Fremont Lumber Co. v. Starrell Petroleum Co.

• Decision Date: 06 September 1961
• Citation: 364 P.2d 773,228 Or. 180
• Parties: FREMONT LUMBER COMPANY, a corporation, Respondent, v. STARRELL PETROLEUM CO., a corporation, Appellant, Charles L. Stuart, Marvin E. Weatherly and James Edgar Dowdy, Defendants.
• Court: Oregon Supreme Court

Page 773

364 P.2d 773

228 Or. 180

FREMONT LUMBER COMPANY, a corporation, Respondent, v. STARRELL PETROLEUM CO., a corporation, Appellant Charles L. Stuart, Marvin E. Weatherly and James Edgar Dowdy, Defendants.

Supreme Court of Oregon, Department 2.

Argued and Submitted May 4, 1961.

Decided Sept. 6, 1961.

William Huey, Eugene, for appellant. With him on the briefs were Frank B. Reid, Eugene, and Welch & Welch, Lakeview.

Ronald W. Husk, Eugene, and Theodore R. Conn, Lakeview, for respondent. With them on the brief were Butler, Husk & Gleaves and Jack A. Gardner, Eugene.

Before McALLISTER, C. J., and WARNER, SLOAN, O'CONNELL and LUSK, JJ.

WARNER, Justice.

This is a suit to quiet title to approximately 25,000 acres of land in Lake County, Oregon. The plaintiff, Fremont Lumber Company, hereinafter called Fremont, and the defendant Starrell Petroleum Co., hereinafter called Starrell, are corporations. From a decree in favor of Fremont, the defendant Starrell, alone, appeals.

On August 25, 1954, Fremont entered into a lease with Starrell covering all the land above mentioned 'for the purpose of investigating, exploring, prospecting, drilling and mining for and producing oil, gas, sulphur and all other minerals.'

The extent and legal significance of Starrell's activity thereon is the subject of this litigation. According to its president-treasurer and majority stockholder, Starrell's endeavors were limited to prospecting for metallic minerals with no interest in oil or gas.

There is no dispute that the lease was in full force and effect during its primary period, i. e., from August 25, 1954, to August 25, 1959, and that the necessary 'annual delay' rentals of ten cents per acre had been paid during those years. However, Starrell began no operations of any kind on the land until sometime late in July, 1959, a few days before the end of the primary period.

Starrell assigns a number of issues, but we think that there are only two issues which are determinative of the case: (1) Was the lease in question so written as to be of the 'unless' type upon a special limitation which expired automatically at the end of the primary term or was it of the 'or' type upon a condition subsequent, as urged by the appellant? (2) Did the activity of Starrell on the leased lands during the primary term qualify as 'operations for * * * mining' within the pertinent extension provisions of paragraph 6 of the lease?

Notwithstanding that we hereinafter make reference to but a few of the 13 numbered paragraphs of the long and printed instrument before us, we have carefully examined it in its entirety to ascertain its meaning and the intent of the parties, but find need to refer more particularly only to those paragraphs which are persuasive in formulating our conclusions.

While the precise questions presented here concerning a mining lease have never before been passed upon in this court with reference to leases of like character, they have been squarely met in jurisdictions wherein oil, gas and mineral leases are far more common than they are in this state. Such decisions come to us with a distinctive nomenclature. They also bring, in addition to the rules of construction generally employed in construing agreements, some rules peculiarly and distinctively applicable to mining leases of the kind now before us.

Mining leases form a distinct class of instruments, creating special and peculiar legal rights and relations. In their principal features they are not unlike other leases but in their purpose and operation they approach more closely gas and oil leases (36 Am.Jur. 309, Mines and Minerals § 39) and the courts generally apply the same rules of construction to them alike. Chandler v. French, 73 W.Va. 658, 81 S.E. 825, 828, L.R.A.1915B, 561; 36 Am.Jur. 316 Mines and Minerals § 52. See Ann.Cas.1917E, 1123, and cases there cited.

Over the years there have been developed two typical classes of oil, gas and mineral leases. They are characterized both by courts and text writers as the 'or' type (sometimes called the 'drill or pay' type) applied to leases on condition subsequent, and the 'unless' type applied to leases on special limitation.

The distinction between these types is explained by a leading authority on oil and gas leases:

'The 'or' and 'unless' clauses may be distinguished as to the manner of terminating the lessee's interest and on the basis of the obligations which the lessee undertakes. The unless clause is one of special limitation that terminates ipso facto according to its terms upon failure to drill or pay. The lessee does not promise either to drill or pay, but if the lease is to continue, he must do one or the other. The or clause is one of condition subsequent that requires affirmative action by the lessor or lessee for termination. The lessee affirmatively covenants to drill or pay * * *. The 'or' clause is seldom used today * * *.' Sullivan, Handbook of Oil and Gas Law, 105-106 (1955). See, also, 2 Summers, Oil and Gas (perm. ed.), 397-399, § 337.

