Texas Outfitters v. Nicholson – the Duty of the Holder of the Executive Right to Lease

Originally published by John McFarland.

Last May, the San Antonio Court of Appeals issued an opinion in Texas Outfitters Limited v. Nicholson, No. 04-16-00392-CV, addressing the duty of holders of the mineral executive right to its non-executive mineral owner – a case now pending on application for writ of error in the Texas Supreme Court. It is the first significant appellate opinion on the duty of the executive since the Supreme Court’s decision in Lesley v. Veterans Land  Board on the same topic. The case tells the remarkable story of a landowner’s failure to carry out its duty of “utmost fair dealing” in exercising – or in this case failing to exercise – its executive right.

The executive right is the power to lease minerals for oil and gas exploration and development. It is one of the sticks in the bundle of rights that make up the mineral estate. The executive right can be conveyed or reserved separately from the other rights of the mineral owner – the right to bonus, delay rental and royalty. When the right to lease the mineral estate is owned by a different party than the owner of the mineral estate, conflicts can arise between the two on whether, when and on what terms the executive should exercise its right. Courts have struggled to define what duty the executive holds to the non-executive mineral owner.

The two previous cases from the Texas Supreme Court, In re Bass, 113 S.W.3d 735 (Tex. 2003) and Lesley v. Texas Veterans Land Board, 352 S.W.3d 479 (Tex. 2011), sent mixed signals on the scope of the executive-rights holder’s duty. In Bass, the court held that the holder of the executive right had no duty to enter into an oil and gas lease, but only to exercise utmost fair dealing if it elected to lease. In Lesley, the court backed off its previous holding, deciding that the holder of the executive right could breach its duty by failing to lease – or in Lesley’s, case, imposing restrictive covenants on the land that made it impossible to lease.

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