chapter 19 how far does the covenant run? … · apply to covenants in oil and gas leases [a]...

Chapter 19 HOW FAR DOES THE COVENANT RUN?

COVENANTS THAT RUN WITH THE LAND IN OIL AND GAS TRANSACTIONS

David A. Thomas

Professor of Law J. Reuben Clark Law School Brigham Young University

Provo, Utah

Synopsis

§ 19.01 Introduction § 19.02 Definition of Covenants Running With the Land

[1] As a Servitude [2] Real Covenants and Equitable Servitudes

§ 19.03 Historical Development of Covenants Running With the Land

§ 19.04 Incidents of Covenants Running With the Land [1] Creation

[a] Covenants Running With the Land as Interests in Land

[b] Covenants Are Subject to the Statute of Frauds [i] Estoppel [ii] Part Performance [iii] Written Memorandum

[c] Implied Covenants May Be Enforceable as Interests in Land

[2] Scope [3] Duration [4] Termination 19–1

19–2 MINERAL LAW INSTITUTE

[5] Assignability [a] Assignability of Benefits and Burdens

Distinguished [b] Requirements for the Running of the

Burden [i] Horizontal Privity [ii] Vertical Privity [iii] Intent [iv] Touch and Concern

[c] Requirements for the Running of the Benefit [i] Horizontal Privity [ii] Vertical Privity [iii] Intent [iv] Touch and Concern

§ 19.05 How the Running of Covenants is Affected by the Nature of the Assignment [1] The Role of the Lessor=s Consent in

Assignments and Subleases [2] Distinctions Between Assignments and

Subleases [a] The Effect of Transfers on Privity of

Estate and Privity of Contract [b] Assumption Agreements

§ 19.06 Overview of How Real Covenant Rules Are Applied in Oil and Gas Transactions [1] Introduction [2] Regarding Covenants Running With the

Land, Oil and Gas Leases Are Treated as Traditional Leases

[3] How Traditional Rules for Real Covenants Apply to Covenants in Oil and Gas Leases [a] Horizontal Privity [b] Vertical Privity

COVENANTS THAT RUN WITH LAND 19–3

[c] Intent [d] Touch and Concern [e] Summary

[4] Is Whether a Covenant Runs With the Land Affected by Whether the Oil and Gas Leasehold is Transferred by Assignment or Sublease? [a] Covenant Benefits and Burdens

Following an Assignment of an Oil and Gas Lease

[b] The Effect of Assumption Agreements in Oil and Gas Lease Assignments

[c] Viability of the Assignment-Sublease Distinction in Oil and Gas Leases [i] Introduction [ii] How Oil and Gas Leases Are

Classified as Assignments or Subleases

[iii] How the Running of Covenants in Oil and Gas Leases Differs in Assignments and Subleases

[iv] Summary § 19.07 Conclusion

§ 19.01 Introduction

In U.S. property law, no rules are more arcane and anachronis-tic than those governing real covenants, also known as covenants at law and covenants running with the land. The rules differ from state to state. Accordingly, various attempts to revise, reform, or “restate”1 the rules of real covenants and other servitudes have not won wide acceptance, further adding to the chaos. Despite

1Despite the enormous energy and care invested in the property restatements, their

impact on the law and on law practice has not been large. See David A. Thomas, “Restatements Relating to Property: Why Lawyers Don=t Really Care,” 38 Real Property, Probate & Trust J. 655 (2004).


that anomaly, real covenants are hugely important in contempo-rary real estate transactions, and practitioners in each jurisdic-tion have more or less come to peace with how covenant rules are applied in their local practices. Outside the mainstream of general residential and commercial real estate transactions, covenants running with the land are also very important in oil and gas transactions. This article will clarify as much as possible the rules for covenants running with the land in real estate transactions generally, and then show how these are applied in oil and gas transactions. With a few exceptions, the conventional covenant rules, including those that are highly technical and even counter-intuitive, are faithfully applied in oil and gas transactions.

Sections 19.02 and 19.03 of this chapter define and distinguish covenants running with the land and describe their legal history. Section 19.04 analyzes the incidents of covenants running with the land, with special emphasis on the rules governing assignability of covenant burdens and benefits. Section 19.05 discusses how the running of covenants is affected by whether the transfer of the in-terest is characterized as an assignment or a sublease.

Section 19.06 shows how the rules for running of covenants generally are applied in oil and gas transactions. Conclusions are in section 19.07.

§ 19.02 Definition of Covenants Running With the Land

[1] As a Servitude

In Anglo-American law, a servitude is an interest in land con-sisting of a non-possessory right in someone else’s land. One type of servitude is an easement, which is a right to use someone else’s land in a particular way (an affirmative easement, such as a right-of-way) or to prohibit an owner from using the land in particular way (a negative easement, such as a prohibition against building a structure that blocks access to sunlight on the adjacent property). An easement is often created by conveyancing terms such as “I grant” or “I reserve.” The conveyance of an easement transfers rights relating to “use,” while conveyance of an estate transfers rights relating to ownership and “possession,” which include use rights. If an easement such as a right-of-way also includes the


right to maintain or improve the roadway, the “use” may become significant and substantial enough to resemble “possession.”2

A covenant is closely related to but distinct from an easement:

In concept, the main difference between easements and covenants is that, whereas an easement allows its holder to go upon and to do something upon the servient tenement [the burdened land], the benefi-ciary of a covenant may not enter the burdened land, but may re-quire the owner of that land to do, or more likely not to do, some-thing on that land.

3

When a jurisdiction limits or restricts the creation of new types of negative easements, a negative covenant may be used to accom-plish the same thing.

A covenant is also a type of servitude, and may be described as a promise respecting the use of land, creating either an obligation for an owner to do something on the land (an affirmative cove-nant, such as a promise to build a fence around the land) or an ob-ligation for an owner to not do something on the land (a negative covenant, such as a promise not to build anything other than a single family residence on the land). A covenant is often created by language such as “I promise” or “I agree.”

In U.S. law, covenants that can be enforced by or against suc-cessors in interest to the original covenanting parties are often called real covenants, or covenants at law, or covenants that “run with the land.”

The technical and somewhat inconsistently applied require-ments for real covenants usually are described as horizontal privi-ty between the covenanting parties, vertical privity between suc-cessor parties, the requirement that the subject of the covenant “touch and concern” the land, and the intent of the parties that the covenant run with the land. These are described in greater detail below.

[2] Real Covenants and Equitable Servitudes

Another type of servitude is sometimes referred to as an equita-ble servitude, which is a promise respecting the use of land that

2William B. Stoebuck & Dale A. Whitman, The Law of Property § 8.1, at 436-37 (3d

ed. 2000). 3Id. § 8.13, at 470.


cannot be enforced against remote parties as a real covenant be-cause of some failure to meet the above requirements for running of covenants. Enforcement of these promises by and against re-mote parties may be permitted if (1) the original parties intended the promise to run, (2) the promise touches and concerns the bur-dened land, and (3) the party against whom enforcement is sought had actual or constructive notice of the promise.4 Neither horizontal privity nor vertical privity is required. Enforcement is limited to equitable remedies, principally injunctions. Probably no consideration is necessary for the creation of an equitable servi-tude. This chapter will not focus directly on equitable servitudes.5

§ 19.03 Historical Development of Covenants Running With the Land

With the rise of the enclosure movement in late medieval Eng-land, easements—in the form of rights-of-way across and other uses on the lands of others—became more important, and the law on the subject was made more explicit and orderly in the early nineteenth century.6 English law readily accepted new affirmative easements, but restricted negative easements to only four catego-ries: don’t block a neighbor’s windows, don’t block certain air flow to a neighbor’s land, don’t remove lateral or subjacent support of a neighbor’s building, and don’t interfere with a neighbor’s flow of water in an artificial stream. Dominant owners could acquire these negative easements by prescription. No other negative ease-ments could be created. American courts are almost as restrictive as English courts in not permitting new types of negative ease-ments, and also do not allow negative easements to be acquired by prescription. The result is that important new kinds of nega-tive easements are usually defined and created by statute, e.g., conservation, scenic, and historic preservation easements. To ac-

4Tulk v. Moxhay, 2 Phillips 774, 41 Eng. Rep. 1143 (Ct. Chancery 1848).

5See generally Stoebuck & Whitman, supra note 2, §§ 8.22-8.33.

6The English law on easements was emerging in the courts in the early decades of

the nineteenth century, and was systematized by a text on easements. Charles James Gale & Thomas D. Whatley, Law of Easements (1st ed. 1839). The 17th edition of Gale on Easements was published in 2002.


complish what they could not do through negative easements, many American landowners turned to covenants.7

When covenant laws were beginning to form, some basic legal principles restrained those developments. One of those principles was that contract rights and duties were generally not assigna-ble.8 This was based on the notion that a promise should not be enforceable against one who was not a party to the contract.9

Another principle was that if a promise were to be enforceable against one who was not an original party to the contract, that person had to have “privity of estate” with the original contracting party at the time the covenant was created.10 Despite numerous cases in which plaintiffs tried to establish a broad concept of privi-ty of estate, ultimately the English courts concluded that privity of estate for this purpose could be based only on the landlord-tenant relationship.11

Two other requirements for contract-like covenants to be treat-ed as assignable were that the covenant had to expressly bind any assigns and that the covenant had to relate directly to the land (to “touch and concern” the land) and not be merely collateral to the land. Both of these requirements were established by the 1583 English decision known as Spencer’s Case.12

American courts followed English courts in insisting on privity of estate between the covenanting parties, even though there was no compelling reason for doing so, but American courts accepted additional kinds of relationships in the transactions to qualify for

7This brief historical summary is drawn partly from the property law casebook most

widely used in U.S. law schools. Jesse Dukeminier et al., Property 740-42 (6th ed. 2006). See also John H. Pearson, “Real Covenants: Promises Concerning the Use of Land,” ch. 61, § 61.03(a) & (b), at 585-88, in 7 Thompson on Real Property, Thomas Edition (David A. Thomas ed., 1994).

