract is considered, and such provision does not excuse AAE from its obligation to pay the $431,000 draft.
The defendants also argued that error vitiated the parties’ consent because the Pilkintons knew that KCS planned to drill a well affecting the KCS lease and that if the defendants knew of such imminent drilling, they would not have been interested in leasing the Pilkintons’ property. This argument was also rejected. The court noted that the KCS lease itself implies that the company would desire to develop its investment in the lease by exploring for oil and gas during the remainder of the primary term of the lease. The defendants’ intent for their acquisition of the Top Lease was given in full view of the contingency for the extension of the KCS lease after December 1 which might result from a decision by that company to drill. Such was an accepted risk by the defendants upon entering into the Top Lease.
A copy of the case discussed above may be obtained upon request from Lauren L. Gardner by facsimile (337-233-9095) or e-mail (email@example.com).
Lauren L. Gardner is an associate in the Lafayette office of Dennis, Bates & Bullen, L.L.P. She was born March 25, 1981, in Cut Off. She graduated from Louisiana State University in 2003 with a B.A. in History and graduated from Louisiana State University School of Law in 2006 with a J.D. and a B.C.L. During law school, Ms. Gardner was a law clerk for Chief Judge Henry N. Brown, Jr. at the Second Circuit Court of Appeals. Ms. Gardner is admitted to the bar in Louisiana, the United States District Courts for the Western, Middle and Eastern Districts of Louisiana, and the United States Fifth Circuit Court of Appeals. She is also on the board of the Lafayette Young Lawyers’ Association and the Editorial Committee of The Promulgator.