Vincent v. Tideway Oil Programs, Inc.

• Decision Date: 29 April 1980
• Docket Number: No. 1,No. 54216,1,54216
• Citation: 620 P.2d 910
• Parties: 1980 OK CIV APP 23 Carl VINCENT, Appellee, v. TIDEWAY OIL PROGRAMS, INC., as managing general partner for and on behalf of Tideway Oil Limited Partnership 1974-1, Tideway Oil Programs, Inc., as managing general partner for and on behalf of Tideway Oil Limited Partnership 1974-2, Tideway Oil Programs, Inc., as managing general partner for and on behalf of Tideway Oil Limited Partnership 1974-3, Tideway Oil Programs, Inc., as managing general partner for and on behalf of Tideway Oil & Gas Associates, Ltd., and E. V. Cleveland, Marvin L. Oxley and James A. Williams, Appellants.
• Court: United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

Page 910

620 P.2d 910

1980 OK CIV APP 23

Carl VINCENT, Appellee, v.TIDEWAY OIL PROGRAMS, INC., as managing generalpartner for and on behalf of Tideway Oil Limited Partnership 1974-1 Tideway Oil Programs, Inc., as managing general partner for and on behalf of Tideway Oil Limited Partnership 1974-2 Tideway Oil Programs, Inc., as managing general partner for and on behalf of Tideway Oil Limited Partnership 1974-3 Tideway Oil Programs, Inc., as managing general partner for and on behalf of Tideway Oil & Gas Associates, Ltd. No. 1 and E. V. Cleveland, Marvin L. Oxley and James A. Williams, Appellants.

No. 54216.

Court of Appeals of Oklahoma, Division No. 1.

April 29, 1980. Released for Publication by Order of Court of Appeals May 29, 1980.

Appeal from the District Court of Muskogee County; Bill Ed Rogers, judge.

REVERSED AND REMANDED WITH INSTRUCTIONS.

Don Pearson, Muskogee, for appellee.

Lawrence, Scott & Lamb by G. Nash Lamb, Tulsa, for appellants.

BOX, Judge:

An appeal by the lessees under an oil and gas lease from an order of the trial court cancelling the lease upon the petition of the plaintiff-lessor, Carl Vincent.

The case was tried to the court upon the following stipulated facts.The lessor executed an oil and gas lease to R. W. Bobo, predecessor in interest of the Appellants-lessees, on December 27, 1974.The lease was created for a primary term of three years with an obligation on the lessees to commence a well on the lease prior to December 27, 1975, or forfeit the lease.A well was commenced prior to that date and was completed as a gas well on April 15 1976.The gas well was shut in to await a pipeline connection by Phillips Petroleum Company.On October 16, 1976, Phillips connected the pipeline and on October 28, production began.There was continuous gas flow until February of 1977, and during that time gas valued at $1,514.14 was derived from the well.No royalties were paid.The well was again shut in on February 12, 1977.From then until November 12, 1977, the lessees did no work on the lease site.On that date the lessees began rework on the well by testing an upper zone.Oil was found, and the well was made ready for production on November 16, 1977.Once again the well was shut in awaiting the laying of concrete pads and the installation of storage tanks.The primary term of the lease expired on December 27, 1977.On January 10, 1978, the lessees arrived at the drill site to install the storage tanks.They were denied admittance by the lessor, who had obtained an injunction to keep them off the site.

Upon reviewing the lease, the stipulated facts, and trial briefs, the court found as follows:

The Court finds that a well was commenced on said property within the specified term of the lease, but that the lease or well which was commenced was abandoned and the defendant(LESSEE), and each of them, forfeited any rights to said lease on February 12, 1977; the Court finds that there was no work done or attempted to be done from February 12, 1977, until November 12, 1977, and this constituted an unreasonable delay and there was no diligent attempt to complete the well as provided for in the lease.

The Court further finds that there was no oil or gas, or either, produced in paying quantities at any time during the term of this lease in that the defendant's proof showed that certain monies were gained from the oil or gas, or both, but there was no royalty paid on said sums of money which leads this Court to believe that it was not sufficient to be in paying quantities, and further, that the defendant(LESSEE), and each of them, failed to pay delay rentals as provided in said lease.

Upon these findings the court cancelled the lease stating it had terminated by its own terms for dilatory delays in completing the well, which constituted abandonment, for non-payment of delay rentals, and for failure to produce oil and gas in "paying quantities" during the primary term.From this order the lessees have appealed.

