The discovery and exploration of the Barnett Shale and other shale plays in Texas have created new concerns for residential property developers. Often, the surface of a particularly valuable portion of a shale play is covered in residential subdivisions. This inevitably creates a conflict between the competing interests of developing the minerals within the shale and the desire of homeowners to enjoy the peace and quiet of their neighborhoods. Over time, residential property developers have created various solutions to address these opposing goals. This is exactly the type of situation that led to the issues discussed before the Supreme Court of Texas in Lesley, et al. v. Veterans Land Board of the State of Texas, et al.1
In Lesley, undivided interests in the minerals at issue were owned partially by prior land owners and partially by current individual residential lot owners. However, the executive right for the entire mineral estate was held by Bluegreen Southwest One, L.P., a residential property developer. In the words of the original deed conveying the executive rights, Bluegreen had the "full, complete and sole right to execute oil, gas and mineral leases covering all the oil, gas and other minerals in the following described land..." Bluegreen proceeded to develop the surface of the property into the Mountain Lakes development, a subdivision containing more than 1,200 lots. In order to "enhance [ ] and protect [ ] the value, desirability and attractiveness" of the subdivision, Bluegreen added restrictive covenants to the deeds conveying the lots, which forbade "commercial oil drilling, oil development operations, oil refining, quarrying or mining operation."
As Bluegreen was developing the Mountain Lakes subdivision, the Barnett Shale was also being developed, and there is evidence that Mountain Lakes sits on $610 million worth of minerals. In 2005, certain non-participating mineral interest owners sued Bluegreen complaining that the restrictive covenants limited mineral development and further alleged that Bluegreen, as the executive mineral interest owner, breached its duty to them. Bluegreen responded that since it had not undertaken to lease the minerals, it had not exercised the executive right and therefore owed no duty to the non-executive mineral interest owners.
In the 1998 case of Manges v. Guerra2, the Supreme Court of Texas held that the duty of the executive mineral interest owner to the non-executive mineral interest owners is fiduciary in nature, with the relationship being one of trust with a duty of utmost fair dealing. The court further stated that the executive’s duty is to "acquire for the non-executive every benefit that he exacts for himself." However, this duty was relaxed somewhat in In re Bass3 when the Supreme Court of Texas held that since the executive mineral interest owner had not acquired any benefits for himself by executing a lease, no duty had been breached to the non-executive mineral interest owners.
In the case at hand, the Supreme Court of Texas clarified the holding from In re Bass by stating that an executive mineral interest owner cannot shield itself from liability by inaction or failure to execute a lease. "It may be that an executive cannot be liable to the non-executive for failing to lease minerals when never requested to do so, but an executive’s refusal to lease must be examined more carefully. If the refusal is arbitrary or motivated by self-interest to the non-executive’s detriment, the executive may have breached his duty."4The court found that Bluegreen exercised its executive right to limit future leasing by imposing restrictive covenants on the subdivision. At the same time, the court found that Bluegreen breached its duty to the non-executive mineral interest owners by filing the restrictive covenants, and stated that the remedy is cancellation of the restrictive covenants. As now established by the Supreme Court of Texas in Lesley, an executive mineral interest owner can no longer rely on In re Bass to automatically guard itself from liability by simply refusing to lease the applicable minerals.