8A. James Casner, American Law of Property § 9.1 (1952).

9The doctrine retains some vitality even in modern times. See Dunlop Pneumatic

Tyre Co. v. Selfridge & Co., [1915] App. Cas. 847. 10

9 Richard R. Powell, Powell on Real Property § 60.04[3][c][i] (Michael Allan Wolf ed., 2005).

11See Pearson, supra note 7, § 61.04(a), at 590-91.

125 Co. Rep. 16a, 77 Eng. Rep. 72 (Q.B. 1583); see 9 Powell, supra note 10, § 60.01[3].


privity of estate.13 As a result, in the United States, privity of es-tate between covenanting parties could be based on their relation-ship as landlord and tenant, or as grantor and grantee,14 or on a kind of mutual privity based on concurrent ownership or domi-nant and servient tenements under an easement.15

The American approach was more liberal than the English rule limiting privity to the landlord and tenant relationship, but it was still restrictive and irrational in even requiring such privity for the running of covenants, especially after the traditional reluc-tance to recognize assignability of contract rights disappeared.

One of the most important aspects of how covenants developed is the rule, still recognized today, that a variety of privity must ex-ist between the covenanting parties if the covenant is to “run with the land.” They must be more than covenanting parties; they must be covenanting parties who are also grantor and grantee, landlord and tenant, concurrent owners, or dominant and ser-vient tenement owners under an easement.

Since generations of law professors from time immemorial have used a simple illustration16 to depict the original covenanting par-ties as adjacent to or across from one another, this relationship between them that is required to make their contract a running covenant is usually called “horizontal privity.” A fuller discussion of this and other features of real covenants is set forth in the next section.

§ 19.04 Incidents of Covenants Running With the Land

Covenants running with the land are interests in land and, like other real property interests, have unique features called “inci-dents.” The incidents of real covenants relate to the covenants’ cre-ation, scope, duration, termination, and, especially, assignability.

13

See Pearson, supra note 7, § 61.04(a), at 591. Pearson also points out the view of some scholars that American covenant jurisprudence developed haphazardly in the independent systems of state courts, without conscious imitation of the English law. Id. § 6l.03(a), at 586-87, nn.31 & 32.

14Id. § 60.04(3)(iii).

15Id. § 60.04(3)(ii).

16See Jesse Dukeminier & James E. Krier, Property 743 (6th ed. 2006).


[1] Creation

[a] Covenants Running With the Land as Interests in Land

In American law, authorities split over the question of whether running covenants are interests in land, and are therefore subject to the statute of frauds. Apparently the majority position is that such covenants are indeed interests in land. This conclusion is based on the position taken by legal writers17 and analysis of court decisions.18 Less directly but still on point, most courts in condemnation cases have concluded that running covenants are a form of property for which a condemnation award can be given.19 According to the minority position, running covenants are merely contract rights that run only because of their connection with es-tates in land.20

17

The view that running covenants are interests in land was taken by Judge Charles Clark (Charles Edward Clark, Real Covenants and Other Interests Which “Run With Land” 94 (2d ed. 1947), Professor Richard Powell in the original edition of Powell on Real Property (see Richard R. Powell & Patrick J. Rohan, Powell on Real Property & 672 (abr. ed. 1968)), and the original Restatement of Property (Restatement of Property § 522 (1944)).

18In 1944, Professor Sims concluded that courts in nine states had ruled that run-

ning covenants are interests in land, and courts in 14 states had held otherwise. Henry U. Sims, “The Law of Real Covenants: Exceptions to the Restatement of the Subject by the American Law Institute,” 30 Cornell L.Q. 1 (1944). In 1970, Professor Stoebuck concluded that the majority of decisions held that running covenants are interests in land, and his more recent treatise also takes that position. William B. Stoebuck, “Con-demnation of Rights the Condemnee Holds in Lands of Another,” 56 Iowa L. Rev. 293, 302-06 (1970); William B. Stoebuck & Dale A. Whitman, The Law of Property § 8.14, at 474 n.4 (3d ed. 2000). The minority position is discussed in Johnson v. Mt. Baker Park Presbyterian Church, 194 P. 536 (Wash. 1920). In 2001, the Powell treatise listed cases in 24 states that take the majority position that running covenants are interests in land: Alabama, Arizona, Arkansas, California, Florida, Hawaii, Illinois, Indiana, Iowa, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. It also listed cases in six states holding that running cove-nants create only contract rights: Colorado, Connecticut, Idaho, Mississippi, New Mex-ico, and Oregon. 9 Powell, supra note 10, § 60.02, at 60-14 & 60-15. The Restatement (Third) of Property (Servitudes), §§ 2.7, 2.8 & 2.9, assumes that the statute of frauds applies to servitudes, including running covenants.

19See, e.g., Wash. Suburban Sanitary Comm’n v. Frankel, 470 A.2d 813 (Md. Ct.

Spec. App. 1984), vacated on other grounds, 487 A.2d 651 (Md. 1985); Stoebuck, supra note 18, at 302-06.

20See, e.g., Johnson v. Mt. Baker Park Presbyterian Church, 194 P. 536 (Wash.

1920); Sims, supra note 18, at 27-30.


[b] Covenants Are Subject to the Statute of Frauds

If running covenants are indeed interests in land, then they are also subject to the statute of frauds, that is, they must be created by a document that meets the requirements of the statute of frauds or avoids the need for a formal writing by one of several well-recognized exceptions. The usual method for creating an es-tate in land is by written deed or lease or easement agreement, executed with sufficient detail and formality that it is qualified to be recorded. Such document, to qualify as a conveyance of an es-tate in land, would identify the parties, the land, the estate, and the date, and be signed at least by the grantor.21 Acknowledgment or notarization is also required for the document’s recordability. Such a document would also be used to create a servitude such as an easement or a profit. If the running covenant is a servitude that, similar to the easement, is considered an interest in land, the same practices, requirements, and formalities would apply.22

One substantial departure from these standard statute of fraud requirements has developed that is unique to running covenants. It sometimes occurs that deeds for conveying estates also contain covenants that bind the grantee and assigns. Such a deed would normally be signed by the grantor, but not by the grantee, even though the document obligates the grantee as a covenantor. Ap-parently the courts treat the grantee/covenantor’s acceptance of such a deed as tantamount to signing it. This situation arises fre-quently in cases of reciprocal negative covenants.23

Standard exceptions or alternatives to the statute of frauds re-quirements include estoppel, part performance, and the existence of some writing that provides evidence of the document that is otherwise required to be in the form of a formal writing.

21

Pearson, supra note 7, § 61.04(b)(3). 22

See William B. Stoebuck, “Running Covenants: An Analytical Primer,” 52 Wash. L. Rev. 861, 867-869 (1977).

23See, e.g., Jeremiah 29:11, Inc. v. Seifert, 136 P.3d 957 (Kan. Ct. App. 2006) (no sig-

nature necessary because the deed had been accepted, and in the absence of evidence to the contrary, acceptance would be presumed); Rodruck v. Sand Point Maintenance Comm’n, 295 P.2d 714 (Wash. 1956); Vogeler v. Alwyn Improvement Corp., 159 N.E. 886 (N.Y. Ct. App. 1928); Sanborn v. McLean, 206 N.W. 496 (Mich. 1925).


[i] Estoppel

Estoppel, the most common exception, has been described as fol-lows:

The equitable principle of estoppel may come into play when a gran-tor orally represents to the grantee that lands retained by the gran-tor have already been subjected to restrictions, and the grantee completes the purchase and builds in reliance upon the truth of this representation. It would not be fair, under such circumstances, to permit the grantor (or the grantor=s successors taking with notice) to raise the absence of a writing as a defense.

24

[ii] Part Performance

The part performance exception requires the party relying on the exception to show that the conduct of the parties can be ex-plained only by the existence of the non-written agreement.25

[iii] Written Memorandum

The English statute of frauds describes the written memoran-dum “alternative” to the written agreement as “the agreement . . . or some memorandum or note thereof [which] shall be in writing, and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized.”26 “[A] writing which forms no part of the contract itself may also suffice as a ‘memoran-dum’, as the statute uses the term. A letter to a third party, a check, a note, or a set of escrow instructions may do quite well.”27

These exceptions have the effect of enabling courts to recognize and enforce actual agreements between the parties, even when the written agreement was not created or cannot be found. In this way, the statute of frauds is restrained from itself becoming an instrument of fraud.

[c] Implied Covenants May Be Enforceable as Interests in Land

According to one authority, “[m]ost jurisdictions will require that the covenant be expressly made. While courts will, under the

24

9 Powell, supra note 10, § 60.02, at 60-19. 25

See, e.g., Bennett v. Charles Corp., 226 S.E.2d 559 (W. Va. 1976); Sprague v. Kim-ball, 100 N.E. 622 (Mass. 1913).

26Stat. 29 Car. II, c.3, § 4 (1677).

