Honing the Habendum: What Happens When Lease Provisions Deviate from Standard?

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In Thistle Creek Ranch, LLC v. Ironroc Partners, LLC,[1] Thistle Creek, LLC (the “Lessor”) argued that the trial court erred in granting summary judgment in favor of Ironroc Partners, LLC (the “Operator”). In making this appeal, the Lessor specifically claimed the Operator failed to prove the subject lease was held by production “in paying quantities” during its secondary term.

When conducting an analysis of a lease’s primary and secondary terms, a court must look first at the lease’s habendum clause.[2] Longstanding precedent provides habendum clause language, inclusive of the words “produced” or “production,” will imply that production is sufficient to hold the lease only if such production occurs in “paying quantities.”[3] For example, when a lease’s habendum clause includes the phrase, “for as long thereafter as oil, gas or other minerals are produced,” then production in paying quantities is required to hold the lease beyond the primary term. “Paying quantities” is additionally defined by utilizing the two-part test set forth in BP AM. Prod. Co. v. Laddex, Ltd.,[4] that asks (1) is production profitable after expenses and (2), if not, would a reasonably prudent operator continue operations for the purpose of making a profit? 

In its analysis, the appellate court explains that the lease at issue can be distinguished from leases that contain traditional habendum clause language falling under a Koontz or Laddex analysis. Instead of containing some form of the word “production,” the lease’s habendum clause in this case provides that the lease shall remain in full force during the primary term, “and as long thereafter as operations, as hereinafter defined, are conducted…”[5] Critically, “operations” is defined in the lease as endeavoring to obtain production “whether or not in paying quantities” (emphasis added).[6]

The lease at issue in this case, then, does not contain those standard habendum clause provisions which would require production in paying quantities to hold the lease beyond the primary term. As such, the lessee successfully contracted around the analysis required in both Koontz and Laddex. While the Lessor additionally argued there are other provisions in the lease which point to a different conclusion, the appellate court counters this argument by noting it cannot ignore the definition of “operations” which expressly removes the requirement of production “in paying quantities” as a condition of holding the lease beyond the primary term.  Ultimately, the appellate court affirmed the trial court in agreeing with the Operator.

It is critical for parties to a mineral lease to understand the impact the habendum clause language will have on the mineral-lease estate term. While this portion of the lease is often standard, deviations from the norm will have tremendous impacts.

[1] 2022 Tex. App. Lexis 2905.

[2] Id at 6.

[3] See Clifton v. Koontz, 160 Tex. 82, 325 S.W. 2nd 684, 690 (Tex. 1959).

[4] 513 S.W.3d 476, 482-83 (Tex. 2017).

[5] 2022 Tex. App. Lexis 2905 at 4.

[6] Id.

 

Brad represents clients in connection with upstream energy transactions, complex mineral titles, pooling issues, lease analysis, joint operating agreements, surface use issues, title curative and general oil and gas business matters.

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