Louisiana Legal Update

By Jamie D. Rhymes
Liskow & Lewis

Divisibility of Mineral Leases

In the Haynesville Shale, there have been a number of deals where companies have purchased “deep rights” in leases in certain areas held by production. A recent suit, Georgia F. Hodgson and Eugene F. Hodgson v. Chesapeake Louisiana, L.P., et al, Dkt. No. 535185-C, Caddo Parish, challenged whether such an assignment of deep rights could divide the mineral lease, such that there would be separate maintenance obligations for the shallow rights and the deep rights. The trial court held that the lease was divided by an assignment of the deep rights. This short article will review the jurisprudence regarding lease divisibility and the recent decisions that might lead to some guidance on whether a lease can be divided by an assignment of the deep rights.

Historical Jurisprudence on Lease Divisibility
Historically, courts have held that a partial assignment of a lease may divide a mineral lease. For example, in Roberson v. Pioneer Gas Co., 137 So. 46 (La. 1931), a 40 acre portion of a 125 acre lease was assigned to a third person. A well was drilled on the 40 acre tract, but there were no operations on the remaining 85 acres. The lease contained a “division rental” or “rental apportionment” clause. Such a clause generally provides as follows:

"It is hereby agreed in the event this lease shall be assigned as to part or as to parts of the above described lands, and the assignee or assignees of such part or parts shall fail or make default in the payment of the proportionate part of the rents due from him or them, such default shall not operate to defeat or affect this lease in so far as it covers a part or parts of said lands upon which said lessee or assignee thereof shall make due payment of said rental."

The Roberson court held that the division rental clause had the effect of making the lease divisible. Thus, the operations on the 40 acres did not maintain the lease as to the remaining 85 acres. See also Swope v. Holmes, 169 La. 17, 124 So. 131 (La. 1929), Tyson v. Surf Oil Co., 195 La. 248, 196 So. 336 (La. 1940). The use of this clause to divine intent to make the lease divisible by the parties is questionable, as on its face it is nothing more than an effort to preserve a portion of the lease if one of the lessees fails to make a delay rental payment properly.

The Hodgson Case
In Hodgson v. Chesapeake Louisiana, L.P., the predecessor in title to the Plaintiffs, Mary Flournoy, granted a mineral lease to Fortune Gas and Oil (“Fortune”) in 1975 covering 52 acres of land in Caddo Parish, Louisiana (the “Flournoy Lease”). In 2006, Fortune assigned to Fairway Resources all depths below the Rodessa Hill formation in the Flournoy Lease in certain geographical areas without any reservation. The lease contained a division rental or rental apportionment clause which stated:

". . . the rentals payable hereunder shall be apportioned as between the several leasehold owners ratably according to the surface area of each, and according to the undivided interest of each, and default in rental by one shall not affect the rights of other leasehold owners hereunder. An assignment of this lease, in whole or in part, shall, to the extent of such assignment, relieve and discharge Lessee of any obligations hereunder and , if Lessee or assignee of part or parts hereof shall fail or make default in the payment of the proportionate part of the rentals due from such Lessee, or assignee, or fail to comply with any other provisions of the lease, such default shall not affect this lease insofar as it covers a part of said lands upon which Lessee or any assignee thereof shall make payment of said rentals."

The Plaintiffs argued that the assignment of the deep rights divided the lease pursuant to Roberson and the older cases regarding division of leases when there is a division rental clause. The Defendants countered that the lease was not divisible and further, that the assignment was properly a “sublease” and as such could not have divided the lease.

The trial court ruled that the rental apportionment clause, cited above, created divisibility when the lease was partially assigned. One issue for the court was whether the lease could be divided “horizontally” in addition to being divided “vertically.” For example, consider a vertical division as taking a 100 acre lease making two 50 acre leases, both of which are unlimited as to the depths each covers. A horizontal division would be to take the same 100 acre lease, and make two separate 100 acre leases, but one covering rights from surface to 100’, and the other all depths below 100’.

