October 11, 2016
Petition for Review from the Court of Appeals for the Seventh
District of Texas.
H. LEHRMANN JUSTICE.
oil-and-gas case, we are asked to apply the rule against
perpetuities to a top lease and to review the trial
court's judgment terminating a bottom lease based on jury
findings that the lease failed to produce in paying
quantities over a specified period. The court of appeals held
that the rule did not invalidate the top lease at issue and
that the trial court erroneously charged the jury on the
production-in-paying-quantities question, necessitating a new
trial. We agree and affirm the court of appeals'
America Production Company acquired by assignment a 1971
oil-and-gas lease (the BP lease) covering property in Roberts
County, Texas. The lease had a primary term of five years and
continued "as long thereafter as oil or gas is produced
from said land hereunder." During the relevant time
period, the BP lease had one producing well, the Mahler D-2.
Beginning in August 2005, production from the Mahler D-2
slowed significantly for approximately fifteen months. In
November 2006, the well resumed producing in quantities
comparable to those before the slowdown.
the period of slowed production, an attorney for the lessors,
Ron Nickum, believed that there had been a total cessation of
production from the well. In April 2006, he sent BP a letter
stating, "[i]t appears that [the BP] lease has
terminated by reason of failure to produce in paying
quantities and cessation of production." The letter went
on to warn:
Any farmout or assignment in the terminated lease, or any
additional drilling, reworking, or other development under
the terminated lease, is taken at your own risk.
. . . Any further payment of royalty will simply be
considered a partial payment of all monies due from
production and sale of hydrocarbons . . . rather than a
ratification or revivor of the terminated lease described
concluded the letter with a request for a BP agent to contact
him to discuss the matter. BP did not respond.
March 2007, approximately five months after the well resumed
pre-slowdown production levels, the lessors under the BP
lease entered into a top lease with Laddex, Ltd. (the Laddex
lease) covering the same property as the BP
lease. The Laddex lease provided in pertinent
It is agreed that this is a top lease and, subject to the
other provisions herein contained, the primary term of this
lease shall commence [(a)] upon the date that written
releases are filed in the official public records of the
county in which the land is located by all owners of record
of the prior terminated lease, releasing the last recorded
prior now-terminated lease (the "base lease"); or
(b) upon the date upon which a judgment of a court of
competent jurisdiction terminating the base lease and all
interests under the base lease becomes final and
nonappealable. This Lease is intended to and does include and
vest in Lessee any and all remainder and reversionary
interest and after-acquired title of Lessor in the Leased
Premises upon expiration of any prior oil, gas or mineral
lease . . . .
after the Laddex lease was executed, Laddex sued BP, alleging
that the BP lease had terminated for failure to produce in
paying quantities in 2005 and 2006. BP moved to dismiss the case
for lack of subject-matter jurisdiction, arguing that Laddex
lacked standing to bring its claims because the purported
source of that standing-the Laddex lease-violated the rule
against perpetuities and was therefore void. The trial court
denied the motion, and the case proceeded to a jury trial on
court's charge to the jury asked whether the Mahler D-2
failed to produce in paying quantities "[f]rom August 1,
2005 to October 31, 2006" and whether, "under all
the relevant circumstances, a reasonably prudent operator
would not continue, for the purpose of making a profit and
not merely for speculation, to operate the Mahler D-2 Well in
the manner in which it was operated between August 1, 2005 to
[sic] October 31, 2006." The jury answered yes to both
questions. The jury also found that Nickum's April 2006
letter did not "repudiate BP's title to the [BP]
lease." The trial court rendered judgment on the
verdict, decreeing that the BP lease "has lapsed and
terminated for failing to produce in paying quantities"
and granting Laddex possession of the pertinent mineral
estate. BP appealed.
court of appeals agreed with the trial court that Laddex had
standing, but reversed the judgment based on charge error and
remanded for a new trial. 458 S.W.3d 683 (Tex. App.- Amarillo
2015). On the standing issue, the court of appeals held that
the Laddex lease was not subject to the rule against
perpetuities because it conveyed to Laddex a vested interest
in the lessors' possibility of reverter. Id. at
686-87. As to the jury charge, the court of appeals held that
the trial court erred in limiting the jury's
paying-production inquiry to the specific fifteen-month
period in which production slowed. Id. at 688.
