The Court of Appeals of Texas held in November 2013 that when a lease has a provision relieving the lessee of all obligations related to any released acreage or interests, an overriding royalty interest (ORRI) on the entire lease is extinguished as to the acreage included in the partial release of the lease, unless the instrument creating the ORRI expressly provides otherwise.
In 1966, Sutton Producing Corporation leased approximately 40,000 acres form Briscoe Ranch for the purpose of oil and gas exploration and production. The lease provided that the lessee could release "any part or all of said land or any mineral or horizon thereunder, and thereby be relieved of all obligations as to the released acreage or interest." Sutton assigned the 1966 lease and reserved an ORRI. This assignment contained a savings provision that the ORRI would apply to "all amendments, extensions, renewals or new leases taken on all or part of the lease premises within one year after termination of the present lease."
In March 2000, Crimson Energy Company L.P. ("Crimson"), a successor lessee under the 1966 lease, released 22,000 of the original 40,000 acres back to Briscoe Ranch. Over one year later, the lessor granted three new leases to Crimson covering the same 22,000 acres. Those leases were assigned to SM Energy Company ("SM Energy"). The 1966 lease continued as to the 18,000 acres not included in the partial release.
The question before the court was whether Crimson's partial release of the 22,000 acres and subsequent leasing of the same 22,000 acres extinguished Sutton's ORRI on those 22,000 acres. The Court of Appeals held that the ORRI on the released 22,000 acres was extinguished.
The general rule under Texas law is that ORRIs terminate when the leases they burden terminate unless the lease expressly provides otherwise. Both parties agreed that the ORRI terminated under the 1966 lease as to the 22,000 acres included in the partial release; however, they disagreed as to whether the savings clause in the assignment made the ORRI applicable to the 22,000 acres under the new lease.
Sutton argued that the savings provision applied to their ORRI because the provision required termination of the "present lease," and they argued the 1966 lease never terminated. Therefore, Sutton contended that the 2001 leases were not taken more than "one year after termination of the present lease." Nevertheless, the court held that "termination of the present lease" included a partial termination, and because no express savings provision addressed a partial release, the effect of that partial release was to extinguish the ORRI as to the 22,000 acres. The court stated it "presume[d] the parties to the 1966 lease knew that the ORRIs could be easily destroyed," and thus "it was the ORRIs' owners' burden to include an express provision to save their ORRIs from being extinguished by a partial termination that the lease expressly contemplated."
This case confirms the general rule that an ORRI does not survive the termination of the leasehold and, further, does not survive even a partial termination as to the released lands absent an express provision otherwise. It also serves as a reminder to owners of overriding royalties that they must clearly protect themselves to prevent their ORRIs from being extinguished. Lessees and ORRI owners should evaluate the instruments creating their ORRIs to determine whether their language allows an ORRI to continue even as to partial termination of a lease or whether an ORRI can be easily extinguished. Accordingly, companies and practitioners should be mindful of this case when drafting assignments and reservations.