Written by John McFarland of the Oil and Gas Lawyer Blog.
The Texas Supreme Court last week handed down its opinion in Coyote Lake Ranch v. City of Lubbock, holding, in a case of first impression, that the accommodation doctrine applies to govern the City’s right to use the surface of the Ranch to develop its groundwater.
Coyote Lake Ranch covers 40 square miles in Bailey County, on the Texas-New Mexico border northwest of Lubbock. In 1953, the then owners of the Ranch sold the groundwater under the Ranch to the City of Lubbock. The Ranch reserved the right to use groundwater for domestic use, ranching operations, oil and gas production, and agricultural irrigation, but the conveyance limits the Ranch to one or two wells in each of 16 specified locations. The Deed contains lengthy, detailed provisions on the City’s right to use the land. It grants to the City the right “at any time and location [to] drill water wells and test wells” on the Ranch, and to build roads, power lines and other improvements and otherwise make use of the Ranch lands “necessary and incidental” to the production of groundwater.
The groundwater underlying the Ranch is the Ogallala Aquifer, a huge aquifer that underlies much of north Texas as well as parts Oklahoma, New Mexico, Kansas, Colorado, and Nebraska. Water from the aquifer has made the arid high plains one of the most prolific agricultural regions of the United States. It is also a depleting resource and has been depleted in substantial areas of the Texas Panhandle.
Prior to 2012, the City of Lubbock had drilled seven wells on the northern edge of the Ranch to supply water for the City’s residents. In 2012, the City announced its plan to drill as many as 20 test wells in the middle of the Ranch, followed by as many as 60 additional wells spread across the Ranch. The Ranch objected to the plan, arguing that the program would increase erosion and unnecessarily injure the surface estate. The Ranch argued that the City had to take reasonable measures to accommodate the surface owner’s use of the land for grazing and agriculture, and it proposed an alternative plan for different well sites and fewer roads. The City claimed that it had the right to implement its plan pursuant to the express language of the deed and that it had no obligation to accommodate the surface uses of the Ranch.
When the City began mowing extensive paths through the native grass on the Ranch to well sites, the Ranch sued the City to enjoin the activities. The trial court granted an injunction, holding that the City’s proposed plan could be “accomplished through reasonable alternative means that do not unreasonably interfere with the Ranch’s current uses.” On appeal, the Amarillo Court of Appeals reversed, holding that the accommodation doctrine does not apply to severed groundwater and that the City had the right to conduct its operations.
The accommodation doctrine holds that the owner of the mineral estate must reasonably accommodate the surface owner’s existing uses. In Merriman v. XTO Energy, Inc., 407 S.W.3d 244, 249 (Tex. 2013), the Court set out the elements that the surface owner must prove to obtain relief under the accommodation doctrine:
To obtain relief on a claim that the mineral lessee has failed to accommodate an existing use of the surface, the surface owner has the burden to prove that (1) the lessee’s use completely precludes or substantially impairs the existing use, and (2) there is no reasonable alternative method available to the surface owner by which the existing use can be continued. If the surface owner carries that burden, he must further prove that given the particular circumstances, there are alternative reasonable, customary, and industry-accepted methods available to the lessee which will allow recovery of the minerals and also allow the surface owner to continue the existing use.
Justice Hecht wrote the majority opinion in Coyote, joined by Justices Green, Johnson, Guzman, Devine and Brown. Justice Boyd filed a concurring opinion, joined by Justices Willett and Lehrmann. The Court affirmed the court of appeals judgment, which reversed the trial court’s judgment granting a temporary injunction and remanded the case to the trial court for further proceedings. But the court disagreed with the court of appeals’ opinion that the accommodation doctrine does not apply to severed groundwater. It concluded that the trial court’s injunction was too broad and should be dissolved, but it remanded the case to the trial court to apply the principles of the accommodation doctrine to the City’s proposed uses of the Ranch.
Both the majority opinion and the concurring opinion agreed that the accommodation doctrine applies to require the holder of severed groundwater rights to reasonably accommodate existing uses of the property by the owner of the surface estate. In this respect, severed groundwater is no different from severed minerals, ruled the court.
