Executive Rights Holders: New Lease Considerations

Posted on May 1, 2012

The Texas Supreme Court’s ruling in late 2011 in Lesley, et al v. Veterans Land Board of the State of Texas, et al indicated a shift in Texas law regarding the duties of the holders of executive rights to the owners of nonexecutive mineral interests. For the uninitiated, “executive rights” are one component of the mineral estate and the owner (or owners) of these rights is vested with authority to enter into oil and gas leases or other contracts for the development of the mineral estate. Lesley signals a potential shift in the law as it indicates that the holders of executive rights may, in some (presently undefined) instances, have a duty to develop the mineral estate. This is a significant expansion of the holdings under prior case law which generally provide that the executive rights owner must extract every benefit for the nonexecutive that it takes for itself in the event the executive rights owner chooses to lease, but the executive rights owner has no duty to lease (exercise the executive right).

The salient facts of Lesley are as follows. Bluegreen Southwest One, LP owned the surface and 100% of the executive rights to several thousand acres of land which it developed into a subdivision. Bluegreen sold lots in the subdivision without reservation, but subject to certain restrictive covenants, including a provision forbidding “…commercial oil drilling, oil development operations, oil refining, quarrying or mining operations.” Subsequently, it was determined that the subdivision was situated over the Barnett Shale and the untapped oil and gas reserves were valued at over $600 million dollars. The nonexecutive mineral interest owners filed suit on a number of counts, including a claim that the owners of the executive rights had breached their duties to the nonexecutives by not leasing and developing the mineral estate.

Bluegreen and its lot owners (who had acquired executive rights to their respective tracts by virtue of their deeds) argued that they had never exercised their executive rights, and therefore could not have breached the duty owed to the nonexecutives. This argument was consistent with the holding of In re Bass, a prior Texas Supreme Court case where the court held that the executive had not breached its duty to the nonexecutives by refusing to enter into an oil and gas lease. However, the Court in Lesley determined that Bluegreen did breach its duty to the nonexecutive mineral owners by filing the restrictive covenants. The Court explains that the imposition of the restrictive covenants was an exercise of the executive right, noting that such exercise had the effect of limiting mineral development in the future.

The Lesley case has a unique set of circumstances in that the executive rights owner had limited future mineral development in a sweeping way (the restrictive covenants could only be revoked by a 2/3 vote of the owners in the subdivision). However, the Court did not limit its holding to the specific facts of the case. The Court states that nonexecutive mineral interest owners have never been “…wholly at the mercy of the executive…” and further expresses that “… [if] the refusal [by the executive to lease] is arbitrary or motivated by self-interest to the non-executive’s detriment, the executive may have breached his duty.”

What does this mean? At this point it is too early to do much except speculate. At a minimum, Lesley indicates that current holders of executive rights should be cautious when making decisions about whether to exercise such rights, particularly when the motive to refrain from signing an oil and gas lease does not serve the best interests of the nonexecutive. For parties who are acquiring executive rights, particularly those with the idea of keeping mineral exploration and development to a minimum, you may want to consult with your attorney about how to best achieve your goals and define your duties. For nonexecutive mineral interest owners whose potential financial benefits from oil and gas exploration and production may be rendered worthless by a recalcitrant executive rights owner, Lesley appears to provide a meaningful means of recourse, or at least leverage to increase the likelihood of mineral development.