The Oil and Gas Addendum

Zarvona Energy LLC v. Black Stone Minerals Co., L.P and Oil and Gas Lease Termination

The March 12, 2026 decision of the Texas Court of Appeals in the Zarvona Energy LLC v. Black Stone Minerals Co., L.P., No. 09-25-00012-CV (Tex. App.--Beaumont Mar. 12, 2026) is not beneficial to landowners. In that decision, the Texas Court of Appeals failed to give effect to clear lease termination language in an oil and gas lease, and instead found ambiguity that, in the court’s view, compelled the finding that the subject leases remained operative. In addition to that, the court found ambiguity in continuous development language in the leases at-issue, striking another blow against the landowners’ claims.

The background of the Zarvona Energy, LLC case is fairly benign. It involved two oil and gas leases covering property in southeast Texas. One of the leases burdened 245 acres and the other lease was much larger, covering approximately 7,100 acres. Both leases were executed in 2005, with primary terms expiring a few years thereafter. Before the expiration of the leases’ primary terms, parts of their leaseholds were included in production units with wells that were producing in paying quantities.

The Lease Duration Issue

The leases’ habendum clauses used fairly common terminology and were functionally identical other than the date identified as the end of the primary term. One habendum clause stated that:

Subject to the other provisions of this Lease, this Lease shall be for a term from the above Effective Date until August 29, 2007 (hereinafter called “Primary Term”) or any extension thereof provided for herein and for so long thereafter as oil and/or gas continues to be produced in paying quantities from the Leased Premises, or lands pooled therewith as may be provided, herein under the terms of this Lease.

However, that was not the provision addressing lease duration. Section 11.0(b) of each lease stipulated that :

Unless maintained by other provisions hereof, cessation of production in paying quantities after the Primary Term for a period of ninety (90) days shall cause this Lease to terminate.

The interplay between these two lease provisions was a principal focus of the appeals court. In their lawsuit, the oil and gas owners contended that during spring 2020, there was no oil and gas production in paying quantities for several months, which exceeded the 90 day limitation in Section 11.0(b). Accordingly, the oil and gas owners contended that the leases had automatically terminated, since that was well beyond the leases’ primary terms and Section 11.0(b) expressly stated that cessation of production in paying quantities for 90 days “. . . shall cause this Lease to terminate.”

Despite the apparent clarity of this position, the Texas Court of Appeals took a different approach and reached a different conclusion, finding that the leases remained operative. The appellate court began its review of the leases’ duration by starting with the habendum clauses. Those provisions maintained the leases in effect beyond their primary terms as long as oil or gas continued to be produced in paying quantities. Under that “paying quantities” provision, the Zarvona Energy, LLC court observed that it would apply the reasonably prudent operator standard from Clifton v. Koontz, 325 S.W.2d 684, 691 (Tex. 1959) to determine if the leases terminated due to insufficient production.

But, the habendum clause was not the only durational provision in the leases. Section 11.0(b) established that the leases would expire if they were beyond their primary terms and there was no production in paying quantities for more than 90 days. Instead of giving effect to this clear language and applying it to the facts, the appellate court curiously found a conflict between the leases’ habendum clauses and the 90 day paying quantities limit in Section 11.0(b). The Zarvona Energy, LLC court observed that those lease provisions “. . . are in conflict because they provide different tests for determining when the lease terminates. [The habendum] and 11.0(b) do not directly reference each other, but each section contains introductory language appearing to make each subordinate to the other.”

This introductory language in each clause was the phrase “[s]ubject to the other provisions of this Lease” and “[u]nless maintained by other provisions hereof.” Since the appeals court believed that the clauses “. . . contain language subjecting each section to the other”, the Zarvona Energy, LLC court concluded that “. . . we cannot harmonize their dissonant provisions regarding the duration or termination of the lease.Together, these provisions are ambiguous as a matter of law.” That finding of “ambiguity” set the stage for the Court of Appeals to reason that ambiguity in a special limitation provision must be resolved against termination.

According to the Zarvona Energy, LLC court, “[b]ecause section 11.0(b) purports to impose a special limitation but does not “clear[ly], precise[ly], and unequivocal[ly]” state that the lease terminates upon a 90-day cessation of production in paying quantities, we will not regard such a cessation to result in forfeiture of the lease unless there is a cessation that also fails Clifton's reasonably-prudent-operator test which is ingrafted into [the habendum].” So, even though the leases expressly stated that a failure to produce in paying quantities for a 90 day period beyond the primary term would result in termination, and the facts showed no production in paying quantities for at least a 90 day period during the leases’ secondary terms, the leases remained operative.

