The Enforceability of Consent-to-Assign Provisions in Texas Oil and Gas Leases

SMU Law Review, May 2018

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 reasonable 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.

A PDF file should load here. If you do not see its contents the file may be temporarily unavailable at the journal website or you do not have a PDF plug-in installed and enabled in your browser.

Alternatively, you can download the file locally and open with any standalone PDF reader:

https://scholar.smu.edu/cgi/viewcontent.cgi?article=4730&context=smulr

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 - 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)


This is a preview of a remote PDF: https://scholar.smu.edu/cgi/viewcontent.cgi?article=4730&context=smulr

T. Ray Guy, Jason Wright. The Enforceability of Consent-to-Assign Provisions in Texas Oil and Gas Leases, SMU Law Review, 2018, Volume 71, Issue 2,