27Stoebuck & Whitman, supra note 2, § 10.1, at 709 (citations omitted).


right conditions, imply an equitable servitude, the general rule is that real covenants must be expressly made.”28 Another authority adds, however, that “in some jurisdictions covenants may be created by implication from the language of deeds, plats and maps, general building development plans, or the conduct of the parties.”29

While the opening statement in the preceding paragraph re-flects good practices in covenant transactions, it does not account for the existence of implied covenants. In real estate transactions, generally, implied covenants most frequently arise in subdivisions in which the title to all the lots originates in a common grantor. Typically, the common grantor will begin conveying lots to pur-chasers under covenants, for instance, to use the land only for single family houses. Because such covenants make little sense unless all the lots in the development (or “common scheme”) are also similarly restricted, the lots retained by the common grantor become, by implication, similarly restricted, and those restrictions are passed on to later grantees of those lots. In other cases, the common grantor has failed to include the express restriction in all the deeds to subdivision lot purchasers.30 The servitudes that arise in these situations are usually called reciprocal negative easements or implied reciprocal servitudes.31

[2] Scope

Covenants have marvelous flexibility, but are not without limits in the scope of their subject matter. For instance, covenants that require illegal conduct will not be enforceable either between the original covenanting parties or between their assignees. An ex-ample of this type of covenant is a covenant restricting land use to single family residences in order to exclude group homes for the disabled. These covenants will usually not be enforceable either as a matter of covenant interpretation or because the federal and state fair housing acts may be violated.32 Even before covenants to

28

Pearson, supra note 7, § 61.04(b). 29

9 Powell, supra note 10, § 60.03[1], at 60-21 and cases cited in n.1. 30

See, e.g., Sanborn v. McLean, 206 N.W. 496 (Mich. 1925). 31

See generally 9 Powell, supra note 10, § 60.03, and the hundreds of cases cited therein.

32See, e.g., Hill v. Community of Damien of Molokai, 911 P.2d 861 (N.M. 1996).


restrict land use on the basis of race were held to be in violation of the U.S. Constitution, attempts to enforce such covenants by means of judicial action were held to be state action in violation of the Fourteenth Amendment.33

[3] Duration

A real covenant may be either finite or permanent in duration. Covenants may be limited in time but subject to a limited or un-limited number of renewals, which may be automatic.34 If a cove-nant is created in perpetuity or for a long term, it may be impor-tant to know the various ways such a covenant can be terminated.

[4] Termination

Covenants that run with the land, like other servitudes, may be terminated by the volitional conduct of the parties or by the force of other circumstances. The range of alternatives for termination is impressive. The brief summary below merely introduces the me-thods, without describing all of the technical requirements for each.

(a) Merger. Because a covenant running with the land typically consists of benefits and burdens, if the parties respectively en-titled to enforce the benefits or obligated to fulfill the burdens be-come one and the same party, that “merger” terminates the cove-nant.35 The same result occurs in the context of easements when the holders of the dominant and servient tenements become the same party.

(b) Release. One who holds the benefit of a covenant may termi-nate the covenant by executing a release.36

33

Shelley v. Kraemer, 334 U.S. 1 (1948). 34

See, e.g., Scholten v. Blackhawk Partners, 909 P.2d 393 (Ariz. Ct. App. 1995); Per-ry v. Bridgetown Community Ass’n, Inc., 486 So. 2d 1230 (Miss. 1986). Even though a real covenant runs with the land, when the covenant expires by its own terms, it no longer runs. First Permian, L.L.C. v. Graham, 212 S.W.3d 368 (Tex. App. 2006) (a pro-vision in an assignment of an oil and gas lease required a production payment and re-served a preferential right to match bona fide purchase offers; when the production payment was completed, the court held the preferential right expired, because that right was intended only to secure the payment).

35See, e.g., Heffner v. Litchfield Golf Co., 189 S.E.2d 3 (S.C. 1972); Olson v. Jan-

tausch, 130 A.2d 650 (N.J. Super. Ct. 1957); Aull v. Kraft, 286 S.W.2d 460 (Tex. App. 1956); Spector v. Traster, 170 N.E. 567 (Mass. 1930).

36See, e.g., Chimney Hill Owners’ Ass’n, Inc. v. Antignani, 392 A.2d 423 (Vt. 1978);

Kene Corp. v. Harris, 139 S.E.2d 61 (Va. Ct. App. 1964); Dartmouth-Willow Terrace,


(c) Rescission. Although a rescission is similar to a release agreement between the parties, the rescission is normally part of a new agreement between the parties to modify the restrictions of the earlier covenant. This usually requires the earlier covenant to be completely rescinded and replaced by the new arrangement.37

(d) “Unclean Hands.” If the plaintiff complains that the defen-dant has violated a covenant restriction that the plaintiff has pre-viously violated, courts may reject the complaint because of the plaintiff’s “unclean hands.”38

(e) Acquiescence. Acquiescence may be raised against a plaintiff who has failed to enforce the same covenant restriction against others who have violated it.39 Acquiescence in violations by the de-fendant may result in the defendant obtaining a prescriptive right to continue that conduct.

(f) Abandonment. Abandonment may occur by conduct of the party entitled to the benefit of the covenant signifying the party’s intent to no longer claim the benefit of the covenant.40

(g) Laches. Terminating a covenant restriction because of laches occurs when the holder of the benefit has failed to enforce a viola-tion for such a long time that the delay has caused prejudice to the defendant.41

Inc. v. MacLean, 371 S.W.2d 937 (Ky. Ct. App. 1963); Atlas Terminals, Inc. v. Sokol, 21 Cal. Rptr. 293 (Cal. Ct. App. 1962); Rector v. Anderson, 1 S.W.2d 699 (Tex. App. 1927).

37See, e.g., Steve Vogli & Co. v. Lane, 405 S.W.2d 885 (Mo. 1966); Obrock v. Crolly

Co., 205 N.Y.S. 231 (N.Y. App. Div. 1924); Rogers v. Zwolak, 110 A. 674 (Del. Ch. 1920). 38

See, e.g., LoBianco v. Clark, 596 N.E.2d 56 (Ill. App. Ct. 1992); Lovelace v. Bandera Cemetery Ass’n, 545 S.W.2d 194 (Tex. App. 1976); Crowl v. McDuffie, 134 So. 2d 542 (Fla. Dist. Ct. App. 1961).

39See, e.g., Mackey v. Griggs, 61 S.W.3d 312 (Mo. Ct. App. 2001); Tompkins v. But-

trum Constr. Co., 659 P.2d 865 (Nev. 1983); Morris v. Nease, 238 S.E.2d 844 (W. Va. 1977); Tones Inc. v. LaSalle Nat’l Bank, 339 N.E.2d 3 (Ill. App. Ct. 1975); Scholosser v. Creamer, 284 A.2d 220 (Md. 1971); Smith v. Shinn, 350 P.2d 348 (Idaho 1960); Harri-son v. Frye, 307 P.2d 76 (Cal. Dist. Ct. App. 1957).

40See, e.g., Fink v. Miller, 896 P.2d 649 (Utah Ct. App. 1995); New Jerusalem Baptist

Church, Inc. v. City of Houston, 598 S.W.2d 666 (Tex. App. 1980); Martin v. Moore, 562 S.W.2d 274 (Tex. Civ. App. 1978); Welch v. Barrows, 218 A.2d 698 (Vt. 1966); Thodos v. Shirk, 79 N.W.2d 733 (Iowa 1956).

41See, e.g., Masterson v. Bd. of Zoning Appeals, 353 S.E.2d 727 (Va. 1987); Tubbs v.

Brandon, 374 So. 2d 1358 (Ala. 1979); Ezer v. Fuchsloch, 160 Cal. Rptr. 486 (Cal. Ct. App. 1979); Chapman v. Bradshaw, 536 S.W.2d 447 (Ky. 1976); Lane v. Derocher, 360


(h) Estoppel. Similar to but more general than laches is a situa-tion giving rise to estoppel. When a covenant restriction is termi-nated because of estoppel, the holder of the benefit has failed to enforce a violation and the holder of the burden has acted in re-liance on that conduct.42

(i) Change in Circumstances. A covenant restriction may be por-trayed as having outlived its usefulness because of changed cir-cumstances. In the words of Restatement (First) of Property, this means of termination may apply “if conditions have so changed since the making of the promise as to make it impossible longer to secure in a substantial degree the benefits intended to be secured by the performance of the promise.”43 Changes in the area sur-rounding the land under covenant usually do not suffice as a change of circumstances; the change must occur on the burdened land itself.44

(j) “Balancing the Equities.” “Balancing the equities” is also re-ferred to as the doctrine of relative hardship, and may be “applied in situations in which the enforcement of a restriction will harm the defendant without substantially benefiting the plaintiff=s land.”45 If a court chooses to invoke this doctrine, usually the dif-ference between benefit and harm must be substantial.46

A.2d 141 (Me. 1976); Builders Supplies Co. v. Gainey, 189 S.E.2d 657 (N.C. Ct. App. 1972), aff’d, 192 S.E.2d 449 (N.C. 1972).

42See, e.g., Woodmoor Improvement Ass’n v. Brenner, 919 P.2d 928 (Colo. Ct. App.

1996); Easterwood v. Burge, 405 S.E.2d 787 (N.C. Ct. App. 1991); Sugar Creek Homes Ass’n v. Berry, 590 S.W.2d 590 (Tex. Civ. App. 1979); Tubbs v. Brandon, 374 So. 2d 1358 (Ala. 1979); Wallace v. St. Clair, 127 S.E.2d 742 (W. Va. 1962); Thodos v. Shirk, 79 N.W.2d 733 (Iowa 1956).

43Restatement (First) of Property § 564 (1944).

44See, e.g., Nash v. State, 401 N.Y.S.2d 923 (N.Y. App. Div. 1978); Nonnenmann v.

Lucky Stores, Inc., 368 N.E.2d 200 (Ill. App. Ct. 1977); Flinkingshelt v. Johnson, 187 S.E.2d 233 (S.C. 1972); Centers, Inc. v. Gilliland, 234 So. 2d 883 (Ala. 1970); Foster v. Harvey, 356 S.W.2d 829 (Tex. Civ. App. 1962); Tull v. Doctors Bldg., Inc., 120 S.E.2d 817 (N.C. 1961).

