Rook v. James E. Russell Petroleum, Inc.

• Decision Date: 24 March 1984
• Docket Number: No. 54031,54031
• Citation: 235 Kan. 6,679 P.2d 158
• Parties: Maxine ROOK and John Rook, Appellees, v. JAMES E. RUSSELL PETROLEUM, INC., a corporation, Appellant.
• Court: Kansas Supreme Court

Page 158

679 P.2d 158

235 Kan. 6

Maxine ROOK and John Rook, Appellees, v. JAMES E. RUSSELL PETROLEUM, INC., a corporation, Appellant.

No. 54031.

Supreme Court of Kansas.

March 24, 1984.

Syllabus by the Court

1. Rules governing the construction of oil and gas leases include these: the intent of the parties is the primary question; meaning should be ascertained by examining the documents from all four corners and by considering all of the pertinent provisions, rather than by critical analysis of a single or isolated provision; reasonable rather than unreasonable interpretations are favored; a practical and equitable construction must be given to ambiguous terms; and any ambiguities in a lease should be construed in favor of the lessor and against the lessee, since it is the lessee who usually provides the lease form or dictates the terms thereof.

2. The habendum clause of an oil and gas lease is unaffected by assignment or partial assignment by the lessor or lessee. Production or drilling operations anywhere on the leased premises which would have kept the lease alive into the secondary term had there been no partial assignment will keep the lease alive after the primary term as to all parties in interest where there has been a partial assignment of a portion of the leased premises.

3. The record is examined in an action by the lessors to cancel an oil and gas lease covering their property predicated on the abandonment of the lease by the lessee, and it is held: Where, as here, the lessee's actions support a finding that the lessee has abandoned the lease, which has been extensively and fully developed in the past but upon which there has been no further production for fifteen years, the lessee is not entitled to be given notice by the lessor to resume production prior to termination of the lease.

John R. Toland, of Toland & Thompson, Iola, argued the cause, and Stanley E. Toland, Iola, of the same firm, was with him on the briefs for appellant.

Orville J. Cole, of Cole & Doering, Garnett, argued the cause, and Steven B. Doering, Garnett, of the same firm, was with him on the brief for appellees.

Don O. Concannon, of Concannon, Traster & Concannon, Hugoton, and Charles J. Meyers and Craig R. Carver, of Gibson, Dunn & Crutcher, Denver, Colo., were on the brief for the amicus curiae, Douglas Energy Co., Inc.

Glenn D. Young, Jr., of Gott, Young & Bogle, P.A., Wichita, Judson S. Woodruff and Eugene Kuntz, of McAfee & Taft, of Oklahoma City, Okl., Harry Landt, of Amoco Production Co., of Denver, Colo., and R.H. Frick, of Amoco Production Co., Chicago, Ill., were on the brief for the amicus curiae, Amoco Production Co.

SCHROEDER, Chief Justice:

This case comes before the court for review of the decision of the Court of Appeals found at 8 Kan.App.2d 412, 658 P.2d 1059 (1983). James E. Russell Petroleum, Inc., (defendant-appellant) appealed from the trial court's determination that it had abandoned its oil and gas production rights under two oil and gas leases to land owned by Maxine Rook Cooper and her son John Rook (plaintiffs-appellees). The Court of Appeals modified the trial court's ruling, holding that where evidence of a breach of implied covenant of an oil and gas lease is relied upon to infer the intent to abandon and the lease has been extensively developed in the past, the lessor is required to make demand for performance upon the lessee prior to initiating a lawsuit before a court will cancel the lease. The Court of Appeals ordered that the appellant be given 60 days to begin production efforts before the oil and gas leases would be deemed cancelled. We granted review.

The facts are summarized in the Court of Appeals opinion, 8 Kan.App.2d 412-13, 658 P.2d 1059, but for purposes of review an expanded version is warranted. James Russell purchased the leases in question in 1963 from W.S. Fees, the original lessee, and subsequently sold them to the defendant corporation in 1973. Two adjacent tracts of land situated in Anderson County are involved, hereinafter referred to as "Tract I" and "Tract II."

