A recent case from the Beaumont Court of Appeals may result in making the practice of taking top leases and challenging the validity of the underlying leases and units more difficult. The case, Kodiak Resources, Inc. v. Smith, reversed a trial court’s grant of summary judgment in favor of the lessors of an oil and gas lease, holding that the trial court abused its discretion by failing to order joinder of all the parties to the underlying lease.

In Kodiak, some of the lessors of an oil and gas lease sued the lessees under the Uniform Declaratory Judgment Act for a declaration that the mineral lease had terminated after the expiration of the three year primary term. Before the lessors filed their motion for summary judgment, the lessees moved to join the remaining lessors who were not already parties to the suit. The court denied that motion, and several months later, granted the lessors’ motion for summary judgment, holding that the lease had expired, and that, as a result, the pooling agreements which contained the tract were also “null and void.” The lessees appealed, arguing that, under Texas Rule of Civil Procedure 39(a), the remaining lessors were required to be joined in the lawsuit.

The Beaumont Court of Appeals began its analysis noting that, prior to the enactment of Rule 39(a), the law in Texas required joinder of all royalty owners in a unitized block in a suit seeking the cancellation of a lease. Consistent with this requirement, Rule 39, as originally enacted, followed the historic approach of treating the inability to join all whose interests would be affected by the outcome of a suit as a jurisdictional defect to court’s power to act. The 1971 revisions to Rule 39 altered the analysis of joinder to focus on whether the court ought to proceed without joining the other parties. However, the court observed, even the current version of Rule 39 directs that a trial court “shall order” joinder of all parties i) whose interests would be affected by the outcome or ii) who, if absent, would leave a party already in the suit subject to inconsistent obligations.

The court then noted that, as with the previous cases, each lessor in the present case “as a royalty owner, possesses an interest in a common lease, and those interests were at issue because the suit’s object was to free the tract subject to the lease from burdens imposed by the lease.” Thus, the court held that “[b]ecause the joinder of non-party lessors was both feasible and needed for a just adjudication, and because their joinder was requested . . . the trial court erred by failing to require the joinder of all parties to the lease.”

The recent upturn in leasing and drilling activity brought on by the shale plays has resulted in an increasing number of challenges to leases and units, sometimes by the original lessors and sometimes by a lessee under a top lease. Kodiak reinforces the proposition that, before a Texas court can hear a challenge to an oil and gas lease or a unit, it should require the joinder of all parties to that lease or unit, making it more difficult, in many instances, for a party seeking the cancellation of a lease. The case is Kodiak Resources, Inc. v. Smith, No. 09–10–00362–CV, — S.W.3d —, 2012 WL 488829 (Tex. App.—Beaumont, Feb. 16, 2012, no pet. hist.).