A Landman’s Guide to Force Majeure and Shut-In Royalty Clauses in a Covid-19 Environment

A. Force Majeure

 Step 1. Determine if the Lease has a force majeure clause. Texas courts will not imply a force majeure clause into a Lease.

 Step 2. Determine whether the current circumstances are specifically covered by the force majeure clause. Broadly speaking, an event will be within the scope of the force majeure clause if: 1) a specific force majeure provision lists the event; 2) the clause is not limited to specifically listed events, the event is similar to events listed in the specific force majeure provision and the event was unforeseeable when the lease was drafted; or 3) the catch-all provision specifies the parties intend to excuse all disruptions regardless of their similarity to the specifically listed force majeure events and the event was unforeseeable when the lease was drafted.

(a) Does the clause cover pandemics, destruction of market or government restrictions on commerce as force majeure events? Note that many clauses simply use the terms force majeure and/or acts of God to define the circumstances covered. These terms are vague and have no generally accepted meanings, giving rise to potential disputes. A useful clause will define the term “force majeure” to include specific events and circumstances, and/or types of events and circumstances that excuse performance. If the specific event or circumstances under which you seek to avoid an obligation are included within the definition of “force majeure,” the clause will apply to excuse performance whether or not such event or circumstances were foreseeable.

(b) If the force majeure clause does not specifically cover the event or circumstances under which you seek to avoid an obligation, look for catch-all language. Magic words to look for are “including without limitation” or “together with any other event, whether similar or dissimilar to those identified, which is beyond the control of Lessee and prohibits performance.” If you are relying on catch-all language you will: 1) need to make sure one or more of the specifically listed force majeure events are similar to the COVID-19 circumstance; and 2) prove the COVID-19 circumstance was unforeseeable. Although market fluctuations are foreseeable events, the destruction of market demand due to a pandemic and government restrictions on commerce are likely not foreseeable.

Step 3. Determine whether the force majeure clause excuses the obligation. Many force majeure clauses do not excuse obligations to pay royalties or money to lessors.

Step 4. Comply with any notice provision and other express requirements in the clause. Analyze the Lease’s shut-in royalty clause to determine whether shut-in royalty payments are required to maintain the Lease.

Bottom Line. Read the force majeure clause in the lease closely and apply it to your current circumstances. If you need to rely on catch-all language, the language should be reviewed by a lawyer unless one or more specific force majeure events listed in the clause are clearly similar to market destruction resulting from COVID-19.

B. Shut-in Royalty

Step 1. Determine if the Lease has a shut-in royalty clause. Texas courts will not imply a shut-in royalty clause into a Lease.

Step 2. Determine if the shut-in royalty clause applies to oil and/or gas wells. Typically, the clause is limited to gas wells.

Step 3. Confirm the well is capable of producing in paying quantities. At the time the well is shut-in, the well must be capable of producing oil or gas in paying quantities over a reasonable period of time when the well is turned “on” without repairs or additional equipment. Courts will imply this requirement into a shut-in royalty clause even though the shut-in royalty clause does not specify a capacity for production.

Step 4. Determine whether the shut-in royalty clause allows the payment of shut-in royalties for temporarily unprofitable wells.

(a)  If the shut-in royalty clause sets out specific reasons for which a well may be shut-in, those reasons are the only reasons authorizing a lessee to shut-in an otherwise productive well.

(b)  If the shut-in royalty clause allows the Lessee to shut-in a well at any time gas or oil is not being sold or used without identifying specific reasons justifying the shutting in of the well, a Lessee could properly shut-in temporarily unprofitable wells with shut-in royalty payments.

Caution. The presence of a shut-in royalty clause will not excuse a Lessee’s obligation to comply with the implied duty to market. Judicial enforcement of the marketing covenant will prevent an indefinite extension of a Lease to protect the Lessor’s interests. However, the presence of a shut-in royalty clause may lengthen the time a court determines is a reasonable time to find a market.

Bottom Line. Read the shut-in royalty clause in the lease closely. Shut-in royalty clauses are usually custom drafted and intended to be conditions of a Lease, whereby failure to timely pay shut-in royalties, and sometimes, the improper tender of shut-in royalties could cause your Lease to terminate.

If you have questions concerning this topic, please contact Jesse Nation, oil, gas and energy lawyer with Branscomb Law, at jnation@branscomblaw.com or (361) 886-3800.

 

Disclaimer: This guide is made available for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. The guide should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Use of this guide does not create an attorney client relationship between you and the publisher.