Oil and Gas Royalty Owner’s Rights of First Refusal (“ROFR”) Granted in Settlement Agreement Held Enforceable on Appeal as Covenants Running with Land.

In a 2002 settlement, our client received overriding royalty interests (“ORRIs”) in certain East Texas oil and gas properties and ROFRs, granting the client the option to purchase any property, lease or well in which the client had an interest on the same terms as offered by a bona fide third party. The settlement also provided the client with certain “anti-washout” rights. During the subsequent fifteen-year period, the client’s ORRIs and ROFRs rights were not honored by various operators with the result that substantial monies were not paid to the client and leases were sold without notice to the client, thereby preventing the client’s exercise of its ROFRs. The client engaged other legal counsel to bring suit against the operators in the chain of title to recover the unpaid ORRIs and the leases that had been sold. The trial court entered summary judgment in favor of the operators, holding that the ROFRs were not covenants running with the land, because they were not mentioned in the recorded assignment establishing the client’s ORRI. On appeal, Shields Legal successfully convinced the appellate court to reverse the summary judgment and hold that the client’s ROFR rights were valid and enforceable.

Introduction

The client owned a 7.5% ORRI in numerous East Texas oil and gas properties and held ROFR rights in the event ownership or operation of such properties was proposed to be assigned, sold, conveyed, or transferred. During the next fifteen years, the oil and gas leases changed hands several times and the client did not receive much in the way of royalty payments. Although no notice was provided to the client regarding the transfer of leases, the client certainly was aware that it was receiving only minimal royalty payments. Nevertheless, the client took no action.

Problem

Although the client’s ROFR rights were documented in the 2002 settlement agreement, the ROFR rights were not expressly referenced in the recorded assignment establishing the client’s 7.5% ORRI. However, the recorded assignment did reference and furnish notice of the 2002 settlement agreement.

In addition to the ROFR rights, the settlement agreement contained an anti-washout provision under which the client had the contractual option to purchase any well or lease that the operator intended to abandon or permanently plug.

During the subsequent fifteen-year period, the client was not provided with any notice to enable the client to exercise its ROFR and anti-washout rights.

The trial court found that the client’s ROFR rights were not enforceable as covenants running with the land, because such rights were not referenced in the recorded assignment evidencing the client’s 7.5% ORRI. Consequently, the trial court granted summary judgment in favor of the operators, and our client faced not only the loss of the royalties but of its property rights and interests.

Solution

After losing in the trial court, the client retained Shields Legal to pursue the client’s property rights and interests on appeal. Although this was an uphill battle, Shields Legal was able to flip the trial court’s adverse summary judgment ruling.

Shields Legal made the argument that a covenant running with the land is not required to be contained in a deed or assignment to be enforceable. The appellate court agreed, ruling that the reference in the recorded assignment to the 2002 settlement agreement was sufficient notice to the operator and any subsequent transferee to ascertain the contents of the 2002 settlement agreement, which disclosed the client’s ROFR rights.

The appellate court further agreed with Shields Legal’s argument that both the recorded assignment and the 2002 settlement agreement contained clear and unambiguous language that the ORRI and ROFR, respectively, were covenants running with the land that were valid and enforceable against not only the current mineral owners and operators, but also their subsequent assigns, successors, and/or transferees.

Redirecting the appellate court to the language of the operative instruments was critical to overturning the trial court’s summary judgment.

Conclusion

As a result of Shields Legal’s efforts, an adverse summary judgment ruling in an oil and gas case was reversed on appeal, and the case was remanded back to the trial court. Ultimately, the client successfully settled its claims against the numerous defendant operators. For further information, see MJR Oil & Gas 2001, LLC v. AriesONE, LP, 558 SW3d 692 (Tex. App. – Texarkana 2018, no pet.).