Noting that the controlling issue was whether the well failed
to produce in paying quantities over a reasonable period of
time and that the Mahler D-2 had undisputedly resumed paying
production by the time the Laddex lease was executed, the
court of appeals concluded that the charge "limited the
jury's consideration to a period of time that was not
reasonable." Id. Finally, the court rejected
BP's challenge to the legal sufficiency of the evidence
to support the verdict, holding that the record revealed
"sufficient evidence to have allowed a reasonable jury
to differ as to whether the lease produced in paying
quantities when a reasonable period of time is
considered." Id. at 689.
Laddex each filed a petition for review complaining of the
court of appeals' judgment. Laddex argues that the jury
was properly instructed and the trial court's judgment
should have been affirmed, while BP maintains that judgment
should be rendered in its favor, either because Laddex lacks
standing or because no evidence supports the jury's
findings regarding the Mahler D-2's cessation of
production in paying quantities. We granted both petitions.
The Rule Against Perpetuities
challenges Laddex's standing to seek termination of the
BP lease, arguing that the top lease on which such standing
depends is void as a perpetuity. Because lack of standing
deprives the court of subject-matter jurisdiction, we address
this issue first. Austin Nursing Ctr. v. Lovato, 171
S.W.3d 845, 849 (Tex. 2005).
Texas Constitution prohibits perpetuities as "contrary
to the genius of a free government." Tex. Const. art. I,
§ 26. This prohibition is embodied in the common-law
rule against perpetuities (Rule), which provides that
"no interest is valid unless it must vest, if at all,
within twenty-one years after the death of some life or lives
in being at the time of the conveyance." Peveto v.
Starkey, 645 S.W.2d 770, 772 (Tex. 1982). In applying
the Rule, we look at the conveyance instrument as of the date
it is executed, "and it is void if by any possible
contingency the grant or devise could violate the Rule."
Id. However, we also recognize "that where an
instrument is equally open to two constructions, the one will
be accepted which renders it valid rather than void, it being
assumed that a grantor would intend to create a legal
instrument rather than one which is illegal." Kelly
v. Womack, 268 S.W.2d 903, 906 (Tex. 1954).
the Rule does not apply to present interests or to future
interests that vest at their creation. See id. at
905-06 ("The requirement of the rule in this respect is
complied with when a future estate or interest becomes vested
in interest regardless of when it becomes vested in
possession."). Accordingly, we must examine the nature
of the interest conveyed under the Laddex lease to guide our
determination of whether the Rule applies.
Texas, a typical oil and gas lease actually conveys the
mineral estate (less those portions expressly reserved, such
as royalty) as a determinable fee." Luckel v.
White, 819 S.W.2d 459, 464 (Tex. 1991). "A
possibility of reverter is the interest left in a grantor
after the grant of a fee simple determinable."
Jupiter Oil Co. v. Snow, 819 S.W.2d 466, 468 (Tex.
1991); Luckel, 819 S.W.2d at 464 (explaining that
the possibility of reverter is "the grantor's right
to fee ownership in the real property reverting to him if the
condition terminating the determinable fee occurs"). The
possibility of reverter, though not presently possessory, is
presently vested at the time the lease is executed. See
Snow, 819 S.W.2d at 468.
this well-established framework, the BP (bottom) lease
conveyed the lessors' mineral estate to BP's
predecessor as a determinable fee, subject to a vested
possibility of reverter in the lessors. And we have
recognized that a lessor may sell or assign all or part of
the possibility of reverter. Id. at 468-69. In turn,
Laddex contends that the lessors conveyed their vested
reversionary interest in the mineral estate to Laddex via the
Laddex (top) lease. See Michael L. Brown, Effect
of Top Leases: Obstruction of Title and Related
Considerations, 30 Baylor L. Rev. 213, 239 (1978)
(noting that a top lease "may be classified as a partial
alienation of a possibility of reverter, " in that
"a lessee under a top lease acquires the lessor's
possibility of reverter to the extent that what he has
acquired is capable of ripening into a fee simple
determinable interest upon expiration of the bottom
lease" (emphasis omitted)). BP responds that, to the
extent the Laddex lease conveyed ...