459 Powell, supra note 10, § 60.10[3] at 60-137.

46See, e.g., Szymczak v. LaFerrara, 655 A.2d 76 (N.J. Super. 1995); Gunnels v. N.

Woodland Hills Community Ass’n, 563 S.W.2d 334 (Tex. App. 1978); Lenhoff v. Birch Bay Real Estate, Inc., 587 P.2d 1087 (Wash. Ct. App. 1978); Swaggerty v. Petersen, 572 P.2d 1309 (Or. 1977); Grange v. Korff, 79 N.W.2d 743 (Iowa 1956).


(k) Governmental Action. When a governmental entity acquires land by eminent domain, the land is acquired free from the bur-den of the covenant.47 States are split over whether compensation should be paid to the holder of the covenant benefit that is so tak-en, with the majority favoring payment.48 States are also split over whether a tax sale extinguishes a covenant restriction.49 Zon-ing ordinances or other land use regulations seldom conflict di-rectly with private covenant restrictions, so enactment of an or-dinance will usually not extinguish the private covenant. If a later zoning ordinance prohibits the very use that is mandated by the restrictive covenant, the ordinance may supersede and extinguish the covenant restriction.50

[5] Assignability

[a] Assignability of Benefits and Burdens Distinguished

For a covenant to be enforceable by and between the successors to the original covenanting parties, several requirements must be met. The requirements differ depending on whether enforcement of the covenant=s benefit is sought by a successor to the benefitted party (running of the benefit required) or enforcement of the co-venant’s burden is sought against a successor to the burdened party (running of the burden required). If one refers to a covenant as running with the land, that should signify that both benefits and burdens of the covenant run with the land. It does not de-scribe a covenant whose benefits may be assignable, but whose burdens are not. The differences in requirements for the running of covenant benefits and burdens are highly technical, not neces-sarily self-evident or rational, and often explicable only through understanding the historical background. More importantly, there is great variation among the states in applying these rules, and specific research for each individual jurisdiction is recom-mended. The discussion below presumes that the most extensive requirements to qualify a covenant as running with the land are

47

See, e.g., Gremillion v. Rapides Parish School Bd., 140 So. 2d 377 (La. 1962). 48

See, e.g., United States v. 4.105 Acres of Land, 68 F. Supp. 279 (N.D. Cal. 1946). 49

9 Powell, supra note 10, § 60.10[4], at 60-142 to 60-144. 50

See, e.g., Weber v. City of Cheyenne, 97 P.2d 667 (Wyo. 1940); Restatement (First) of Property § 568 (1944).


imposed. In fact, these requirements are usually relaxed in al-most all states.

[b] Requirements for the Running of the Burden

[i] Horizontal Privity

The most esoteric requirement for the running of a covenant burden has been traditionally labeled horizontal privity. It signifies a special, additional element in the relationship between the origi-nal covenanting parties, who might be graphically represented as being next to, across from, laterally positioned or horizontally posi-tioned with respect to one another. According to the traditional concept of horizontal privity, the original covenanting parties seek-ing to create an assignable covenant, a covenant running with the land, would have to have some additional transactional element to their relationship, and not be merely two parties seeking to cove-nant with one another. Various versions of horizontal privity have appeared in American courts. The most rigorous, the so-called “Massachusetts privity,” required that the covenanting parties par-ticipate in a transaction that left both of them with a continuing in-terest in the land under covenant. This would usually arise in a landlord-tenant relationship, and reflects the highly restrictive English notion of horizontal privity, which was limited to landlord-tenant transactions.51 This rule has no certain viability today.

More common in American courts was the requirement that a transaction in some kind of real property interest take place be-tween the covenanting parties. This could be a landlord-tenant arrangement, as under Massachusetts privity; creation of a co-tenancy; creation of an easement; or, most commonly, conveyance of an estate. Even if this was the position of American courts, lit-tle modern case law exhibits adoption of the horizontal privity re-quirement. Scholars conclude that American courts today are tending toward the third view on horizontal privity, which is that it should not be required for the running of the covenant burden.52

51

Hurd v. Curtis, 36 Mass. (19 Pick.) 459 (1837). 52

Profs. Stoebuck and Whitman declared, “An article published in 1970 noted that only one state, Oregon, had adopted a horizontal privity requirement in the preceding twenty-seven years. Modern thinking on covenants certainly militates against the re-quirement, because, instead of being disfavored as title burdens, covenant restrictions are now favored as a mode of preserving neighborhood plans.” Stoebuck & Whitman, supra note 2, § 8.18, at 486 (citations omitted). The Powell treatise reaches basically


That may not be the attitude, however, of individual courts in in-dividual states. Because the horizontal privity requirement is eas-ily met in most real covenant cases, practitioners should continue to pay attention to this requirement and not invite gratuitous challenges to the covenants they create.

[ii] Vertical Privity

Also easily met and considerably less controversial is the re-quirement of so-called “vertical privity.” This phrase refers, on the one hand, to the relationship between the covenantor and the covenantor’s successors in interest and, on the other hand, to the relationship between the covenantee and the convenantee’s suc-cessors in interest. It “requires a showing of succession in interest between the original covenanting parties and the current owners of the dominant and servient estates.”53 Vertical privity exists “where the party seeking to enforce the covenant and the party against whom it is to be enforced are successors in title to the property of the covenantee and covenantor respectively.”54 The vertical privity requirement for the covenantor’s successor (the burdened party) may be more rigorous than the requirement for the covenantee’s successor (the benefited party). If the burden is sought to be enforced, the successor to the burdened party is usually required to have succeeded to the same estate as held by the original burdened party; if enforcement of the benefit is sought, the successor to the benefited party may sue even though it has succeeded to a lesser estate than that held by the original benefit holder.55

[iii] Intent

A key issue in the running of covenants is whether the cove-nanting parties intended that their successors should also be bound. This was the central point in the leading early English similar conclusions, although declares that “many states appear to require horizontal privity,” and gives dozens of case citations representing 18 states. 9 Powell, supra note 10, § 60.04[3][c][iii], at 60-60.2. See also Pearson, supra note 7, § 61.04(a)(3), at 593-94; Restatement (Third) of Property (Servitudes) § 2.4, Reporter’s Note (2000).

53Runyon v. Paley, 416 S.E.2d 177, 184 (N.C. 1992).

54Moseley v. Bishop, 470 N.E.2d 773, 777 (Ind. Ct. App. 1984).

55See, e.g., Alexander’s Dep’t Stores v. Arnold Constable Corp., 250 A.2d 792 (N.J.

Super. Ct. Ch. Div. 1962); American Law of Property § 9.20 (1952); Restatement (First) of Property § 547 (1944).


covenant case.56 That case looked for intent in whether the cove-nant required that “assigns” should be bound; modern American cases simply inquire into any indication of intent,57 or even whether the nature of the covenant itself suggests that the parties did or did not intend to bind their successors.58 The parties may intend that the burden run but not the benefit, or vice versa.

[iv] Touch and Concern

Once again, Spencer’s Case of 1583 is the source for the arcane but important “touch and concern” requirement for covenants running with the land. Although that case was decided on the ground that inadequate technical language was used to create the assignability of the covenant, the court also declared that a cove-nant, to run, must “touch and concern the thing demised.”59 Even if the parties agreed that a covenant for a personal service should run with the land, and executed a document embodying that co-venant with all the requisite formalities and expressions of intent to bind successors and assigns, the covenant would still not run because it would have nothing to do with the land. Clear cases of “touch and concern” are covenants calling for something physi-cal to be done or not done on land. A broader, more abstract statement of this concept was propounded by one scholar and paraphrased by another as follows:

if the covenantor’s legal interest in land is rendered less valuable by the covenant’s performance, then the burden of the covenant satis-fies the requirement that the covenant touch and concern land. If, on the other hand, the covenantee’s legal interest in land is rendered more valuable by the covenant’s performance, the benefit of the cove-nant also satisfies the requirement that the covenant touch and con-cern the land.

60

56

Spencer’s Case, 5 Co. Rep. 16a, 77 Eng. Rep. 72 (Q.B. 1583). 57

See, e.g., Masury v. Southworth, 9 Ohio St. 340 (Ohio 1859). 58

See, e.g., Suttle v. Bailey, 361 P.2d 325 (N.M. 1961); Meado-Lawn Homes, Inc. v. Westchester Lighting Co., 13 N.Y.S.2d 709 (N.Y. Sup. Ct. 1939), aff’d, 20 N.Y.S.2d 396 (N.Y. App. Div. 1940), aff’d, 30 N.E.2d 608 (N.Y. 1940); Sebald v. Mulholland, 50 N.E. 260 (N.Y. 1898); Gibson v. Holden, 3 N.E. 282 (Ill. 1885).

59Spencer’s Case, 5 Co. Rep. 16a, 77 Eng. Rep. 72 (Q.B. 1583).

60The source of the formulation is Harry Bigelow, “The Content of Covenants in

Leases,” 12 Mich. L. Rev. 639, 645 (1914). The paraphrase is from 9 Powell, supra note 10, § 60.04[3][a], at 60-42.


Direct physical impact on the land is no longer required, but a covenant to pay money or other consideration will be held to touch and concern only if the money or consideration is required to be used for the land or improvements.61 Covenants to pay rent are unanimously held to touch and concern.62 If a covenant to pay money enables performance of an act that itself touches and con-cerns the land, then the covenant qualifies as touching and con-cerning. In some jurisdictions, for the running of the burden, only the burden must touch and concern the land; in others, both the burden and the benefit must touch and concern the land.63

[c] Requirements for the Running of the Benefit

As might be expected, the requirements for the running of the benefit of a covenant are considerably less rigorous than those re-quired for the running of the burden. The requirements, when applied, are the same as and rely on the same authorities as those discussed in the preceding section relating to the running of cove-nant burdens. Therefore, in this section, only summary state-ments of the requirement’s applicability are given.