An action for cancellation is one of equity.Therefore, we must weigh the evidence in order to determine if the judgment of cancellation is against the clear weight of the evidence.If it is not, we must affirm.Fox Petroleum Co. v. Booker, 123 Okl. 276, 253 P. 33, 34.

The relevant portions of the lease, a form of the Producer's 88 lease, are as follows:

(HABENDUM OR TERM CLAUSE)

It is agreed that this lease shall remain in force for a term of three years from date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.

(ROYALTIES CLAUSE)

(DELAY RENTAL CLAUSE)

If no well be commenced on said land on or before the 27th day of December, 1975, and this lease shall terminate as to both parties, unless the lessee on or before that date shall pay or tender to the lessor or the lessor's credit in the ______ Bankat ________ or its successors, which shall continue as the depository regardless of changes in the ownership of said land, the sum of ______ DOLLARS, which shall operate as rental and cover the privilege of deferring commencement of a well for ______ months from said date ....

(DRY HOLE CLAUSE)

(DEVELOPMENT CLAUSE)

... If the lessee shall commence to drill a well within the term of this lease on any extension thereof, or on acreage pooled therewith, the lessee shall have the right to drill such well to completion with reasonable diligence and dispatch, and if oil or gas, or either of them, be found in paying quantities, this lease shall continue and be in force with like effect as if such well had been completed within the term of years first mentioned.

Typed at the bottom was the following:

Lessee agrees to commence drilling in good faith on or before December 27, 1975; if drilling is delayed beyond December 27, 1975, then this lease shall become null and void.Lessor shall have the right to use, free of cost, gas, oil and water for his own use.

The trial court held both that the lease terminated and that it was forfeited.It is unclear whether the court found the lease to be forfeited on a theory of abandonment or for a breach of the implied covenants to develop.The parties interpreted the journal entry to encompass both theories; and therefore, we will address both herein.

First we will address the issue of termination.One of the reasons the trial court held that the lease terminated was because the lessees failed to obtain production in paying quantities before expiration of the primary term.The lessor, relying on the habendum clause, asserts that the court was correct.The lessees admit that there was no production in paying quantities at the end of the primary term.They contend, however, that because they commenced a well within the specified period, they were entitled to complete the well with due diligence even if the primary term expired prior to obtaining production in paying quantities.The lessees rely on the language of the development clause for this contention.For the reasons stated below, we find that the contention of the lessees to be correct.

The lease in question is one which is commonly referred to as an "unless" lease.It derives its name from its delay rental provision.In H. Williams, Oil and Gas Law § 605.2(1977), it is explained as follows:

Commonly the "unless" clause of contemporary leases begins with a statement introduced by the word "if" concerning some supposition as to operations (as here) or production, followed by a provision for the termination of the lease unless certain rentals are paid.The supposition may refer to the commencement of a well (in which case the lease may be described as a "commencement" lease), or to the completion of a well (in which case the lease may be described as a "completion" lease).

This lease is a "commencement" lease, and our Supreme Court has drawn a distinction between "completion" and "commencement" leases on the basis of what is required to extend the lease into the secondary term within the meaning of the "thereafter" portion of the habendum clause.The distinction is set forth in State v. Carter Oil Co., Okl., 336 P.2d 1086, 1095, as follows:

(W)here the lease involved is a "completion" lease, a well must be completed within the primary term thereof or when the lease involved is a "commence" lease, a well must be commenced before and completed with due diligence after the primary term fixed therein, producing oil or gas in paying quantities

So under "commencement" leases it is not necessary that production in paying quantities be obtained prior to the expiration of the primary term.It is only necessary for the lessee to have commenced a well by the expiration of the primary term.

In Simons v. McDaniel, 154 Okl. 168, 7 P.2d 419, the Oklahoma Supreme Court explained a "commencement" lease which provided for the payment of delay rentals.The Court stated, 7 P.2d at 420-21,

The drilling clause of lessee plaintiffs' lease conferred upon them the right to commence a well (by complying with the conditions of the instrument, i. e., exercising the option of paying rentals and thus continuing the lease in force) on the very last day of the term specified in the duration clause.Since lessee had such an agreed right, can we with reason say the parties to the lease contract contemplated that right a barren or worthless privilege?To do so is to convict the parties of an absurdity.To the contrary, "in every private grant there passes by implication that which is reasonably necessary to the enjoyment of the thing granted."(Citations omitted.)

Therefore we hold that the grant to lessee plaintiff of the right to commence a well at any time within the term fixed by the lease contract, by necessary legal implication, carried with it the right to complete the well after the period fixed for commencement had expired, subject, however, to abandonment of that right by failure to proceed in good faith and with diligence.

The reasoning of the Court was that...