Oil and Gas Lease Void for Lack of Consideration

November 15, 2010 | Erin Herbold

A farm couple owned farmland jointly, but divorced in 1995 with each of them receiving one-half of the farmland.  Before and after the divorce they rented the land to their son for farming purposes.  In 2002, they each signed an oil and gas lease in favor other another son. The lease was recorded. Some months later, the father created a revocable trust, naming himself trustee and a cousin as successor trustee. He transferred his land to the trust. The father died thereafter.  The son with the oil and gas lease testified that his father told him he could live on the abandoned house on the trust’s property. The successor trustee allowed the son to live on the property rent-free. The son did pay the insurance, taxes and made utility payments. The cousin withdrew as successor trustee in 2007 and another individual took over. The brothers began to feud over the use of their father’s property. The farming brother alleged that his brother dug a trench across his mother’s property without her permission.

The mother and the trust filed an action against the brother seeking a permanent injunction to prohibit him from digging across the mother’s land. The brother claimed that the plaintiffs were interfering with his rights under the oil and gas lease. The trial court concluded that the oil and gas lease were “not what they purport to be” and were “void on their face.”  The court granted injunctive relief in favor of the farming brother and mother. 

The brother appealed and the Iowa Court of Appeals reversed the injunction, finding that the trial court’s rationale behind declaring the oil and gas lease void was invalid. The case went back to the trial court and the court beefed up their rationale, stating that the oil and gas lease failed for lack of consideration. There was no evidence showing that the brother and his parents exchanged any money or value for these leases.

The brother appealed yet again and, this time, the Iowa Court of Appeals agreed with the trial court’s analysis. According to the court, “a total failure of consideration occurs when a party has failed or refused to perform a substantial part of what the party agreed to do.” The mother testified that neither she nor her ex-husband received any consideration for the lease. The brother was unable to provide any “believable” testimony that he did, indeed, provide consideration for the lease. Thus, the appellate court ordered the forfeiture of the oil and gas lease and enjoined the brother from interfering with the agricultural purpose behind his sibling’s farm lease. In re Smith Revocable Trust, No. 0-0643/10-0234 (Iowa Ct. App. Oct. 6, 2010).