Overriding royalty interests, (“ORRIs”), and the way they are treated by both Lessees and case law, have been a cause for some contention in Texas. As many are aware, ORRIs terminate when the lease terminates. This allows a calculating Lessee to choose to let a lease terminate, and take a new lease without the ORRI burden. To prevent this, many ORRI owners include language in the relevant assignment giving rise to the ORRI that “saves” the ORRI and applies it to amendments, extensions, and even new leases within a set amount of time (i.e. “savings clauses”). However, even ORRI owners that think they were protected are surprised now and again.

Recently, the San Antonio Texas Appellate Court issued an opinion that further cemented the general rule that an ORRI does not survive the termination of the leasehold, and, in fact, does not survive even a partial termination as to released lands, unless the ORRI owner includes express provisions that protect him from such termination. In this case, SM Energy Co. v. Sutton, Sutton leased 40,000 acres in 1966. The lease allowed for a full or partial release of the acreage or interest, and an associated release of the obligations as to the released acreage or interest. Sutton assigned the leases and reserved an ORRI. Sutton included a savings clause in the assignment, which provided that the ORRI would apply to “amendments, extensions, renewals or new leases taken on all or part of the lease premises within one year after termination of the present lease.”

Crimson Energy Company, L.P. (the successor Lessee), eventually released 22,000 acres of the leased land. Later, and past the one year savings clause term, Crimson obtained new leases on those 22,000 acres, free of the ORRI, which were assigned to SM Energy Co. While the parties agreed that the lease allowed for a partial release, they disagreed as to whether the savings clause applied the ORRI to the new leases.

Sutton’s argument was that the savings clause applied to the new leases because the lease taken in 1966 did not terminate, and was the present lease. SM argued that the partial termination of the lease extinguished Sutton’s rights in the ORRI as to the released acreage.

Ultimately, the Court agreed with SM. The Court found that the “1966 lease contemplate[d] a partial termination; it expressly provide[d] for the lessee to release ‘any part or all of said land or of any mineral or horizon thereunder, and thereby be relieved of all obligations as to the released acreage or interest.’” The Court also stated that they “presume[d] the parties to the 1966 lease knew that the ORRIs could be easily destroyed,” and that “it was the ORRIs' owners' burden to include an express provision to save their ORRIs from being extinguished by a partial termination that the lease expressly contemplated.” The Court noted that the assignment’s savings clauses did not provide that “’termination of the present lease’ can only mean termination of the entire lease.” Thus, the Court concluded that “the ORRIs were extinguished and they were not saved because the new leases were signed more than one year after the termination of ‘the present lease’ to which the ORRIs pertained.”

In light of this decision, Lessees and ORRI owners alike should evaluate the instruments creating the ORRIs, and the associated leases. Careful wording could perpetuate the ORRI even as to lands previously released as a result of a partial termination of a lease. Conversely, an ORRI could be extinguished more easily than the owner contemplated.