Ionno v. Glen-Gery Corp.
| Decision Date | 05 January 1983 |
| Docket Number | GLEN-GERY,No. 82-129,82-129 |
| Citation | 443 N.E.2d 504,2 Ohio St.3d 131,2 OBR 678 |
| Parties | , 2 O.B.R. 678 IONNO et al., Appellees, v.CORPORATION et al., Appellants. |
| Court | Ohio Supreme Court |
Syllabus by the Court
1. An annual advance payment which is credited against future royalties under the terms of a mineral lease does not relieve the lessee of his obligation to reasonably develop the land.
2. Although the payment by a lessee of annual minimum royalties under a mineral lease will not necessarily preclude a claim of forfeiture asserted by a lessor and based upon an implied covenant to reasonably develop the land, the lessor has the burden of proving damages are inadequate before such forfeiture may be declared.
On September 14, 1960, Oscar W. and Delores T. Menges, as lessors, executed a coal and clay lease in favor of NATCO Corporation, as lessee. The lease was thereafter assigned by NATCO to Glen-Gery Shale Brick Corporation, later known as Glen-Gery Corporation, appellant herein. Ultimately, the clay rights were transferred to appellant Crescent Brick Company and the coal rights to appellants Richard James, Jr., and Kermit James. Meanwhile, John M. and Lucinda S. Ionno, appellees herein, succeeded to the rights of the Menges under the lease, upon acquiring title to the real estate in question on October 18, 1978.
According to the terms of the lease, lessee was granted the right to " * * * mine, let and lease * * * all merchantable, mineable and usuable [sic ] coal * * * and * * * clay" located upon a certain portion of lessor's property. In return, lessee was obligated to pay lessors a royalty on the product mined or $300 per year for the first two years and $600 per year thereafter as "minimum rent or royalty" which payment would be "credited against the amount or amounts that shall thereafter become due for or on account of the removal, mining or hauling of coal and/or clay * * *."
The lease further provided for forfeiture for the following reasons:
"Lessee agrees that in the event payment of the rent or royalty due under the terms of this Lease is not made within thirty (30) days after the same shall become due and payable, or if the Lessee shall fail to keep and perform any of the covenants on its part to be kept and performed, and such default shall continue for a period of thirty (30) days after notice in writing shall have been given to the Lessee, then this Lease shall, at the option of the Lessors, become null and void and of no further force or effect."
The record discloses that although lessees have timely tendered all payments, 1 they have failed to undertake any mining activity or operations since the inception of the lease. Accordingly, appellees brought the instant action, seeking forfeiture and cancellation of the mineral lease for reasons of nonperformance and failure of consideration.
The trial court ruled in favor of the lessees, finding that the rights of the parties were determined solely by the 1960 lease. Appellees appealed to the court of appeals, contending that the trial court erred in concluding that there was no implied duty to perform the mining lease within a reasonable time.
The court of appeals reversed the judgment of the trial court, ordering the subject lease forfeited and cancelled. The cause is now before this court pursuant to the allowance of a motion to certify the record.
Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A., and Ronald W. Dougherty, Canton, for appellants Richard James, Jr., and Kermit James.
Day, Ketterer, Raley, Wright & Rybolt and Donald W. Raley, Canton, for appellant Glen-Gery Corp.
Black, McCuskey, Souers & Arbaugh and Gene Barnhart, Canton, for appellant Crescent Brick Co.
Dale T. Evans, Massillon, for appellees.
Thompson, Hine & Flory and Paul W. Brown, Columbus, urging reversal for amicus curiae Ohio Mining & Reclamation Association.
Robert Shenk, Columbus, urging affirmance for amicus curiae Ohio Farm Bureau Federation, Inc.
In the present case, we are confronted with a situation in which a lessor under a mining lease seeks to enforce a forfeiture of that lease for breach of an implied duty to reasonably develop the leased premises. The lease in question contains no time period in which mining operations are required to commence, but does provide for both a percentage of the value of the minerals secured and the annual payment to lessor of advance minimum royalties. Our first consideration must therefore be whether, under these circumstances, lessee is under the obligation to reasonably develop the land; second, whether the payment of an annual royalty operates so as to relieve lessee of this obligation; and third, whether breach of an implied covenant, without more, is sufficient to justify the asserted forfeiture.
This court has long adhered to the general principle that absent express provisions to the contrary, a mineral lease includes an implied covenant to reasonably develop the land. Beer v. Griffith (1980), 61 Ohio St.2d 119, 399 N.E.2d 1227 , paragraph two of the syllabus; Venedocia Oil & Gas Co. v Robinson (1905), 71 Ohio St. 302, 314, 73 N.E. 222; Harris v. Ohio Oil Co. (1897), 57 Ohio St. 118, 127, 48 N.E. 502. Thus, where a lease fails to contain any specific reference to the timeliness of development, the law will infer a duty to operate with reasonable diligence. See, generally, 60 A.L.R. 901; 76 A.L.R.2d 721; 87 A.L.R.2d 1076 and cases cited therein. Inasmuch as the lease in question contains no express disclaimer of the covenant to develop within a reasonable time, the instant case clearly falls within this general rule.
It is contended by appellants, however, that the payment of an annual minimum rent or royalty relieves them of their obligation to diligently mine the premises. In essence, they argue that they have an option to either work or not to work the land for an indefinite term as long as the payments are timely made. In determining the validity of this proposition, it is necessary to evaluate the precise language contained in the contract upon which appellants base their argument.
The lease at issue provides for an annual payment, which "shall be credited against the amount or amounts that shall thereafter become due for or on account of the removal, mining or hauling of coal and/or clay as provided in this Lease." Clearly, we are not dealing with a contract which exacts a non-refundable annual payment of rent to the lessor as separate and independent consideration. Rather, because the minimum royalties required under the lease at hand offset production royalties, the real consideration for the lease is the expected return derived from the actual mining of the land. 2
Given the nature of these annual payments, there is manifestly an implied covenant on the part of the lessees that they will work the land with ordinary diligence, not simply for their own advantage and profit, but also so that lessors may secure the actual consideration for the lease, i.e., the production of minerals and the payment of a royalty on the minerals mined. It would therefore contravene the nature and spirit of the lease to allow the lessees to continue to hold the land for a considerable length of time without making any effort to mine.
The fact that the lessees have continued to make annual payments for a period of over eighteen years does not alter their responsibility to develop the land within a reasonable time. The questions of working diligently and of paying rent or royalties are entirely separate matters. An annual advance payment which is credited against future royalties cannot be viewed as a substitute for timely development. To hold otherwise would be to reward mere speculation without development, effort, or expenditure on the part of the lessees. It would allow a lessee to encumber a lessor's property in perpetuity merely by paying an annual sum. Such long-term leases under which there is no development impede the mining of mineral lands and are thus against public policy.
We therefore hold that an annual advance payment which is credited against future royalties under the terms of a mineral lease does not relieve the lessee of his obligation to reasonably develop the land. We further find that since the lessees in the present case have failed to carry on any sort of mining activity on the leased premises since the inception of the lease in 1960, that they have breached such duty. The question remains, however, whether breach of an implied covenant to reasonably develop is a proper ground for forfeiture.
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