But the majority opinion and the concurring opinion differed on the second issue in the case: whether the detailed language in the deed by which the City acquired the groundwater, specifying the City’s rights to use the surface estate, precluded application of the accommodation doctrine. The City argued that the parties addressed in great detail its right to use the surface estate for production of groundwater, and that the parties’ express agreements on that subject precluded the application of the accommodation doctrine. Justice Hecht’s opinion concludes otherwise:
The deed gives the City the right to drill wells “at any time and location” but only “for the purpose of” conducting operations to access the groundwater. The deed then limits the City’s use of the Ranch to what is “necessary or incidental” to those operations. But the deed leaves unclear whether the City can do everything necessary or incidental to drilling anywhere, as it claims, or only what is necessary or incidental to fully access the groundwater, as the Ranch argues. If the City is correct, it has an all but absolute right to use the surface heedless of avoidable injury, although it must answer for damages caused to the surface and rent incurred for the surface occupied [as required in the deed]. The City contends that it can drill wherever it chooses, even if it could drill in places less damaging to the surface and still access all the water. If the Ranch is correct, the City can drill only where the Ranch allows as long as full access to the groundwater is not impaired. The Ranch could thus severely restrict the City’s drilling activities. The deed does not resolve this dispute. It is simply silent on the subject.
The majority concludes that the deed language does not preclude application of the accommodation doctrine.
Justice Boyd’s concurring opinion would construe the surface-use language in the deed differently. He would hold that the deed’s language allows the City to drill its wells wherever it wants, and that this right should be enforced even if the result is to fail to reasonably accommodate the surface owner’s existing use. Justice Boyd quotes from the deed the grant of “the full and exclusive rights of ingress and egress in, over and on said lands, so that the [City] may at any time and location drill water wells and test wells on said lands for the purpose of investigating, exploring, producing, and getting access to percolating and underground water.” He concludes that, under this language, “if the City chooses to drill those wells where native grass grows on sand dunes, the deed expressly grants the City that right. Because the express terms of the parties’ agreement address the issue, the accommodation doctrine does not apply and the Ranch cannot rely on the doctrine to require the City to adopt an alternative plan for different well sites.” Justice Boyd would hold otherwise with respect to the City’s right to construct access roads. The deed says that the City can construct access roads and other improvements only as “necessary or incidental” to its operations. Under that language, Justice Boyd would hold that the accommodation doctrine should apply.
A few observations:
First, it was not surprising to me that the Court held the accommodation doctrine to apply to severed groundwater. There is no logical basis for distinguishing groundwater from mineral rights in the application of the doctrine, as Justice Hecht’s opinion concludes.
The more interesting part of the Court’s opinions concerns its interpretation of the deed language and whether that language precludes application of the accommodation doctrine. The deed’s provisions specifying the City’s rights to use the land are extensive, and the parties obviously spent considerable time and resources negotiating those terms in some detail. The City argued that, the parties having negotiated its rights of surface use in such detail, the City should not also be burdened with an implied obligation to accommodate surface uses, thereby further impairing its rights to use the surface. Whether and when express language in a deed or lease should limit or eliminate application of the accommodation doctrine is not an issue previously addressed by the Court. As can be seen from the difference between the majority and concurring opinions, the issue is not free from doubt.
Modern oil and gas leases often contain extensive provisions governing the lessee’s rights of surface use. Where, as in Coyote, the language does not expressly address whether the accommodation doctrine should apply, the same arguments made by the Ranch and the City could arise in surface-use disputes between landowners and their oil and gas lessees – does the express surface-use language in the lease preclude or limit application of the accommodation doctrine? The lesson of Coyote appears to be that parties to an oil and gas lease should say whether the accommodation doctrine will apply to the oil and gas lessee’s proposed surface uses, in addition to express limitations in the lease.
Finally, the difference between the majority and concurring opinions in Coyote is indicative of a dichotomy I have long observed in how courts address disputes in oil and gas leases and related contracts — what I call “relational” analysis versus “plain-meaning” analysis. Some courts look at oil and gas leases as “relational” contracts — contracts that govern a long-term relationship between the parties. In interpreting relational contracts, some courts apply an analysis that considers the general intent and purpose of the contract and imply an obligation of good faith in the parties’ performance. Courts using this approach may consider the general purpose and intent of the contract as more important than its specific language. The implied covenants in oil and gas leases were developed by courts using this relational approach to contract interpretation.
Courts adopting the “plain-meaning” approach to contract interpretation focus on the language used by the parties and not on the overall general purpose of the agreement. In the last twenty years, Texas courts have in my opinion moved away from the relational method of interpreting oil and gas contracts and toward the “plain-meaning” approach. A good example of this is Heritage v. NationsBank, 939 S.W.2d 118 (Tex. 1996). Justice Boyd’s opinion in Coyote is another example of this “plain-meaning” approach to contract interpretation. Courts in other states have tended to lean more to the relational approach to interpreting oil and gas contracts; for example, those courts in Colorado, Oklahoma, and Arkansas, which have adopted the “marketable condition” rule, requiring the lessee to bear the cost of making gas marketable for sale.
While Coyote’s principal holding is that the accommodation doctrine applies to severed groundwater rights, its opinions have implications for the application of the accommodation doctrine in oil and gas cases as well.