Background

Craddick and other override owners held overriding royalty interests carved out of Cimarex Energy Co.'s working interest in a producing oil and gas lease covering acreage in Reeves County. Cimarex elected to surrender the lease to the mineral owner while the lease remained in production, a decision that extinguished the override owners' derivative interests under settled Texas law that overriding royalty interests terminate when the underlying lease terminates. The override owners sued Cimarex, alleging the surrender was executed in bad faith to wash out their interests.

The Court's Holdings

The El Paso Court of Appeals affirmed the take-nothing judgment on two grounds. First, the court declined to recognize a common-law bad-faith washout claim. The court held that Texas law does not impose a freestanding duty preventing lessees from surrendering leases that would extinguish derivative interests held by override owners.

Second, on the lease construction issue, the court held that the surrender clause's 'good faith' language imposed only a ministerial obligation—specifically, the duty to deliver a recordable release instrument to the mineral owner. The court rejected the override owners' argument that 'good faith' created a substantive limitation on Cimarex's business judgment regarding whether to surrender. This construction treats the good-faith language as procedural rather than as a covenant restricting the lessee's discretion to make operational and economic decisions about lease retention.

Implications for Practitioners

The decision underscores that override owners hold derivative interests dependent on the continued existence of the underlying lease and bear the risk of lease termination. Override owners who fail to negotiate express contractual protections against surrender face the risk that lessees may terminate leases and extinguish their interests without recourse under Texas common law.