[i] Horizontal Privity

Horizontal privity, possibly required for the running of the covenant burden, is not required for the running of the covenant benefit.64

[ii] Vertical Privity

Vertical privity is required for the running of the benefit, but it is not required that the successor in interest hold the same estate

61

In Flying Diamond Oil Corp. v. Newton Sheep Co., 776 P.2d 618 (Utah 1989), the court held that a covenant to pay oil and gas royalties met the touch and concern re-quirement, and the court also repudiated the earlier rule requiring physical acts on land to qualify as touching and concerning. Contrary to that decision is Vulcan Mate-rials Co. v. Miller, 691 So. 2d 908 (Miss. 1997) (promises to pay mineral royalties did not touch and concern).

62See, e.g., Abbott v. Bob’s U-Drive, 352 P.2d 598 (Or. 1960).

63Extensive discussion and documentation on touch and concern are found in Pear-

son, supra note 7, § 61.04(d); 9 Powell, supra note 10, § 60.04[3][a]; and Stoebuck & Whitman, supra note 2, § 8.15.

64City of Reno v. Matley, 378 P.2d 256 (Nev. 1963); Restatement (First) of Property

§ 548 (1944).


as the predecessor. The successor need only have succeeded “to some interest in the benefited parcel.”65

[iii] Intent

The intent requirement applies equally to the running of the covenant burden and the running of the covenant benefit. A cove-nant benefit that touches and concerns the land is probably in-tended by the parties to run.66

[iv] Touch and Concern

The “touch and concern” requirement may also apply to benefits as well as burdens; however, the jurisprudence is divided and somewhat confusing. One scholar has noted:

Many jurisdictions will require that the covenant affect legal rela-tions to land not only on the burden side but also on the benefit side. They will, therefore, not enforce covenants “in gross.” Thus, the [First] Restatement has it that the “benefit of a promise can run only if it is a promise respecting the use of land of the beneficiary of the promise.” [quoting Restatement (First) of Property § 543(1) (1944)] . . . . “Although there is some authority in American law that a blanket prohibition on covenants in gross exists, the cases show that covenant benefits in gross are recognized and enforced in a variety of contexts.” [citing and quoting Restatement (Third) of Prop-erty (Servitudes) § 2.6, Reporter’s Note at 108 (2000)]

67

§ 19.05 How the Running of Covenants is Affected by the Nature of the Assignment

One of the principal transactional settings in which real cove-nants are created is that of landlord and tenant. The principal transactional setting in which the running of such covenants is at issue is the transfer of the interest of either party, either assign-ment of the tenant’s interest or conveyance of the landlord’s inter-est. This section will focus on the general property laws governing assignment of the tenant’s interest, which is this chapter’s final issue of general property law to be discussed before examining the application of such laws to oil and gas transactions.

65

Curtis J. Berger, “Some Reflections on a Unified Law of Servitudes,” 55 S. Cal. L. Rev. 1323, 1327 (1982); Alexander’s Dep’t Stores v. Arnold Constable Corp., 250 A.2d 792 (N.J. Super. 1969).

66See Stoebuck & Whitman, supra note 2, § 8.16, at 481.

67Pearson, supra note 7, § 61.04(d)(3), at 608, 610 (citations omitted).


[1] The Role of the Lessor’s Consent in Assignments and Subleases

The traditional common law rule is that leasehold interests are freely alienable; however, parties may also by contract impose re-strictions on transfer by assignment or sublease.68 Such provi-sions are often narrowly interpreted because of the general com-mon law policy favoring free alienability of real property interests. The majority of American jurisdictions apparently still adhere to the old English rule in Dumpor’s Case, to the effect that when a required consent is given, without restriction, consent for future assignments is presumed.69 American courts generally hold that the required consent of the landlord may be withheld without a reason being given,70 although some jurisdictions insist that con-sent not be unreasonably withheld.71

A clause requiring consent may be coupled with a clause giving the landlord power to terminate the lease if assignment occurs without consent, because the assignment without consent is oth-erwise still valid, subject only to an action for damages.72

[2] Distinctions Between Assignments and Subleases

The traditional test of whether a transfer from the lessee is an assignment or a sublease is whether the lessee has retained a re-version. If no interest pertaining to the original leasehold has been retained, the transfer is an assignment; otherwise it is a sub-

68

Kendall v. Ernest Pestana, Inc., 709 P.2d 837 (Cal. 1985). Annotation, “Right of lessee in absence of covenant to assign or sublet premises,” 23 A.L.R. 135 (1923), Supp. 70 A.L.R. 486 (1931).

69Dumpor’s Case, 4 Coke 119b, 76 Eng. Rep. 1110 (K.B. 1578).

70See, e.g., Johnson v. Yousoofian, 930 P.2d 921 (Wash. Ct. App. 1996); Dress Shirt

Sales, Inc. v. Hotel Martinique Assocs., 239 N.Y.S.2d 660 (N.Y. 1963); Gruman v. In-vestors Diversified Servs., Inc., 78 N.W.2d 377 (Minn. 1956); Friedman v. Thomas J. Fisher & Co., 88 A.2d 321 (D.C. 1952). See generally Robert A. Schoshinski, American Law of Landlord and Tenant § 8.10 (1980).

71See, e.g., Kendall v. Ernest Pestana, Inc., 709 P.2d 837 (Cal. 1985); Campbell v.

Westdahl, 715 P.2d 288 (Ariz. Ct. App. 1985); Jack Frost Sales, Inc. v. Harris Trust & Sav. Bank, 433 N.E.2d 941 (Ill App. Ct. 1982). See generally Schoshinski, supra note 70, § 8.10.

72People v. Klopstock, 151 P.2d 641 (Cal. 1944); Reynolds v. McCullough, 739 S.W.2d

424 (Tex. App. 1987).


lease.73 Such a reversion could be a lessee’s right to resume pos-session when the transferee’s interest expires, meaning that any transfer for less than the remaining unexpired term of the origi-nal lease would be a sublease.74 Retaining a contingent right or possibility of possession is not a sufficient reversionary interest to consider a transfer a sublease,75 although some courts disagree.76 A difference in lease terms under the transfer, such as increased rent, has also been held to make the transfer a sublease.77 Indi-vidual courts may deviate from any of these stated rules, but it is generally correct to treat a transfer of the lessee’s entire unex-pired term as an assignment, and not a sublease.

[a] The Effect of Transfers on Privity of Estate and Privity of Contract

When parties enter into a leasehold agreement, privity of con-tract and privity of estate arise between them, succinctly de-scribed as follows:

Rights and liabilities under lease covenants arise from two types of relationships between the parties, privity of estate and privity of contract. The execution of a lease gives rise to a contractual rela-tionship between lessor and lessee, imposing contract duties and in-vesting contract rights. Lessor and lessee are said to be in privity of contract with each other. Since the lease is also a conveyance of an estate, it also creates a relationship based on mutual and successive

73

See, e.g., Maxima Corp. v. Cystic Fibrosis Fdn., 568 A.2d 1170 (Md. Ct. Spec. App. 1990); Joseph Bros. Co. v. F. W. Woolworth Co., 844 F.2d 369 (6th Cir. 1988); Italian Fisherman, Inc. v. Middlemas, 545 A.2d 1 (Md. 1988); Capoccia v. Brognano, 522 N.Y.S.2d 733 (N.Y. App. Div. 1987); Weeks v. Cal-Maine Foods, Inc., 522 So. 2d 725 (Miss. 1987); Tidewater Investors, Ltd. v. United Dominion Realty Trust, Inc. 804 F.2d 293 (4th Cir. 1986).

74See, e.g., Maxima Corp. v. Cystic Fibrosis Fdn., 568 A.2d 1170 (Md. Ct. Spec. App.

1990); Am. Community Stores Corp. v. Newman, 441 N.W.2d 154 (Neb. 1989); OTR v. Flakey Jake’s, Inc., 770 P.2d 629 (Wash. 1989); Joseph Bros. Co. v. F. W. Woolworth Co., 844 F.2d 369 (6th Cir. 1988).

75See, e.g., Wangsgard v. Fitzpatrick, 542 P.2d 194 (Utah 1975); Thomas v. United

States, 505 F.2d 1282 (Ct. Cl. 1974); Groth v. Cont’l Oil Co., 373 P.2d 548 (Idaho 1962). 76

See, e.g., Am. Community Stores Corp. v. Newman, 441 N.W.2d 154 (Neb. 1989); Brickum Inv. Co. v. Vernham Corp., 731 P.2d 533 (Wash. Ct. App. 1987); Orchard Shopping Ctr., Inc. v. Campo, 485 N.E.2d 1248 (Ill. App. Ct. 1985); Conklin Dev. Corp. v. Acme Markets, Inc., 453 N.Y.S.2d 930 (N.Y. App. Div. 1982); Nat’l Tea Co. v. Am. Nat’l Bank & Trust Co., 427 N.E.2d 806 (Ill. App. Ct. 1981).

77See, e.g., V.O.B. Co. v. Hang It Up, Inc., 691 P.2d 1157 (Colo. Ct. App. 1984); Bor-

delon v. Bordelon, 434 So. 2d 633 (La. Ct. App. 1983).


ownership by lessor and lessee of the demised premises, termed privity of estate. The privity of estate is mutual, in that it exists as long as the landlord-tenant relationship endures, and successive, in that the leasehold originates from the lessor’s ownership.