The Continuous Development Inquiry

Since the leases remained operative, the Court of Appeals had to address another fundamental question. This related to the geographic area that was subject to the leases and the extent of the driller’s obligation to continuously develop the leaseholds. Once more, different lease provisions addressed this issue. The first provisions were sections 3.0 and 3.1, which collectively stated that:

... Following the 90-day continuous development provision provided in Section 10.0 hereof, this Lease shall terminate, except as to all wells producing oil or gas in paying quantities or being drilled or reworked, and as to the area of the Leased Premises comprising the spacing units surrounding each well, or portion thereof included within the boundaries of any pooled unit or units as hereinafter provided. This Lease shall not terminate as to easements and rights-of-way necessary for Lessee's operations on the retained acreage provided that production from such acreage shall be continuous and upon cessation of production, this Lease shall terminate as to such acreage unless production therefrom is restored within ninety (90) days from such cessation by drilling or reworking operations thereon, or otherwise maintained in force provided elsewhere in this Lease.

Subject to the continuous operations provisions of Sections 9.0 and 10.0, at the end of the Primary Term and at all times thereafter, as to each spacing unit, Lessee shall promptly release this Lease as to all depths below one hundred feet (100') below the stratigraphic equivalent of the base of the deepest productive reservoir from which there is commercial production of oil and/or gas from the well located in said spacing unit.

The other principal provision referenced here is Section 10.0. That part of the leases states that:

If, at the expiration of the Primary Term, oil or gas is being produced and Lessee is then engaged in drilling or reworking operations on unreleased acreage of such Leased Premises, then this Lease shall remain in force and effect as to such acreage not developed in accordance with Section 3.0, so long as after the date of the expiration of the Primary Term (or the date drilling or reworking operations cease if being conducted), Lessee does not permit more than ninety (90) days to elapse before commencing the next well on said Leased Premises and thereafter shall not allow more than ninety (90) days to elapse between the completion or abandonment of one well and commencement of another.

The driller acknowledged that since no well was commenced within 90 days after the expiration of the leases’ primary terms, Sections 3.0 and 10.0 operated to terminate the leases as to any acreage outside of the production units that the leaseholds had been included in (with producing wells) as of that date. But, there was a dispute about the leases’ geographical extents beyond this issue.

The oil and gas owner contended that the leases’ extent was continuously pared back under Section 3.0 as a result of insufficient new development. In support of this argument, the oil and gas owner pointed to Section 3.1, which releases certain depths "at the end of the Primary Term and at all times thereafter." The reasoning behind this argument was that if Section 3.1 operates on a continuing basis, Section 3.0 should too. As a result, having one snapshot provision alongside one rolling provision would be internally inconsistent within the lease provisions. On the other hand, the driller contended that lease section 3.0 and its continuous development requirement was a “snapshot” that was operative at a single point in time, and not a continuing requirement that could serve to remove new areas from the scope of the lease over time.

The driller’s view prevailed. The Court of Appeals rejected the oil and gas owner’s effort to have Section 3.1 inform the meaning of Section 3.0. The court wrote that “[i]t may be that the parties intended in section 3.0 to provide for a one-time termination of all depths below non-producing units ‘following’ section 10.0's 90-day period and that they also intended in section 3.1 to provide for recurring releases of certain depths below the deepest producing reservoir of the producing units ‘at all times’ after the end of the primary term. We cannot conclude they intended otherwise when they used different terms to express the temporal applicability of each section.”

From that baseline conclusion, the appeals court seized on the word “following” in Section 3.0 and believed that it dictated the outcome. The Zarvona Energy, LLC court proceeded to examine the dictionary definitions of the word “following”, which led the court to conclude that it “. . . indicates when section 3.0 applies—after the end of the 90-day period provided by section 10.0—but it does not indicate how often it applies.”

Similar to the lease duration inquiry the Zarvona Energy, LLC court found ambiguity in this subject matter, observing that Section 3.0 “. . . could be reasonably understood either as a “snapshot” or as a “rolling” provision.” The appeals court wrote that “Section 3.0 is a special limitation provision because it provides that the lease will automatically terminate as to certain geographical areas upon the happening of a stipulated event.” This reference to a “special limitation provision” was important, because it implicated Texas’s strong public policy against forfeiture. That dictated the result, with the Court of Appeals concluding that “ . . .that while section 3.0 clearly, precisely and unequivocally indicates that it applies to non-producing geographical units after the end of the 90-day period provided by section 10.0, it does not clearly, precisely and unequivocally indicate that it applies on a recurring basis, and we will not construe the provision to result in forfeiture of additional non-producing geographical units on a recurring basis.”

