EP Energy E&P Co., L.P. v. Storey Minerals, LTD, No. 04-19-00534-CV, 2022 WL 223253 (Tex. App.—San Antonio Jan. 26, 2022, pet. filed). Construction of Most-Favored-Nations clause in Oil and Gas Lease.
At issue in this case is the construction of most-favored-nations (MFN) clauses contained in identical oil and gas leases. Specifically, the number of additional bonuses due to lessors upon the triggering of said clause, and whether the lower court failed to consider surrounding circumstances while construing the clause.
Key Takeaways
Origin of the Dispute
In 2009, Storey Minerals, Ltd., Maltsberger/Storey Ranch, LLC, and Rene R. Barrientos, Ltd. (hereinafter “MSB”), entered into three identical oil and gas leases containing most-favored-nations clauses (MFN) with EP Energy E&P Company, L.P. (hereinafter “EP”). Under Article II of the three leases (hereinafter “A leases”), EP was required to pay $500 in bonuses per net mineral acre (NMA) for the right to lease MSB’s property. Later, EP took two additional leases – the First Presbyterian and Donaldson Brown leases – at $5,200 per NMA, which MSB maintained triggered the A leases’ MFN clauses. If the MFN applied, MSB would be owed an additional $4,700/acre on the A leases.
Believing that the First Presbyterian and Donaldson Brown leases had triggered their MFN clause, MSB demanded to review the lease forms. Eventually, EP obliged and tendered an amendment to the A leases, which increased bonuses, but did not increase delay rentals. After the parties failed to agree on amounts due for bonuses and delay rentals, MSB filed suit for breach of the A leases.
MSB’s motion for partial summary judgment asserted that EP breached the MFN clause after failing to amend the leases and increase bonuses and delay rental payments. MSB also sought specific performance, in the form of amended A leases, as well as damages. In response, EP moved for summary judgment on MSB’s claim and argued the MFN clause’s plain language and surrounding circumstances proved that no breach had occurred because an amendment to the A leases was tendered and EP had offered true-up bonus payments. Additionally, EP argued that MSB was never entitled to specific performance.
The trial court ruled in favor of MSB, finding that EP breached the MFN clause, and required it to amend the A leases, as well as pay $41 MILLION IN UNPAID BONUSES (being the difference between the original bonus and the higher Donaldson Brown lease bonus). The court, however, denied MSB’s summary judgment motion on payment of delay rentals, finding that neither triggering lease called for rental increases. EP Energy timely appealed.
If at any time during the existence of this lease, the lessee . acquires an Oil and Gas Lease on a portion of the leased premises with any . entity that owns a mineral interest in the leased premises on such terms that the . bonus . [is] greater than th[at] provided to be paid to lessor hereunder, lessee expressly stipulates, warrants, and agrees that it will execute an amendment to this lease, effective as of the date of the third party lease on the leased premises, to provide that the lessor hereunder shall receive thereafter the same percentage (per net mineral acre) . bonus . as any subsequent lessor of the leased premises to the extent that such . bonus . [is] greater than those provided to be paid herein. To the extent that the . bonus . in any subsequent lease [is] less than provided herein, lessor hereunder shall continue to receive the . bonus . as provided in this lease. This Paragraph XXVI shall not apply to any lease or contract with a mineral owner that covers less than twenty (20) net mineral acres.
Disputed Terms and Prospective Lease Construction
The appellate court briefly highlighted the disputed terms within the MFN clause. In particular, the meanings of “effective” and “thereafter.” After applying the common definitions to the MFN clause, as a substitute for the disputed terms, the court ruled the language was properly applied and required EP Energy to pay the higher per NMA bonus.
More specifically, EP’s argument that “effective” called for a prospective rather than retroactive construction was deemed out of context. As the parties intended, “effective” simply meant the executed amendment operated “as of the date of the third-party lease,” whereas EP wrongly argued that requiring the amendment “effective on the effective date” made retroactive construction meaningless.
Additionally, EP contended use of “thereafter,” rather than “theretofore,” supported the MFN clause’s prospective application, with the latter having retroactive meaning. However, the court found that the use of “theretofore” elsewhere in the A leases was too sparse and unrelated to evidence the parties’ intent to use a prospective construction. Moreover, by arguing that the meaning of the whole MFN clause was the opposite of theretofore’s retroactive meaning, EP ignored the parties’ use of words in the MFN clause.
Despite additional EP arguments ultimately focused on semantics, the appellate court determined that the various constructions put forth by EP fell outside of the MFN clause’s plain language. Instead, the court made clear that the MFN clause provided straightforward instructions to each party: “if the bonus amount is higher in a triggering lease, (1) execute an amendment to the A leases to provide the same bonus per net mineral acre as the triggering lease, and (2) pay the same bonus per net mineral acre as the triggering lease.”
Next EP argued that the lower court improperly construed the MFN clause by failing to consider the surrounding circumstances that support their argument that no MFN breach occurred.
Texas law provides that in order to aid in construing an unambiguous lease, a court may in fact consider facts and circumstances surrounding a lease’s execution to aid in construction. However, in the case of an unambiguous document, the court is not allowed to “delve into the parties’ intent beyond what their agreement plainly yields,” and those facts and circumstances cannot be used to make the agreement say what it unambiguously does not say, “to show what the parties probably, or could have meant” or otherwise “add, alter, or change the contracts’ agreed-to terms.”
Illustrating what these facts and circumstances could look like, the court noted that while only objective facts and circumstances could be considered, these could include:
1. The commercial or business setting in which the contract negotiation took place;
2. The parties’ sophistication;
3. Trade custom and usage, as relevant;
4. Facts attending the agreement’s execution if they do not transform the meaning of the unambiguous language; and
5. Any other objective facts and circumstances that do not add to, alter, or contradict the agreement’s meaning.
Notably, at the time the parties executed the leases, MSB may not have had clear title to all the subject lands’ acreage. Nonetheless, an addendum was added to recognize that EP would pay bonuses on said acreage later, after title cleared. However, this addendum did not amend Article II’s $500 bonus amounts, nor the MFN clause. EP asserted that the fact MSB possibly lacked clear title during lease execution supported their reading of the MFN clause that bonus was only due on acreage that EP decided to pay bonus on. To the contrary, the court found the contention impermissibly added to, altered, or contradicted the MFN clause’s clear and unambiguous language.
The Court of Appeals held the trial court’s grant of summary judgment in favor of MSB was proper, though the claims for specific performance were denied.
EP filed a petition for review with the Supreme Court of Texas, so stay tuned. Oil and Gas professionals should note that MFN clauses intended to operate with prospective effect should be drafted with that intent made clear, as courts are reluctant to imply it.
For a more detailed insight into the 2022 Texas Oil & Gas Case Law Update, download the HELG paper.