Background and Lease Terms
In this case (Scout Energy Mgmt., LLC v. Taylor Properties, No. 23-1014, 2024 WL 5249490 [Tex. Dec. 31, 2024]), the Texas Supreme Court held that vague notations on shut-in royalty check receipts cannot modify an unambiguous lease provision regarding the timing and effect of shut-in payments.
The dispute arose from two leases containing identical shut-in royalty provisions. These provisions allowed the lessee to maintain the lease during periods of non-production by paying “$50.00 per well per year,” stating that “upon such payment it will be considered that gas is being produced” within the meaning of the habendum clause.
After production ceased in September 2017, ConocoPhillips (Scout’s predecessor) made shut-in payments for both leases, with receipts showing “Mth Begin: 9-06-17”. One month later, in October 2017, ConocoPhillips made two additional shut-in payments in the same amounts, but they included a notation reading “Mth Begin: 10-09-2017”. Scout interpreted the payments as securing two consecutive 12-month periods, and made another shut-in payment in December 2018.
Procedural History and Conflicting Interpretations
Taylor Properties sued Scout, arguing the leases had terminated before Scout’s December 2018 payment because more than one year had passed since the October 9, 2017 date noted on ConocoPhillips’s October 2017 shut-in check. The trial court found the shut-in clause ambiguous but ruled for Scout, holding that each payment secured a full year of constructive production without resetting the clock. The court of appeals agreed with Scout that the clause unambiguously would have allowed each payment to secure a full one-year period of constructive production, but ultimately reversed and held the leases had terminated because, in its view, the “Mth Begin” notations on the check receipts controlled the beginning date for the applicable one-year shut-in period. Under that view, the shut-in period expired in October of 2018, making Scout’s December 2018 payment untimely.
Supreme Court Ruling on Shut-In Clause and Payment Timing
The supreme court held the shut-in clause was unambiguous and that each $50 payment secured a full year of constructive production, regardless of when subsequent payments were made. The court explained this interpretation properly gave effect to the parties’ express agreement that $50 would cover an entire year of constructive production.
The court rejected Taylor’s argument that the phrase “upon such payment” meant the one-year period began anew at the time of each payment. The court explained this interpretation would improperly rewrite the clause to add language about resetting the time period, while also potentially requiring lessees to pay twice for the same months of constructive production—undercutting the parties’ express agreement that $50 would cover an entire year.
Effect of Payment Notations and Practical Implications
The court then addressed whether the “Mth Begin” notations modified the lease terms regarding when the shut-in period would run. While acknowledging parties can modify lease terms through subsequent agreement, the court held these particular notations were “too vague to be given effect as a contract or a lease modification.”
In the court’s view, this was distinguishable from two cases the appellate court had relied upon which involved more specific check notations. Without expressly approving those prior decisions, the supreme court explained they involved situations where check notations explicitly stated the specific time period intended to be covered by the payment. Distinguishing those cases from the ConocoPhillips payments, the court said that the mere notation “Mth Begin” with a date was insufficient to constitute a clear agreement modifying unambiguous lease terms.
This case is notable insofar as providing guidance for practitioners regarding both interpretation of shut-in clauses and whether notations on shut-in payments can effectuate a modification of lease terms. The court’s analysis suggests shut-in provisions should generally be construed to avoid interpretations requiring double payment for overlapping time periods. The court’s treatment of the Amend and Mayers decisions also provides some guidance for practitioners analyzing when payment notations might effectively modify lease terms.
