Renner v. Huntington-Hawthorne Oil & Gas Co.

• Decision Date: 04 June 1952
• Docket Number: HUNTINGTON-HAWTHORNE
• Citation: 39 Cal.2d 93,244 P.2d 895
• Court: California Supreme Court
• Parties: RENNER v.OIL & GAS CO. et al. L. A. 21759.

Page 895

244 P.2d 895

39 Cal.2d 93

RENNER v. HUNTINGTON-HAWTHORNE OIL & GAS CO. et al.

L. A. 21759.

Supreme Court of California, in Bank.

June 4, 1952.

Rehearing Denied June 26, 1952.

Ben F. Griffith, Los Angeles, Mize, Kroese, Larsh & Mize, Santa Ana, Newby, Holder & Newby, Los Angeles, for appellants.

Blodget, Morris & Blodget, L. W. Blodget and June E. Blodget, Santa Ana, for respondent.

SCHAUER, Justice.

Plaintiff, the owner of fee title to certain real property, obtained judgment quieting her title as aginst defendants, who claim under an oil and gas lease. This is an appeal by the defendants. Plaintiff's position, which was accepted by the trial court, is that the term of the lease has expired. We have concluded that this position is correct, but that, because the lessee held over after the expiration of the lease and the lessor continued to accept royalty payments, there arose a tenancy from month to month which has not yet been terminated.

On April 23, 1921, plaintiff's predecessor in interest executed the oil and gas lease. The material provisions of the lease are as follows:

The habendum clause provides that the term of the lease is 20 years 'and so long thereafter as oil or gas or other hydrocarbon substances can be secured therefrom in paying quantities within the definition hereinafter particularly specified, unless otherwise surrendered or forfeited by the Lessee.'

The development provision requires the lessee to drill 'with reasonable diligence until oil is found in paying quantities within the definition of such term next hereunder set forth, or to a depth at which further drilling would, to the judgment of the Lessee, be unprofitable, or terminate this lease * * * (I)f oil should not be obtained in paying quantities * * * in the first well drilled, the Lessee shall, as a condition of the continuation of any of the rights given to it by this lease, within sixty (60) days after drilling has ceased on said first well, commence upon the premises the drilling of a second well and shall prosecute the drilling of the same with reasonable diligence until oil is found in such paying quantities by the Lessee or until such well has been drilled to a depth at which further drilling would, in the judgment of the Lessee, be unprofitable.'

The definition of 'paying quantities' reads: 'Oil in paying quantities shall be understood to mean a well drilled from which there may be pumped for a period of thirty (30) consecutive days a quantity of oil which shall average fifty (50) barrels of oil * * * per day.'

'The Lessee agrees to operate each completed well on the premises to its full capacity so long as such well shall produce oil in quantities deemed paying quantities within the definition aforesaid, while this lease is in force as to the portion of the premises on which such well is situated; provided, however, that nothing in this paragraph shall be construed as to require the Lessee to maintain such well to such capacity as would, within the judgment of experienced oil men, possibly result in the destruction of such well.'

In 1923 a well was brought in; initial production was 650 barrels of oil a day; by 1938 production had fallen to less than 50 barrels a day and since 1941 the well has produced 30 or 40 barrels a day. There is no other well on the premises.

In 1945 the lessor died and his interest in the land passed to plaintiff. Defendants are the successors in interest of the original lessee. Defendant Invader Oil Company has been in physical possession of the land and has operated the well since oil was discovered in 1923. The remaining defendants are owners of participating interests in production from the well.

Although production had fallen below the 'paying quantities' rate of 50 barrels per day at the time when, on April 23, 1941, the 20 years specified in the habendum clause of the lease had passed, Indader continued to operate the well and the lessor (until his death in 1945) and plaintiff (until the institution of this action in 1947) continued to accept their royalty share without protest that the production was less than 50 barrels per day. The trial court found 'that said well cannot be made to produce at the rate of 50 barrels of oil per day for 30 consecutive days, and it is not true that since April 23, 1941, oil or gas or other hydrocarbon substances may be pumped therefrom in paying quantities within the definition particularly specified in said lease.' This finding is supported by the evidence. ¹

