The Enforceability of Consent-to-Assign Provisions in Texas Oil and Gas Leases
The Enforceability of Consent-to-Assign Provisions in Texas Oil and Gas Leases
T. Ray Guy 0
Gotshal 0
Manges 0
0
0 T. Ray Guy, et al., The Enforceability of Consent-to-Assign Provisions in Texas Oil and Gas Leases, 71 SMU L. Rev. 477 (2018) https://scholar.smu.edu/smulr/vol71/iss2/4 , USA
Part of the Contracts Commons; and the Oil; Gas; and Mineral Law Commons
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Article 4
PROVISIONS IN
TEXAS OIL
AND
GAS
LEASES
T. Ray Guy & Jason E. Wright*
Oil and gas leases are unique instruments that, on their face, appear to be
contracts or traditional landlord–tenant leases. Indeed, landowners often
desire to have them treated as such by including provisions giving a lessor
power to limit or control any assignment of the lease. Typically, this takes
the form of a consent-to-assign provision seen in many types of ordinary
contracts and leases. In Texas, however, an oil gas lease actually conveys a
fee simple property interest; and property law, far more than contract or
landlord–tenant law, greatly disfavors any restraint that acts to restrict the
free transferability (or “alienation”) of property rights. As such, an
inherent tension may exist between a lessor who has a right to withhold consent
to an assignment under the lease terms and a lessee who desires to transfer
the drilling rights to others.
Nonetheless, Texas courts have rarely had occasion to pass on the
enforceability of consent-to-assign provisions in the oil and gas leasing
context, primarily because commercial parties generally are more apt to be
reasonably and reach agreements when times are good. The prolonged
downturn in oil prices, however, is likely to result in increased litigation in
many areas. There is a potential, in particular, that lessors may seek to
exploit the lack of developed case law in the consent-to-assign area by
demanding “consent fees” or attempting to terminate leases if assigned
without consent. This article thus analyzes the legal underpinnings in Texas to
provide guidance to lessees faced with unreasonable demands or litigation
risk and concludes that, in most situations, a consent-to-assign provision is
not as enforceable as it may appear, while further suggesting practical ways
in which to mitigate the risks of routine assignment.
* The authors are attorneys in the Dallas office of Weil, Gotshal & Manges LLP, and
would like to thank their colleague Rodney L. Moore for assistance in reviewing and
improving this article.
TABLE OF CONTENTS
I. INTRODUCTION
Cgoals in a free-market society. Perhaps the most evident aim of
ONTRACT law and property law both serve several important
contract law is to provide assurance that promises will be
enforced (through expectancy damages at the least). Property law seeks
similar predictability but at the same time strives to promote a “better
utilization of society’s wealth by . . . assisting in assets flowing to those
who would put them to their best use.”1 On occasion those objectives
may conflict. This article explores the outcome of such a conflict in the
context of Texas oil and gas leases that contain provisions that purport to
give a landowner power to restrict the assignment of the leased rights to
others.
The upstream oil and gas business achieves efficiency in large part
based upon the ability to buy, sell, or otherwise transfer drilling rights
obtained by lease, and in practice, it is routine for those rights to change
hands several times before a single well is ever drilled. There are several
practical reasons why that may occur: (i) the landman who first signs up a
property owner may be a speculator with no intent of developing the
rights; (ii) the circumstances for the original lessee may change such that
it becomes unable to drill; or (iii) a producer may need to prioritize and
redirect its resources to other assets. In general, then, the free
transferability of oil and gas leases maximizes profit-making opportunities for both
landowners and producers by naturally guiding drilling rights into the
hands of those most likely to use them.
Nevertheless, some landowners seek to limit the assignability of a
lease—most often to maintain control over who works on their land and
to ensure the leasing counterparty is financially responsible enough to be
held accountable for any problems that may arise (such as excessive
surface damage or underpayment of royalties).2 It would be unusual for a
landowner to seek to prohibit assignment altogether—or for one to have
the negotiating power to attain such a concession—yet it is fairly common
for oil and gas leases in Texas to contain a clause requiring lessor consent
prior to an assignment. Most often such consent right is coupled with the
corresponding obligation that consent “shall not be unreasonably
withheld,” but on occasion there are provisions that go further to declare that
any assignment done without consent is void or that the entire lease
terminates as a penalty. When parties fail to act rationally, such provisions
can end (...truncated)