The consent to assign

When I first began practicing oil and gas law, it wasn’t long before I came across my first consent to assign provision in an oil and gas lease.  Such provisions function to limit the ability of one or both parties in an oil and gas lease from assigning their interests under the lease to a third party.  To assign one’s interest means to transfer one’s rights and/or obligations under the lease to a different party.  While this concept appears to be relatively straightforward, recent case law on the construction of consent to assign provisions could potentially have interesting future implications for the oil and gas industry.

When considering the general construction of consent to assign provisions, arguments tend to revolve around the existence of qualifications for consent or the lack thereof (i.e. “consent to assign shall not be unreasonably withheld”).  For instance, last year, in Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471 (Tex. 2019), the Texas Supreme Court held that a consent to assign provision in a farmout agreement, which lacked a qualification that consent could not be unreasonably withheld, was valid and enforceable.  In that case, the Court rejected the argument that such a qualification was implied in the agreement by virtue of industry “custom and usage” and held that any qualification for the consent to assign provision should have been explicit to be effective.  Therefore, the consent-withholding party could withhold consent for any reason without limitation.  This holding was a wake-up call for lessors and lessees to pay close attention to the wording of consent to assign provisions in their oil and gas leases.  It has since been generally understood that if a consent to assign provision doesn’t limit the ability to withhold consent, a consent-withholding party may do so for any reason.

A new case with a different angle

At a glance, restricting a party’s ability to assign their interest makes sense—under general Texas contract principles, parties have the freedom to contract for anything (assuming no exceptions to this general rule apply; i.e. fraudulent inducement, unconscionability, illegal purpose, etc.).  However, as we have discussed in a previous post (link), oil and gas leases are treated as conveyances of real property, not as mere contracts.  Accordingly, consent to assign provisions could be categorized as restraints on alienation.  This was the position that the U.S. District Court, in Amarillo, took earlier this year in its opinion for Mayo Foundation for Medical Education and Research v. BP America Production Company, 447 F. Supp.3d 522 (March 3, 2020), which discusses the enforceability of a certain consent to assign provision in an oil and gas lease. Specifically, whether the consent to assign provision was an unenforceable restraint on alienation, an issue that was not addressed by the Texas Supreme Court in Barrow-Shaver.

Restraints on alienation are restrictions on how a grantee in a real property conveyance may subsequently transfer the property they are acquiring.  When considering this fact through the lens of oil and gas leases being real property conveyances, it becomes apparent how the Mayo court reasoned that a consent to assign provision is a restraint on alienation.  But how do restraints on alienation become unenforceable?  The Court’s analysis in Mayo is instructive on how to answer this question.

The consent to assign provision at issue in Mayo read, “The rights and obligations of the Lessee hereunder are not assignable or transferable in any respect by it, except upon the written approval of [Lessor], which approval shall not be unreasonably withheld.”  The Court determined that this consent to assign provision was a promissory restraint on alienation and not a disabling restraint (rendering any attempted transfer void) or a forfeiture restraint (terminating the lease under which the transfer was attempted) because nothing in the provision indicates that attempted transfers are void or that the lease terminates in the event of an attempted transfer.  Promissory restraints impose contractual liability on the party that assigns without consent and are enforceable only if the restraint permits transfer to some possible transferees; disabling restraints and forfeiture restraints are simply unenforceable.

The Court ultimately concluded that the consent to assign provision was an enforceable promissory restraint on alienation because it allows transfer to some transferees.  Namely, because the provision dictates that consent may not be “unreasonably withheld”, there is a potential for transfer that prevents the promissory restraint from being absolute and, consequently, unenforceable.  Absent the “unreasonably withheld” qualification, the consent to assign provision would have been an unenforceable restraint on alienation.

Going forward…

While the opinion for Mayo is from U.S. District Court and not the Texas Supreme Court, the analysis in Mayo may present new precedent for consent to assign provisions in Texas oil and gas leases in the future.  Before, it was nearly certain that consent to assign provisions could be completely unrestricted unless there were expressed qualifications for withholding consent.  Now, it seems that, absent a qualification that provides potential transfer, it’s possible that consent to assign provisions could be void as unenforceable restraints on alienation.

Regardless, both Barrow-Shaver and Mayo provide strong indication that it is prudent to include the qualification that consent shall not be unreasonably withheld in consent to assign provisions in oil and gas leases.  Failing to do so may result in consent to assign provisions being void in the future.  Ultimately, I think the analysis in Mayo is headed in the right direction.  Providing lessors and/or lessees the unqualified ability to withhold consent to assign the other party’s interests under an oil and gas lease presents unnecessary complications to the regular operation and production of mineral assets. Assignments are a key function to the oil and gas industry and, while I don’t advocate that any assignment be made unchecked, I think the middle ground we are reaching by potentially requiring the qualification that consent to assign not be unreasonably withheld is, well…reasonable.