The issue in this case was whether a new lease of the same mineral interest was considered a top lease or if it terminated the previous lease and replaced it. More particularly, the case highlighted the effect of a new lease on lands already under lease as determined by the parties’ intent. First, the court clarified the holding in Ridge Oil Co. v. Guinn Investments., Inc.100 The court then determined that an existing lease is terminated unless the new lease clearly shows the parties’ intent to create a “top lease,” meaning that the new lease does not terminate the prior lease and the new lease is subject to it.101
In 2007, TRO-X, L.P. (“TRO-X”) executed mineral leases from David E. Cooper; Hill-Cooper, Ltd.; Richard W. Cooper; Kendall C. Cooper Hill; and Shirley Cooper (collectively, “the Coopers”). The leases contained identical terms and included a provision that required TRO-X to drill an offset well if an off-lease well was completed within 660 feet of the lease lines and produced in paying quantities. Upon failure to drill such a well, the lessors had the right to demand release of a specified portion of the lands back to the Coopers. TRO-X and Eagle Oil & Gas Co. (“Eagle”) entered into an agreement in which TRO-X transferred its interest in the leases except for a contingent reversionary interest. The agreement included a back-in option if Eagle produced minerals and reached a predetermined project payout on the leases. The back-in provision would allow TRO-X to exercise the option and be entitled to transfer of 5% of the working interest. To provide security for their contingent reversionary interest, TRO-X included an anti-washout provision in the agreement with Eagle. The clause provided that TRO-X’s back-in option “shall extend to and be binding upon any renewal(s), extension(s) or top lease(s) taken within one (1) year of termination of the underlying interest.”102 Eagle assigned their interest to Anadarko Petroleum Corporation (“Anadarko”) who subsequently violated the offset well provision with the Coopers. Anadarko then entered into negotiations for a new lease with the Coopers. The new leases were executed with Anadarko as lessee in 2011 and included the same interests as did the 2007 leases.103 TRO-X approached Anadarko to confirm that its back-in interest in the 2011 leases was valid and was denied. Thus, the following litigation ensued. It is important to note that the court based the following decision solely on TRO-X’s argument that the leases were top leases and does not consider whether the leases were renewals or extensions.
In February 2014, TRO-X sued Anadarko for breach of contract and trespass to try title claims and sought declaratory judgment that the 2011 leases were top leases subject to TRX-O’s back-in interest. The trial court held that TRO-X owned an undivided 5% working interest because the 2007 leases were in effect until they were released. Therefore, the 2011 leases were top leases. The court of appeals reversed the trial court’s decision citing TRO-X did not prove that the Coopers intended the 2011 leases to be top leases, which would come into effect only when a release of the 2007 leases was executed.104 This appeal to the Supreme Court of Texas followed with TRO-X contending that the 2011 leases were top leases and Anadarko maintaining that the 2011 leases were new leases that terminated the 2007 leases.
The court agreed with Anadarko that the 2007 leases and 2011 leases did not exist at the same time because the 2007 leases were terminated upon the signing of the 2011 leases.105 The court noted Ridge Oil held that when the owners of a possibility of reverter execute a lease with the same lessee, they effectively terminate the previous lease.106 TRO-X argued that no specific language was included in the 2011 leases that showed the parties intended to terminate the previous lease.107 The court again disagreed and clarified the rule in Ridge Oil, explaining that termination will occur on execution of a new lease unless the parties clearly show their intent for the previous lease to remain in effect.
The court also clarified that the intent of both lessor and lessee matters when considering whether a new lease terminates an old lease or creates a top lease subordinate to the previous lease’s expiration.108 Lastly, the court agreed with Anadarko and the court of appeals that TRO-X had the burden of proof with respect to the parties’ intent, as the plaintiff in a breach of contract claim.109 TRO-X did not point out any language in the new leases that would show the parties’ intention to that 2007 leases survive the 2011; therefore, they failed to meet their burden of proof. The court determined that the 2011 leases were not top leases and terminated the 2007 leases. Therefore TRO-X’s back-in interest did not survive.
The rule of this case is when a lessor and lessee under an existing mineral lease execute a new lease on the same mineral interests, the original lease terminates unless the new lease shows the party’s intent to do otherwise.110 This case is important for landmen and attorneys to reference when negotiating a new lease with current lessors and considering the effect the new lease will have on the previous lease and interest holders, whether termination or continuance through subordination via top lease.
99 TRO-X, LP v. Anadarko Petroleum Corp. , No. 16-0412, 2018 WL 2372805, (Tex. May 25, 2018).
100 Ridge Oil Co. v. Guinn Investments, Inc. , 148 S.W.3d 143, 153 (Tex. 2004).
101 TRO-X, LP v. Anadarko Petroleum Corp. , No. 16-0412, 2018 WL 2372805, (Tex. May 25, 2018).
102 Id. at *1.
103 Id. at *2.
105 Id. at *3.
106 Ridge Oil Co. v. Guinn Investments, Inc. , 148 S.W.3d 143, 153 (Tex. 2004).
107 TRO-X, LP v. Anadarko Petroleum Corp. at *4.
109 Id. at *5.
110 Id. at *4.