Tract I (the Southeast Quarter of Section 22, Township 22, Range 19, Anderson County, Kansas) is covered by an oil and gas lease executed between the original landowner and Fees in 1921, and a supplemental agreement executed on June 27, 1936. Under the original oil and gas lease the landowner is to receive a one-eighth royalty from all gas and oil produced and to have gas supplied free of charge to the principal dwelling on the premises. The supplemental agreement expanded the terms of the original lease by allowing the property to be used for the storage and removal of natural gas. The landowner was paid a sum in exchange for his royalty interest in gas remaining in the land at depths not exceeding 1,050 feet below the surface. As consideration for the storage rights the lessee was to pay the landowner an annual gas storage rental of $1.00 per acre. The habendum clause of the lease was enlarged by the agreement to provide:

"SECOND: The term of said oil and gas lease shall be and is hereby enlarged so as to run as long as oil and gas or either of them is produced, and as long thereafter as the premises above described shall be utilized for the introduction, storage and/or removal of natural gas (whether introduced into or withdrawn from this or other land) and/or as long as the storage rentals hereinafter fixed shall be paid."

The agreement also stated:

"SIXTH: Lessee shall have the right to assign said lease as hereby modified as to all or any portion of the acreage covered thereby or as to any interest therein, and upon any such assignment, Lessee shall have thereafter no personal liability as to any covenant of said modified lease in respect to the acreage or interest as to which assignment has been made."

At the same time the supplemental agreement pertaining to Tract I was executed, the landowner and Fees entered into a similar oil, gas and underground gas storage lease covering Tract II (the North Half of Section 22, Township 22, Range 19, Anderson County, Kansas). As in the lease pertaining to Tract I, the lessor was paid a sum for his interest in the gas remaining in the land above 1,050 feet, and the lessee was required to pay an annual storage rental of $1.00 per acre for the right to store gas on the premises and furnish free gas to the landowners for living purposes. The gas storage rental provision in the lease additionally provides:

"During such times as Lessee is not producing any of such minerals from sands or formations containing them in their original state, Lessee may during the primary term hereof defer development from year to year by the payment of an annual rental in the same amount and in the same manner as herein provided, which payment shall be in addition to the storage rental herein provided."

The habendum clause of this lease provides:

"2. This lease shall remain in force for a term of ten years from this date and so long thereafter as oil, gas, casinghead gas or other kindred products [are] produced or the storage right is being exercised as hereinafter set forth."

The lease also stated:

"12. Lessee shall have the right to assign this lease as to all or any portion of the acreage covered thereby or as to any interest therein, and upon any such assignment Lessee shall have thereafter no personal liability as to any covenant thereof in respect to the acreage or interest as to which assignment has been made, and the default of either owner shall not affect the other."

The supplemental agreement pertaining to Tract I provides the lessee may relinquish its gas storage rights at any time it becomes unprofitable to continue such operations, and the lease pertaining to Tract II provides the lessee may continue its gas storage operation from year to year beyond the expiration of the primary term of the lease by the payment of annual storage rentals as long as the lessee deems it necessary or convenient to do so.

In 1937 Fees assigned to Cities Service Gas Company all his gas production and gas storage rights existing under the Tract I and Tract II leases at depths not exceeding 1,050 feet from the surface. This assignment was made subject to a contract between Fees and Cities Service Gas Company, dated March 18, 1936. A supplemental contract relating to the assignment of the gas rights was executed by the parties on March 31, 1937, specifically making the leasehold subject to the provisions of Section IV of the contract executed March 18, 1936, entitled "Future Operation of Leaseholds." This provision of the March 18, 1936, contract specifically reserved to Fees all oil rights under the two leases and all gas production rights at depths below 1,050 feet. In addition, it provided that the assignor (Fees) had the right to elect to obtain an assignment of the assignee's (Cities Service) interests in the leasehold at such time as the assignee no longer has any use for the leasehold.

As stated previously, Fees subsequently transferred his rights and interests in these leases to James E. Russell in 1963, who transferred them to the defendant corporation in 1973. The assignment of the oil and gas leases by Fees in 1963 to Russell was for a consideration of $75,000.00, payment of which was secured by a reservation of one-eighth of the seventh-eighths working interest free of all costs. The assignment then specifically stated:

"4. Assignee expressly covenants and agrees that, until said Production Payment of $75,000.00 is retired and discharged in full in the manner provided for herein, that Assignee, for himself and his heirs, executors, administrators and assigns will cause the producing oil wells on said leases to be operated in a good, prudent and workmanlike manner, to the end that each well capable of producing oil in paying quantities under reasonable prudent operations shall continue to produce its daily allowable, if it has an allowable, and, if not, then to...