The trial court relied upon the decision in Scurlock Oil Co. v. Getty Oil Co., 278 So.2d 851 (La. App. 3d Cir. 1973) to hold that the lease could be divided horizontally. The trial court noted that in Scurlock , the Third Circuit theorized that a mineral lease could be horizontally divided under the right circumstances, but held that such a division did not occur in that case. The Louisiana Supreme Court reversed Scurlock, but on other grounds, Scurlock Oil Co. v. Getty Oil Co., 294 So.2d 810 (La. 1974), but on other grounds and did not reach the question of whether a mineral lease could be horizontally divided by an assignment.

Nevertheless, the Hodgson court followed the Third Circuit’s logic in Scurlock, and held that the Flournoy Lease could be horizontally divided. The Defendants in Hodgson also argued that the transfer of the Flournoy Lease was a sublease, and not an assignment, and thus did not divide the lease. In simple terms, Louisiana mineral law distinguishes between an assignment conveying all of the assignor’s interest in a lease, and a sublease, under which the sublessor conveys a portion of his interest, but not everything. (Thus, an “assignment” under which the assignor retains an overriding royalty interest is actually a sublease).

The Hodgson Defendants argued that under the Third Circuit’s opinion in Scurlock, a partial assignment of a horizontal stratum was a sublease, as the owner of the deep rights necessarily reserved the right to access the surface of the land. The trial court in Hodgson did not address why they considered the transfer of the Flournoy Lease as an assignment, but one can only assume that the trial court took the position that without a reservation of an overriding royalty or some other interest in the deep rights, the transfer was an assignment and not a sublease.

Hoover Tree Farm v. Goodrich
Several months prior to the Hodgson opinion, the Second Circuit gave some guidance on the issue of divisibility of mineral leases. In Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., L.L.C., 63 So.2d 159 (La. App. 2d Cir. 2011), the court addressed the impact of a Most Favored Nations (“MFN”) clause. The MFN at issue applied only to Goodrich Petroleum Company, and its “respective successors and assigns.” Goodrich assigned a 50% working interest as to all depths below the Cotton Valley formation to Chesapeake Louisiana LP (“Chesapeake”).

Although not pertinent to the court’s decision as to whether Chesapeake was a successor or assign of Goodrich, the court noted that the language relied upon in the Roberson case, supra, “contemplated only a type of limited lease division upon the nonpayment of a portion of the lease rentals during the primary term” and did not provide for a division for all purposes. Id. at 174. Applying this strict construction of lease divisibility, the court that the assignment of a 50% working interest in the deep rights in the subject lease did not divide the lease, as there was not a transfer of a specific geographical portion of the lease. Id. at 175 n18. It appears that the panel in the Hoover Tree Farm was of the view that the rental apportionment clause did not indicate an intent to make the lease divisible, even as to vertical division. It is difficult to imagine, therefore, that the Hoover Tree Farm would have found a basis for horizontal lease division. The Hodgson case is on appeal and it appears that a correct result would be to reverse the decision as to its holding that a lease can be horizontally divided based upon the rental apportionment clause.

The defendants in the Hoover Tree Farm case also took the position that the transfer to Chesapeake was a sublease, and not an assignment, and thus Chesapeake was not a “successor or assign.” The court reviewed the jurisprudence regarding determining whether a partial transfer of a lease is to be considered a sublease or assignment, including the Scurlock decision from the Third Circuit. The court found that the no prior case had involved the transfer of an undivided interest in a mineral lease, and in that situation, the court found that the transfer of a 50% interest was not a sublease, but an assignment of an undivided interest in the deep rights, leaving Goodrich and Chesapeake as co-owners of the deep rights. Thus the court found that Chesapeake was an “assign” under the MFN clause, and the lessees were obliged to pay the higher amounts owed pursuant to the MFN clause.

Jamie Rhymes represents oil and gas companies, from the largest to the smallest, in a in a
wide variety of energy litigation and legal matters. He has extensive experience in oil and gas
litigation, including royalty litigation, lease litigation, joint operating agreement disputes, loss
of control litigation, and legacy litigation. Mr. Rhymes has appeared before the Commissioner
of Conservation and the State Mineral Board in various oil and gas matters for clients. He also
performs title examinations. He renders drillsite and division order title opinions for the energy
industry in connection with the drilling of wells and disbursing proceeds of their production.

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