Reflections

The Zarvona Energy, LLC court’s conclusion about the leases’ duration is difficult to explain. The leases’ habendum provisions are relatively straightforward - the leases remained operative as long as oil and gas were produced in paying quantities. The habendum clauses’ introductory language, “[s]ubject to the other provisions of this Lease . . .” can be easily interpreted to include “savings clauses” within the ambit of the habendum, like a shut-in royalty clause or a force majeure clause, as well as a more specific clause about the limits of paying quantities.

That more specific limitation of paying quantities is found in Section 11.0(b) which expressly sets a 90 day limit on the absence of production in paying quantities. While Section 11.0(b) begins with the “[u]nless maintained by other provisions hereof. . .” language, there is no real tension with the habendum clause. The “[u]nless maintained by other provisions hereof. . .” phraseology in Section 11.0(b) can be easily read to encompass “savings” clauses like a shut-in royalty or force majeure. In those scenarios, there would not be production in paying quantities in a 90 day period, but the lease would remain operative because of some express “savings” or gap-filler clause.

But, contrary to the Zarvona Energy, LLC court’s conclusion, the “[u]nless maintained by other provisions hereof. . . ” terminology in Section 11.0(b) did not implicate the habendum clause. It could not. The habendums stipulated that the leases would remain operative as long as oil and gas was produced in paying quantities. Section 11.0(b) defined what this “paying quantities” duration meant in the lease. Since Section 11.0(b) informed and limited the scope of the habendum clause, the habendum clause could not have been one of the “other provisions hereof” that was an exception to Section 11.0(b)’s impact.

In other words, based on the structure of the leases, the habendum and Section 11.0(b) did not, and could not have subjected Section 11.0(b) to the habendum. Since that was the critical rationale that the Zarvona Energy, LLC court used to find the ambiguity that was needed to implicate the public policy against forfeiture, it is respectfully submitted that this architecture is fundamentally flawed. While one could reason that a different result may occur if the clauses’ prefatory language is removed, or if one provision was moved to an addendum to make clear that it superseded contradictory terms in the body of the lease, those potential courses of action do not seem like they would have made a difference to the reviewing court. It appears that the court simply erred by misreading the leases’ structure and failing to understand how Section 11.0(b) modified and restricted the habendum clause.

The analysis of the appellate court’s continuous development is a little murkier, due to imprecise language. Section 3.0 and Section 10.0 of the leases cross-referenced each other. Section 3.0 contained the “[f]ollowing the 90-day continuous development provision in Section 10.0 hereof” that the appellate court seized on. But, there was not a singular “90-day continuous development provision in Section 10.0.” Rather, Section 10.0 required development to continue with lapses of less than 90 days between the completion or abandonment of one well and the commencement of another well.

In this lens, the “when” versus “how often” discussion from the Zarvona Energy, LLC court does not wholly address the issue. The “90 day” period in Section 10.0 is not a singular timeframe; it is not a “one-time” occurrence. The language of Section. 10.0 counsels that there can, and should, be multiple “90 day” periods over the course of development of the leaseholds. Once one well is completed, the “90 day” continuous development clock starts anew. The difficulty with the interplay between Section 3.0 and Section 10.0 is that the latter section addresses continuous development of the leasehold, and Section 3.0 seems to focus more on areas of the leasehold within production units.

Thus, to the extent that there is ambiguity in the interplay between Section 3.0 and Section 10.0, it appears to focus on the geographic area(s) that are subject to (and could be released by) the continuous development obligation, rather than a simple “when” or “how often” dynamic. While the “when” versus “how often” dynamic could encapsulate the geographic question, there are still open questions there. But, in this vein, if the court believed that the language terminating the lease as to certain geographic areas due to failure of the continuous development obligation had to be clear and specific, the lack of clear description in Section 3.0 and Section 10.0 could fail this test. On this front, clearer drafting may have resulted in a better result.

It does not appear that this decision of the Court of Appeals has been further appealed to the Texas Supreme Court, so it does not appear that these conclusions will be subject to further review at the time being. While this case is not binding on Pennsylvania courts reviewing oil and gas lease issues, the Zarvona Energy, LLC decision is a reminder that oil and gas lease language that appears to be clear is not always viewed that same way when examined by a court. If you have questions about this post, contact Brendan A. O’Donnell at odonnellba@hh-law.com or 412-288-2226.