When a lease is of the 'unless' type or optional as to one party, it will be strictly construed against the lessee. Phillips Petroleum Co. v. Curtis, 10 Cir., 1950, 182 F.2d 122, 125; Stanolind Oil & Gas Co. v. Guertzgen, 9 Cir., 1938, 100 F.2d 299, 300; Hill v. Stanolind Oil & Gas Co., 1949, 119 Colo. 477, 205 P.2d 643, 649; Solberg v. Sunburst Oil & Gas Co., 76 Mont. 254, 246 P. 168, 172; Lewis v. Grininger, 198 Okl. 419, 179 P.2d 463, 464; 2 Summers, supra, at 485, § 372; Sullivan, supra, at 84; 58 C.J.S. Mines and Minerals § 197, pages 439-440.

The reason for the rule is well stated by Sullivan, supra, at 84. He says:

'In spite of an almost universal practice to use printed lease forms and to pay a substantial bonus for the execution of the lease, the courts continue to apply the cannot of construction that differentiates the oil and gas lease from leases generally, i. e., it is to be construed strictly against the lessee and in favor of the lessor. This is not an arbitrary rule, inasmuch as it represents a construction in the light of the surrounding circumstances and against the party who selects the language used in the instrument. It is chiefly applied to broad provisions favoring the lessee. The canon of construction that has had the most profound effect upon the law applicable to, and the evolution of, lease clauses, is that the lease is to be construed in the light of the subject matter and the situation of the parties to promote development and prevent delay. * * *'

And, as said by some courts, the rule is for the protection of the landowner and the public generally. Solberg v. Sunburst Oil & Gas Co., supra, 246 P.2d at page 172; Stanolind Oil & Gas Co. v. Guertzgen, supra, 100 F.2d at page 300.

With these basic differences in mind, we proceed to determine whether the instant lease is of the 'unless' type or the 'drill or pay' variety.

Our first inquiry is whether this lease would have terminated automatically at the end of the primary term; that is, without any notice or re-entry by Fremont, the lessor.

In an estate on condition subsequent the title does not revert upon a mere breach of the condition. On the happening of such a contingency it is still necessary for the grantor, in order to regain title, to manifest an intention to terminate the estate by giving notice or by the exercise of his right of re-entry. But in estates of special limitation a reverter ipso facto occurs. In such estates no action on the part of the person creating the same is necessary. The termination is accomplished by the happening of the event itself. Clark v. Jones, 1943, 173 Or. 106, 108, 144 P.2d 498; Magness v. Kerr, 1927, 121 Or. 373, 379-380, 254 P. 1912, 51 A.L.R. 1466; O'Connell, Estates on Condition Subsequent and Estates on Special Limitation in Oregon, 18 Or.L.Rev. 63 (1939).

Paragraph 2 is typical of the habendum clauses found in the 'unless' leases. Sullivan, supra, 95, § 40. That paragraph reads:

'Subject to the other provisions hereof, this lease shall be for a term of five (5) years from this date (called 'primary term') and as long thereafter as oil, gas or other mineral is produced from said land or lands with which said land is pooled.'

From 1A Summers, supra, 380, § 153, we also take the following:

'* * * Where an instrument purports to grant the oil and gas under a tract of land, or the privilege of taking oil and gas from the land, for a definite term of years and as long thereafter as oil and gas are produced from the land in paying quantities, it has all the earmarks of an estate on special limitation. * * *'

Again, we turn to Wullivan, supra, where we find at pp. 96-97, the following elucidating statement:

'The most commonly used habendum clause [in mining leases] is referred to as the clause of special limitation. It consists of two parts, the primary term, also called the exploratory period, which is for a definite period ranging from 60 days to 10 years depending upon whether the land is in proven or wildcat territory, and the secondary term, also called the thereafter clause, which is of indefinite duration. Actually there are two limitations, and not merely one, which control the duration of the lessee's interest, i. e., there must be production at the end of the primary term in order to extend the lease, * * *.'

The foregoing statements from Summers and Sullivan are abundantly supported by case authority. See Dabney v. Edwards, 1935, 5 Cal.2d 1, 53 P.2d 962, 103 A.L.R. 822, 830; Woodside v. Lee, N.D.1957, 81 N.W.2d 745, 746; Valentine Oil Co. v. Powers, 1953, 157 Neb. 71, 59 N.W.2d 150, 159; Kugel v. Young, 1955, 132 Colo. 529, 291 P.2d 695; Petroleum Engineers Producing Corp. v. White, Okl.1960, 350 P.2d 601, 604.

We note particularly the court's statement in Woodside v. Lee, supra, 81 N.W.2d at 746:

'The generally accepted construction of the provisions for the termination of an 'unless' lease is that the 'unless'...