According to the ordinary meaning of language the lease terminated on April 23, 1941, at the expiration of 20 years from the date of its making, because oil and gas could then no longer be produced therefrom in 'paying quantities' as defined in the lease. Plaintiff contends and the trial court took the view that the lease means just what it plainly says. This construction of the lease is more tenable than the rather strained construction, hereinafter discussed, which is urged by defendants. The oil lease, with its 'and so long thereafter' phrase in the habendum clause, created a determinable fee interest in a profit a prendre. (Dabney v. Edwards (1935), 5 Cal.2d 1, 12, 53 P.2d 962, 103 A.L.R. 822; Tanner v. Title Ins. & Trust Co. (1942), 20 Cal.2d 814, 819, 129 P.2d 383; and cases cited therein and in 8 Cal.Jur. Ten Year Supp. (1948 rev.), p. 624.) A determinable fee terminates upon the happening of the event named in the terms of the instrument which created the estate; no notice is required for, and no forfeiture results from, such termination. (Henck v. Lake Hemet Water Co. (1937), 9 Cal.2d 136, 140, 69 P.2d 849; Caswell v. Gardner (1936), 12 Cal.App.2d 597, 600, 55 P.2d 1222; Macco Construction Co. v. Fickert (1946), 76 Cal.App.2d 295, 304, 172 P.2d 951.)

Defendants rely upon Transport Oil Co. v. Exeter Oil Co. (1948), 84 Cal.App.2d 616, 191 P.2d 129. That opinion contains the following correct general statements 84 Cal.App.2d at pages 621, 622 of 84 Cal.App.2d at page 132 of 191 P.2d: 'In the evolution of oil and gas leases, the paying quantities phrase has come to have two entirely different meanings. In the habendum it serves to perpetuate the lease beyond the fixed term for as long thereafter as it would be mutually profitable to the parties. (Citations.) A different function is performed where the term appears in the development provisions, for there it operates primarily for the benefit of the lessee, as a limitation upon his obligation to drill and pay royalties. * * * By the great weight of authority, the term, 'paying quantities,' when used in the extension clause of an oil lease habendum means production in quantities sufficient to yield a return in excess of operating costs, even through drilling and equipment costs may never be repaid and the undertaking considered as a whole may ultimately result in a loss. (Citations.)' Where the term appears in the development provisions of the lease, and the question is whether oil has been found in 'paying quantities' so as to permit or require the drilling of other wells, the normal meaning of the term is such quantities as would lead to a reasonable expectation of a reasonable profit on the entire sum, including drilling costs, to be expended in prosecution of the enterprise. (See cases collected in 48 A.L.R. 887; 84 A.L.R. 761; 91 A.L.R. 900.)

These general statements apply where the term 'paying quantities' is not expressly defined by provisions of the lease. However, the lease of which Transport was lessee, like the lease here, contained an express definition of the term 'paying quantities.' The material provisions of 'Transport's lease were as follows:

'The habendum clause provided: 'The Lessee shall hold said land hereunder, for the period of twenty (20) years from, and after, the date hereof and as long thereafter as oil or gas is produced in paying quantities unless otherwise forfeited by Lessee in accordance with the terms of this lease. " (Pages 617-618 of 84 Cal.App.2d, page 130 of 191 P.2d.)

'The duty to drill the first well was limited to a depth of 3,500 feet, 'unless oil, in paying quantities shall have been obtained at a lessor (sic) depth.' Furthermore, a cash bonus was to become payable only 'in the event oil is obtained in paying quantities in the well so drilled on the north half of said Lot Three.' And finally, the lessee's obligation to pay royalties was not to commence until 'after the discovery and production of oil in paying quantities from said well. " (Page 620 of 84 Cal.App.2d, page 132 of 191 P.2d.)

The term 'paying quantities' was defined as follows: "For all purposes herein contemplated, a well shall be deemed to be producing oil in paying quantities when such well, operated in a diligent and skillful manner, will produce oil or gas or both of a value at the well of $15.00 per day or more in excess of the reasonable cost of the fuel, labor, supplies and material required in the operation of such well." (Page 620 of 84 Cal.App.2d, page 132 of 191 P.2d.)

In the Transport case the wells on the leased property were all producing but none was making as much as $15 per day. It was contended that the lease had expired and that production could be abandoned. The District Court of Appeal (page 621 of 84 Cal.App.2d, page 133 of 191 P.2d) held that 'the effect to be given to the term 'paying quantities,' in the habendum is not governed by the $15 per day definition, but is to be determined by reference to the established legal meaning of the term' (i. e production yielding revenue in excess of operating costs); otherwise, said the District Court of Appeal, the operator of the wells could abandon production even though such production was mutually profitable to lessor and lessee, a result which 'would do violence to the rule that such leases are to be construed in accordance with their reasonable and common sense meaning.'

Defendants urge that by similar reasoning the lease here...