78

These two privity relationships are affected differently, depend-ing on whether the transfer of the lessee’s interest is an assign-ment or a sublease. If the transfer is an assignment, the privity of contract between the original lessor and original lessee remains in effect,79 and the privity of estate between them ceases.80 The as-signee comes into privity of estate with the lessor,81 and also ob-tains the burdens and benefits of lease covenants that run with the land,82 unless the lessor has released the lessee or entered into a new lease or novation with the assignee.83 This assignee liability to the lessor based on privity of estate ends if the assignee further as-signs. If the assignee agrees to assume the leasehold covenants and obligations, the privity of contract arises between the original les-sor (as a third party beneficiary) and the assignee, and that privity of contract remains intact even if the assignee further assigns.84

If the transfer is a sublease, the privity of contract and privity of estate created in the original lease are unaffected.85 Sublessor and sublessee are in a landlord-tenant relationship.86 Traditionally,

78

Schoshinski, supra note 70, § 8.1 & n.1, at 532. 79

See, e.g., Newfeld v. Chem. Dynamics, Inc., 784 S.W.2d 240 (Mo. Ct. App. 1989); George W. Watkins Family v. Messenger, 766 P.2d 1267 (Idaho Ct. App. 1988); Italian Fisherman, Inc. v. Middlemas, 545 A.2d 1 (Md. Ct. App. 1988).

80See, e.g., Dayenian v. Am. Nat’l Bank & Trust Co., 414 N.E.2d 1199 (Ill. App. Ct.

1980); Nutley v. Gregory, 494 P.2d 1384 (Wash. Ct. App. 1972); Earlington Realty Co. v. Berkow, 128 A. 605 (N.J. 1925).

81See, e.g., Newfeld v. Chem. Dynamics, Inc., 784 S.W.2d 240 (Mo. Ct. App. 1989);

Dayenian v. Am. Nat’l Bank & Trust Co., 414 N.E.2d 1199 (Ill. App. Ct. 1980); Miles v. United Oil Co., 234 S.W. 209 (Ky. Ct. App. 1921); Sanborn v. Cree, 3 Colo. 149 (1876).

82See Schoshinski, supra note 70, § 8.12, at 564 n.5.

83Id. § 8.12, at 560 n.75 & 564 n.1.

84See, e.g., Klager v. Robert Meyer Co., 329 N.W.2d 721 (Mich. 1982); Hartman

Ranch Co. v. Associated Oil Co., 73 P.2d 1163 (Cal. 1937). 85

See, e.g., OTR v. Flakey Jake’s, Inc., 770 P.2d 629 (Wash. 1989); Tollius v. Dutch Inns of Am., Inc., 244 So. 2d 467 (Fla. Ct. App. 1970); Berman v. Brown, 70 So. 2d 433 (La. 1953).

86See, e.g., Kraft v. Sheridan, 521 N.Y.S.2d 238 (N.Y. App. Div. 1987); Diminich v.

2001 Enter., Inc., 355 S.E.2d 275 (S.C. Ct. App. 1987); Reed v. S. Shore Foods, Inc., 40


the lessor has no right of direct action against a sublessee, be-cause between them there is neither privity of estate nor privity of contract.87 If the sublessee agrees to assume the sublessor’s obli-gations under the original lease, privity of contract with the lessor may arise.88

[b] Assumption Agreements

If an assignee reassigns, the first assignee has no further liability for breaches of the lease occurring after the reassignment, because privity of estate has ended.89 However, if the first assignee, as part of the first assignment, assumed the obligations of the lease, then privity of contract arose between the first assignee and the lessor, and that privity of contract would continue despite further assign-ments, just as the original tenant’s privity of contract with the les-sor continues even after assignments.90 An assumption of the lease covenants must be clear and unambiguous.91 If a breach of the lease occurs, the lessor’s right to direct action against an assuming assignee is based on the lessor’s status as a third party beneficiary of the assignment agreement.92

§ 19.06 Overview of How Real Covenant Rules Are Applied in Oil and Gas Transactions

[1] Introduction

This section examines to what extent the rules governing cove-nants that run with the land under traditional real estate leases are applicable to oil and gas leases.

Cal. Rptr. 575 (Cal. Dist. Ct. App. 1964); Wehrle v. Landsman, 92 A.2d 525 (N.J. Super. Ct. 1952).

87See Schoshinski, supra note 70, § 8.13, at 574 n.44.

88See, e.g., Hibbs v. K-Mart Corp., 870 F.2d 435 (8th Cir. 1989); Bob Pearsall Motors,

Inc. v. Regal Chrysler-Plymouth, Inc., 521 S.W.2d 578 (Tenn. 1975). 89

See, e.g., O’Neil v. A. F. Oys & Sons, Inc., 13 N.W.2d 8 (Minn. 1944); Consol. Coal Co. v. Peers, 46 N.E. 1105 (Ill. 1896).

90See, e.g., Delano v. Tennent, 244 P. 273 (Wash. 1926); Harris & Cole Bros. v.

Strickler, 120 P. 343 (Kan. 1912). 91

See, e.g., Kelly v. Tri-Cities Broadcasting, Inc., 195 Cal. Rptr. 303 (Cal. Ct. App. 1983); Packard-Bamberger Co. v. Maloof, 214 A.2d 45 (N.J. Super. Ct. 1965); A. D. Juil-liard & Co. v. Am. Woolen Co., 32 A.2d 800 (R.I. 1943).

92See, e.g., Hollywood Shopping Plaza, Inc. v. Schuyler, 179 So. 2d 573 (Fla. Ct. App.

1965); Nelson v. Seidel, 328 S.W.2d 805 (Tex. Civ. App. 1959); Hartman Ranch Co. v. Associated Oil Co., 73 P.2d 1163 (Cal. 1937).


The oil and gas lease is unique. It is a conveyance of an interest in real property, with conditions and special limitations, which creates a continuing relationship between the parties. It is also an executory contract in that it contains elaborate contractual provisions which continue in force between the lessor and lessee during the life of the interest granted. In addition, many rights and duties arise as be-tween the lessor and lessee by virtue of their special relationship and their common objectives with respect to a fugitive substance, which rights and duties do not arise between vendor and purchaser nor between landlord and tenant.

93

Kuntz concluded his analysis of the uniqueness of oil and gas leases by declaring, “it is uniformly recognized that an oil and gas lease does not give rise to the ordinary relationship of landlord and tenant and that the rules applicable to ordinary tenancies do not necessarily apply.”94

[2] Regarding Covenants Running With the Land, Oil and Gas Leases Are Treated as Traditional Leases

Despite the uniqueness of oil and gas leases relative to the typi-cal landlord and tenant relationship, in matters pertaining to covenants running with the land, oil and gas leases are governed by traditional leasehold rules:

Although for other purposes the courts may have held that the in-terest created by an oil and gas lease is not an ordinary leasehold es-tate in the true sense, yet when the question is raised as to who is entitled to enforce and on whom the duty rests to perform the vari-ous express and implied covenants of an oil and gas lease, the courts have uniformly applied the rules of law applicable to covenants run-ning with the land in leasehold estates.

95

Williams and Meyers agree that “[l]iability of the assignee for breach of his assignor’s covenants and entitlement of the assignee to the benefit of the lessor’s covenants are based on the theory of running of the covenants with the land at law.”96

93

2 Eugene Kuntz, A Treatise on the Law of Oil and Gas § 18.2, at 4 (1989). 94

Id. at 6. See, e.g., Cross v. Lowrey, 404 So. 2d 645 (Ala. 1981); Alphin v. Gulf Ref. Co., 39 F. Supp. 570 (D. Ark. 1941); Shell Petroleum Corp. v. Howth, 133 S.W.2d 253 (Tex. Civ. App. 1939); Staplin v. Vesely, 72 P.2d 7 (N.M. 1937).

953 W. L. Summers, The Law of Oil and Gas § 553, at 582 (1958), citing dozens of

cases from 16 jurisdictions. 96

2 Howard R. Williams & Charles J. Meyers, Williams & Meyers Oil and Gas Law § 403.3, at 268 (Patrick H. Martin & Bruce M. Kramer revs., 2006). See, e.g., Mt. W. Mines, Inc. v. Cleveland-Cliffs Iron Co., 376 F. Supp. 2d 1298 (D. Wyo. 2005); Pro-Gas,


[3] How Traditional Rules for Real Covenants Apply to Covenants in Oil and Gas Leases

The first part of this chapter distinguished between the rules that govern running of the burden of a covenant and those that govern running of the benefit of a covenant. It pointed out that, although the rules are applied with wide variation in the states, they fall into four categories: horizontal privity, vertical privity, intent, and touch and concern.

An examination of each of these categories in the context of oil and gas covenants reveals that these requirements are almost al-ways easily and straightforwardly met in this context. This makes it unnecessary to determine precise limits of state jurisprudence on individual issues or to draw distinctions common in many real covenant cases.

[a] Horizontal Privity

As discussed in a preceding section of this chapter, horizontal privity was portrayed as a troublesome and inconsistently applied characteristic of covenants running with the land. It is a require-ment premised on the notion that parties to a covenant must create their covenant as part of a transaction between them that confers successive or mutual interests in the land under covenant. The original and universally recognized transaction sufficing to meet this requirement has always been the leasehold transaction. Because a form of lease is almost always the context in which oil and gas covenants are created and enforced, the requirement of horizontal privity is easily met and has not been an issue.97

Inc. v. Har-Ken Oil Co., 883 S.W.2d 485 (Ky. 1994); Hinson v. State, 245 S.W.2d 755 (Tex. Civ. App. 1951); Annotation, “Covenants in oil and gas lease as running with the land,” 79 A.L.R. 496 (1932).

97“Although the relationship between lessor and lessee in an oil and gas lease is not

properly classifiable as landlord and tenant in the common law sense, it appears to be sufficiently comparable as concerns the privity requirement to permit the running of covenants even in jurisdictions which normally require that relationship for the run-ning of covenants.” 2 Williams & Meyers, supra note 96, § 403.3, at 268 n.2. Some older cases denied that prior to successful development an oil or gas lease did not create an interest or estate in the land, but was little more than a license to enter upon the land and drill. Annotation, “Covenants in oil and gas lease as running with the land,” 79 A.L.R. 496, 497 (1932).


