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Case Study: Sauder V. Frye – Unitization – Timely Recording Necessary to Perpetuate Non-Drillsite Tracts

Posted 6:30 AM, November, 4th 2014 by Manning Wolfe & filed under Blog, Case Studies, Legal

Background:  The case involved an oil, gas and mineral lease with A.L. Sauder, Jr., as lessee and Rex Allen Frye as lessor.  The primary term of the Frye lease expired May 24, 1979. Sauder, Appellant, contended the lease was extended by the execution of a designation of pooled unit, which unit included the Frye lease. Frye, Appellee, contended that the pooling unit was of no effect as it failed to meet the formalities set out in the lease and there was no other lease (or amendment) extending the lease in existence on May 23, 1979.   Therefore, the lease expired under its own terms.

Facts:  The significant portions of the lease provided:

1. "The commencement, drilling, completion of, reworking of or production from a well on any portion of the unit created hereunder shall have the same effect upon the terms of this lease as if a well were commenced, drilled, completed, reworked or producing on the land embraced by this lease...”.

2. "If lessee does create any such unit or units under the rights herein granted, then lessee shall execute in writing and record in the county or counties in which each such unit or units created hereunder may be located an instrument identifying and describing each such unit or units so created."

On May 7, 1979 Sauder signed and had acknowledged the designation of pooled unit that included a portion of the land covered by the Frye lease. This date was sixteen days prior to the Frye lease expiration date. Included within this pooled unit was a lease (other than the Frye lease) on which drilling operations had commenced April 15, 1979. That well was completed as a gas well capable of producing in commercial quantities on May 26, 1979. On May 31, 1979 the designated pooled unit was recorded.

Frye obtained a declaratory judgment that the lease was void and terminated by its own terms on May 24, 1979. Sauder appealed.

Issue:  Was the designation of pooled unit executed by Sauder effective as to the Frye lease as of the date it was executed and acknowledged or was it effective only when it was filed for record in the required county?  The Frye lease provides that where the lessee creates pooled units he "shall execute in writing and record in the county" where the units are created an instrument identifying them.  Although executed prior to the expiration of the primary term the unit designation containing a part of the acreage of the Frye lease was not recorded until after the primary term had lapsed.

Rationale:  The case of Yelderman v. McCarthy, 474 S.W.2d 781, 782 (Tex.Civ.App.— Houston [1st Dist.] 1971, writ ref'd n. r. e.) was noted by the Court of Appeals to be more on point. The lease in Yelderman provided that the unit declaration be filed for record and that "upon such recordation the unit shall be effective as to all parties hereto ....". The Houston court found the lease effective from the date of the recordation of the unit declaration.

Final Judgment:  The Court of Appeals found that the provision in the Frye lease evidenced the intent of the parties that for unitization to be effective one of its required conditions was the recordation of the designation of pooling. Only at that point would the unitization validly come into being under the terms of the lease. Sauder failed to comply with the contractual condition precedent set out in the Frye lease necessary to extend that lease beyond its primary term.

Judgment affirmed.

Reference:  Sauder v. Frye, 613 S.W.2d 63 (Tex. Civ. App. - Ft. Worth 1981, no writ)

 

Drafting Note:
To solve this problem, draft or amend the pooling clause to provide that pooling is effective when the designation of unit is executed. The pooling clause in Tiller v. Fields, 301 S.W.2d 185 (Tex. App. - Texarkana 1957, no writ) did not require the recording of a designation of unit in order for it to become effective, thus the pooled unit became effective upon execution, irrespective of what was ultimately recorded.

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