[b] Vertical Privity

With covenants in traditional leases, vertical privity, the suc-cession of interest from the original covenanting parties, has sometimes been at issue when the successor has a lesser estate than the predecessor. This issue rarely arises, however, even in the context of traditional leasehold covenants.

[c] Intent

The requirement of intent is easily met when the lease instru-ment contains authority to assign. “The typical contemporary [oil or gas] lease contains an express provision authorizing assign-ments by the lessee. . . .”98 In the absence of such an express au-thorization to assign, the right to assign has been implied from a provision that covenants in the lease run to assignees.99 Of course, as in ordinary leases, the right to assign may be prohibited or limited, such as by a requirement of prior written approval from the lessor, and that limitation may itself, in some jurisdictions, be subject to a reasonableness standard.100 This type of rule also oc-casionally occurs in oil and gas cases.101

[d] Touch and Concern

As discussed earlier, the “touch and concern” requirement can be vague. However, as stated by one authority, “[t]he usual cove-nants, express and implied, in oil and gas leases, e.g., to drill a test well or to offset, obviously touch and concern the estates owned by lessor and lessee.”102

Another writer agreed:

Practically all covenants of the lease, express or implied, such as covenants to pay rents and royalties, furnish free gas, to test and develop the land, protect it from drainage, market the oil or gas pro-

98

2 Williams & Meyers, supra note 96, § 402, at 260.1. 99

Whale v. Rice, 49 P.2d 737 (Okla. 1935); Jackson v. Pure Oil Operating Co., 217 S.W. 959 (Tex. Civ. App. 1919).

100See, e.g., Kendall v. Ernest Pestana, Inc., 709 P.2d 837 (Cal. 1985).

101See, e.g., Shields v. Moffitt, 683 P.2d 530, 534 (Okla. 1984) (requirement of lessor’s

written approval before assigning an oil and gas lease held to be void as an impermis-sible restraint on alienation; the court left open the possibility of a valid “suitably limited provision . . . imposed in reasonable protection of some interest in the premises retained by a grantor or third person.”

1022 Williams & Meyers, supra note 96, § 403.3, at 268 n.2.


duced, and many other minor covenants, are covenants which so af-fect the nature of the legal interests of the lessor and the lessee, or “touch and concern the land,” so that the benefit or burden thereof may run with an assignment of the lease or the reversion with the rules of Spencer’s Case, and are not purely collateral or personal.

103

Although covenants to pay rents and royalties typically have been upheld as to the “touch and concern” requirement, it is not axiomatic that they will run with the land. In the mining area, royalty covenants are treated as touching and concerning the land, but have been found not to run because the parties did not intend that they run104 or because the covenanting parties were not in privity of estate with one another.105

Under some gas gathering and gas purchasing agreements, the producer enters into a commitment to dedicate existing and even later-acquired reserves to the gatherer or processor. By analogy to more typical royalty agreements, as noted above, such obligations would seem to touch and concern the land. If the producer later sells or assigns the reserves covered by the gathering agreement, but fails to include any language in the transaction binding the transferee to assume the obligations of the gathering agreement, that may signify that the parties do not intend for those obliga-tions to run with the land. More commonly in standard oil and gas lease assignment contexts, even in the absence of explicit statements of intent from the parties, courts may find that the covenants run if running is necessary for the functioning of the overall transaction.106107108109

[e] Summary

This brief review, then, suggests that in oil and gas leases there is no real controversy about which covenants run with the land, and the major requirements for covenants running with the land

1033 Summers, supra note 95, § 553, at 583-84.

104See, e.g., Mt. W. Mines, Inc. v. Cleveland-Cliffs Iron Co., 376 F. Supp. 2d 1298 (D.

Wyo. 2005). 105

See, e.g., Mt. W. Mines, Inc. v. Cleveland-Cliffs Iron Co., 470 F.3d 947 (10th Cir. 2006).

106Reserved.

107Reserved.

108Reserved.

109Reserved.


seem to be easily met in most cases. Also, as under traditional leasehold law, a covenant that runs with the land in an oil and gas lease may be terminated if it expires according to its terms.110

In fact, one other element of leasehold law does impact on the running of covenants, and that is in the nature of the assignment itself.

[4] Is Whether a Covenant Runs With the Land Affected by Whether the Oil and Gas Leasehold is Transferred by Assignment or Sublease?

As described above, in traditional leasehold law, whether a leasehold covenant that qualifies to run with the land is successful-ly transferred to a successor of the lessor or lessee is often depen-dent on whether the transfer is accomplished by an assignment or a sublease. Under an assignment, the assignee succeeds to the covenants through the operation of privity of estate, or even through privity of contract, if the assignee has expressly assumed the obligations of the lease. However, if the transfer is deemed a sublease, the sublessee is merely an extension of the sublessor, having no independent privity of estate relationship with the les-sor, and immune to direct action by the lessor in case of breach of the lease. Do these distinct impacts on privity generated by wheth-er a transfer of the leasehold is an assignment or a sublease also pertain to oil and gas leases? The answer is mostly “No,” and the reason is that in oil and gas leases a strict distinction between as-signments and subleases in matters of privity is not recognized in most jurisdictions. In the following paragraphs is a review of the rules for running of covenants in assignments of oil and gas leases.

[a] Covenant Benefits and Burdens Following an Assignment of an Oil and Gas Lease

“The assignee of a lease is liable during the period that he owns the working interest for breach of the express and implied cove-nants of the lease. (By the same token, the benefit of covenants

110

Even though a real covenant runs with the land, when the covenant expires by its own terms, it no longer runs. First Permian, L.L.C. v. Graham, 212 S.W.3d 368 (Tex. App. 2006) (a provision in an assignment of an oil and gas lease required a production payment and reserved a preferential right to match bona fide purchase offers; when the production payment was completed, the court held the preferential right expired, be-cause that right was intended only to secure the payment).


made by the lessor may be claimed by the assignee of the les-see.)”111 “Liability of the assignee for breach of his assignor’s cove-nants and entitlement of the assignee to the benefit of the lessor’s covenants are based on the theory of the running of covenants with the land at law.”112 This is consistent with common law prin-ciples for leaseholds generally. Under early common law, lessors were permitted to enforce the lessee’s covenants against an as-signee, based on privity of estate. By a statute of Henry VIII, as-signs of the lessor and lessee were given rights to enforce lease covenants against each other.113

Numerous courts in oil and gas leasehold cases have found as-signee liability under covenants to pay delay rentals in lieu of drilling, to pay oil and gas royalties, to pay gas well rentals, to pay additional royalties out of production, to furnish free gas to the lessor for domestic purposes, to reasonably develop the premises after discovery of paying quantities, and to protect the land from drainage.114 All these covenants run with the land.

Other oil and gas covenants that have been held to run with the land and whose benefits and burdens pass to assignees are cove-nants giving the lessee right to possession, a covenant by the les-sor to renew the lease, and a covenant by the lessee to keep the lease free from mechanics’ liens.115

Thus, in oil and gas leases, because of privity of estate, during the period of the assignment, an assignee must perform and may benefit from all lease covenants that run with the land. The as-signee normally bears no liability for breaches of lease covenants occurring either before or after the assignee’s occupancy under the assignment.116

111

2 Williams & Meyers, supra note 96, § 403.3, at 267-68 (see especially numerous cases cited in nn.1 & 1.1).

112Id. at 268.

11332 Hen. 8, c. 34.

1143 Summers, supra note 95, § 553, at 584-91 (see especially numerous cases cited

in nn.16-23). 115

Id. at 591-92, nn.24-27. 116

Williams and Meyers express a slight reservation on this point, averring that “in most states the assignee is not liable for a breach of covenant occurring after his inter-est in the premises has been extinguished by further assignment of the interest.” This reservation is because in ordinary leases a few states impose liability on the assignee


By virtue of privity of contract, the oil and gas lessee/assignor also remains bound to perform the covenants, usually as a surety to the assignee.117 This point is well-recognized as to express cove-nants,118 and is assumed to be true also for implied covenants in fact (but not for implied covenants in law), but there is little au-thority.119

Even though the “original lessee continues liable to the lessor for a breach of an express covenant of the lease occurring after his assignment,” it is possible for the lessee to escape this liability by a clause in the lease that relieves the lessee of “further liability after assignment.”120 Moreover, such clauses are often found in oil and gas leases, relieving the lessee/assignor, who makes a good faith assignment, of liability for breaches of the lease occurring after the assignment goes into effect. Two typical clauses are:

In case Lessee assigns this lease, in whole or in part, Lessee shall be relieved of all obligations with respect to the assigned portion or portions arising subsequent to the date of assignment, except as to payment of the minimum rental above provided.

121

An assignment of this Lease, in whole or in part, shall, to the ex-tent of such assignment, relieve and discharge lessee of any obliga-tions hereunder.

122

[b] The Effect of Assumption Agreements in Oil and Gas Lease Assignments

In addition to the lease clauses quoted above, which relieve the assignor of liability for breaches after assignment, it is possi- even after a further assignment and in the absence of an assumption agreement. 2 Williams & Meyers, supra note 96, § 403.3, at 269-70 nn.4-6.

117See, e.g., Mire v. Sunray DX Oil Co., 285 F. Supp. 885 (W.D. La. 1968); Stafford v.

Yerge, 294 P.2d 721 (Cal. Ct. App. 1956); Tate v. Bristow, 45 P.2d 153 (Okla. 1935); Benson v. Nyman, 16 P.2d 963 (Kan. 1932).

118Richard W. Hemingway, The Law of Oil and Gas § 9.11(B), at 503 (1983).

119Id.; Gillet v. Elmhurst Inv. Co., 207 P. 843 (Kan. 1922). Covenants implied in fact

are imposed to carry out the intent of the parties; covenants implied in law are imposed to ensure a course of fair dealing between parties. No consensus exists on these distinc-tions. See Hemingway, supra note 118, § 8.1. See also 2 Williams & Meyers, supra note 96, § 403.2, at 266, especially n.1.

1202 Williams & Meyers, supra note 96, § 403.1, at 264-65, citing cases from nine ju-

risdictions. 121

Broussard v. Hassie Hent Trust, 91 So. 2d 762, 764 (La. 1956). 122

Hafeman v. Gem Oil Co., 80 N.W.2d 139, 155 (Neb. 1956).


ble for the assignee to extend its own liability even after a further assignment. In traditional leasehold law, the assignee may alter the privity arrangements by entering into a so-called assumption agreement, by which the assignee assumes all of the contractual obligations of the leasehold agreement. By this means, the assign-ee comes into privity of contract with the lessor, and like the as-signor, remains liable under privity of contract even if privity of estate is extinguished by a further assignment.

Such assumption agreements also occur in oil and gas leases:

Frequently the assignment of a lease will contain an express as-sumption by the assignee (or sub-lessee, if so classified) of the obli-gations of the lease. Such a provision is given full force and effect so that the assignee may not relieve himself of liability for breaches oc-curring after his further assignment of the lease.

123

The assumption agreement may be achieved less directly in oil and gas leases by a clause in a subsequent assignment agreement that incorporates the provisions of the original assignment agree-ment.124 Through the assignment agreement, the assignee also enters into privity of contract with the assignor, including obliga-tions based on express covenants with the assignor pertaining solely to the assignment relationship and not directly to the un-derlying lease.

[c] Viability of the Assignment-Sublease Distinction in Oil and Gas Leases

[i] Introduction

Much of the traditional leasehold law related to the distinction between assignments and subleases124.1 holds true for oil and gas leases, but significant differences also exist. The transfer of the lessee’s interest under an oil and gas lease may be a straightfor-ward assignment of the entire interest for the entire remaining term of the lease. The transfer may be of a portion of the lease-hold interest for the entire remaining term of the lease, and prop-

123

2 Williams & Meyers, supra note 96, § 403.3, at 270. For the proposition that these assumption clauses also apply to sublessees, the authors cite Bender v. Cogdell, 49 S.W.2d 857 (Tex. Civ. App. 1932).

124See, e.g., Shore Exploration & Production Corp. v. Exxon Corp., 976 F. Supp. 514,

521 (N.D. Tex. 1997). 124.1

See § 19.05[2] supra.


erly be called a partial assignment. This portion of the leasehold interest may be a transfer limited to certain territory, formations, strata, or minerals.125 The transfer may also be considered a sub-lease. This concluding section of the chapter will first discuss the considerable variety of authority about how to classify transfers of oil and gas leases as assignments or subleases, and then show how this distinction generally is not treated the same as under traditional leasehold law.

[ii] How Oil and Gas Lease Transfers Are Classified as Assignments or Subleases

Authorities agree that in most producing states, the distinction between assignments and subleases is not applicable to oil and gas leases.126 In the typical oil and gas lease situation, the lessee is an investor, and makes an assignment of the lease to a party that will actually undertake exploration and production. There-fore, such assignments often include provisions not in the original lease, such as requirements for overriding royalties, oil payments, or drilling; the assignment may provide for rights of entry in the assignor for breaches of such covenants by the assignee. Clearly, under traditional leasehold law, such provisions and reversionary rights would cause the transfer to be deemed a sublease in a few jurisdictions. With respect to oil and gas leases, however, in only a few jurisdictions have such provisions prompted courts to treat these transfers as subleases rather than assignments.127

On the other hand, there are a great many cases wherein lessors have recovered against assignees or part assignees of oil and gas leases for breaches of the express and implied covenants of the leas-es who held under assignments reserving overriding royalties or oil payments or providing for reentry for breach of the covenants of the lease. In these cases the assignees did not escape liability on the ground they were sublessees.

128

125

See Maurice H. Merrill, “The Partial Assignee—Done in Oil,” 20 Tex. L. Rev. 298 (1942).

126See, e.g., Moore v. Campbell, 267 F. Supp. 126 (N.D. Tex. 1967); 2 Williams &

Meyers, supra note 96, § 412, at 320. 127

The cases are cited in 3 Summers, supra note 95, § 553, at 599-602, n.36.7. 128

Id. § 553, at 602, with cases cited in n.36.12.


Courts in California,129 Indiana,130 and Montana131 have held that reservation of a right of entry or an overriding royalty makes the lease transfer a sublease. In Louisiana, the sublease distinction was recognized in the Louisiana Civil Code,132 but a non-retroactive code revision in 1975 abolished the assignment-sublease distinction in favor of assignment treatment.133 In Texas, the distinction be-tween assignment and sublease has not been applied to transfers of oil and gas leases because in that state an oil and gas lease is re-garded as a sale of the oil and gas in place, creating in the lessee a defeasible fee.134

[iii] How the Running of Covenants in Oil and Gas Leases Differs in Assignments and Subleases

If the transfer of an oil and gas lease occurs in a jurisdiction recognizing the common law distinction between assignments and subleases, and the transfer is therefore treated as a sublease, that means, as stated above, that the sublessee has no privity of estate (and, of course, no privity of contract) with the lessor. The lessor, therefore, must look to the sublessor to recover for any breaches of lease provisions attributable to the sublessee. By way of excep-tion, the lessor may sue the sublessee directly to recover royalty in kind payments reserved in the original lease.135 Also, if the primary terms of the sublease and the lease are extended by con-tinuing production under a sublease, so that both sublease and lease will expire at the same time, the sublease is converted into

129

Hartman Ranch Co. v. Associated Oil Co., 73 P.2d 1163 (Cal. 1937). 130

Halbert v. Hendrix, 95 N.E.2d 221 (Ind. Ct. App. 1950). 131

Cedar Creek Oil & Gas Co. v. Archer, 117 P.2d 265 (Mont. 1941); Williard v. Campbell, 11 P.2d 782 (Mont. 1932); Saling v. Flesch, 277 P. 612 (Mont. 1929); Sun-burst Oil & Refining Co. V. Callender, 274 P. 834 (Mont. 1929); McNamer Realty Co. v. Sunburst Oil & Gas Co., 247 P. 166 (Mont. 1926).

132La. Civ. Code Ann. art. 2725.

133La. Rev. Stat. §§ 31:126 to 31:132. See discussion in 2 Williams & Meyers, supra

note 96, § 412.1, at 322-23. 134

3 Summers, supra note 95, § 553, at 612; Hamblen v. Placid Oil Co., 279 S.W.2d 127 (Tex. Civ. App. 1955); Quintana Petroleum Co. v. Comm’r of Internal Rev., 143 F.2d 588 (5th Cir. 1944).

135See, e.g., Hartman Ranch Co. v. Associated Oil Co., 73 P.2d 1163 (Cal. 1937).


an assignment with privity of estate between the lessor and the former sublessee.136

[iv] Summary

With only the noted exceptions, most transfers of oil and gas leases are considered assignments, with the assignee liable for express and implied covenants that run with the land, under priv-ity of estate. That liability expires upon further assignment, un-less the assignee entered into an assumption agreement as part of the assignment. That assumption agreement creates privity of contract between the lessor and assignee, which continues even after further assignment. The original lessee is also under privity of contract and continues so even after assignments. The original lease and any assignment may provide for termination of such privity of contract upon assignment or further assignment.

In the few jurisdictions that may recognize some transfers of oil and gas leases as subleases, the covenants are not extinguished by the sublease, but most of them do not run to the sublessee. En-forcement of covenant obligations remains a matter between the lessor and lessee/sublessor.

§ 19.07 Conclusion

This chapter has reviewed, in the context of general real property law in the United States, the definition and historical development of covenants running with the land, also known as real covenants and covenants at law. Traditional real covenants are assignable and may be enforced by or against successors in interest to the covenanting parties, which is referred to as the “running” of the covenants with the land. The rules for the running of a covenant differ depending on whether the covenant burden or benefit is at issue. Depending on the jurisdiction, those rules are a mix of hori-zontal privity, vertical privity, intent, and whether the burden or benefit “touches and concerns” the land. One of the transactional settings in which traditional real covenants usually “run” is in the context of a transfer of a leasehold interest. If the transfer is an as-signment, running occurs; if the transfer is a sublease, running may not occur. Whether the transaction is an assignment or a sub-lease, and whether the transferee has explicitly assumed the obli-

136

Haynes v. Eagle-Picher Co., 295 F.2d 761 (10th Cir. 1961).


gations of the lease, impacts whether privity of contract and privity of estate exist between the transferee and the original lessor.

It is in the context of leasehold interests that the issue of cove-nants running with the land arises in oil and gas transactions. Even though oil and gas leases create interests that are unique and distinct from the parties’ interests in a traditional leasehold, with respect to covenants running with the land, oil and gas leas-es are usually treated like traditional leases. Covenants in oil and gas leases usually meet whatever elements of horizontal privity, vertical privity, intent, and “touch and concern” are applied in a particular jurisdiction. Even covenants to pay royalties and other fees are typically upheld as meeting the “touch and concern” re-quirement. Some implied covenants in oil and gas leases may also be treated as running with the land.

Whether the transfer of an oil and gas leasehold interest is an assignment or sublease is not as important in the oil and gas con-text as it is for traditional leaseholds; most such transfers are treated as assignments, so the covenants consequently almost al-ways run with the land, with certain exceptions noted above.

chapter 19 how far does the covenant run? … · apply to covenants in oil and gas leases [a]...

Documents