Opinion ID: 1230173
Heading Depth: 1
Heading Rank: 2

Heading: The Habendum Clause

Text: This Court has long held that the terms produced and produced in paying quantities have substantially the same meaning. State ex rel. Commissioners of the Land Office v. Carter Oil Co. of West Virginia, 336 P.2d 1086 (Okla. 1958). Therein, we construed a typical habendum clause which extended the lease past its ten-year primary term as long thereafter as oil or gas is produced in paying quantities. We held that in order to extend the fixed term of ten years and acquire a limited estate in the land covered thereby the lessee must have found oil or gas upon the premises in paying quantities by completing a well thereon prior to the expiration of such fixed term. 336 P.2d at 1094. The Court then rejected the lessors' argument that production in paying quantities required the lessees to not only complete a well capable of producing in paying quantities but also remove the product from the ground and market it. Thus, where a well was completed and capable of producing in paying quantities within the primary term, the lease continued, so far as the habendum clause was concerned, as long as the well remained capable of producing in paying quantities, regardless of any marketing of the product. [3] This rule of law has been consistently upheld. See, e.g., Gard v. Kaiser, 582 P.2d 1311 (Okla. 1978) and McVicker v. Horn, Robinson and Nathan, 322 P.2d 410 (Okla. 1958). Perhaps one of the best explanations for the rule was given in McVicker where we stated: To say that marketing during the primary term of the lease is essential to its extension beyond said term, unless the lease contains additional provisions indicating a contrary intent, is to not only ignore the distinction between producing and marketing, which inheres in the nature of the oil and gas business, but it also ignores the difference between express and implied terms in lease contracts. 322 P.2d at 413 (Emphasis in original). More recently, in Stewart v. Amerada Hess Corp., 604 P.2d 854 (Okla. 1979), we reaffirmed the rule that an oil and gas lease could not be terminated under the habendum clause merely because the subject well ceased producing in paying quantities. Rather, the finder of fact must also look into the circumstances surrounding the cessation, including the [d]uration and cause of the cessation, as well as the diligence or lack of diligence exercised in the resumption of production. 604 P.2d at 858, fn. 18. In so holding we affirmed our rejection of a literal construction of the habendum clause stating: Under a literal or strict interpretation of the `thereafter' provision in a habendum clause, uninterrupted production  following expiration of primary term  would be indispensable to maintain a lease in force. This would mean, of course, that any cessation of production [in the paying-quantities sense of the term], however slight or short, would put an end to the lease. Oklahoma has rejected that literal a view. Our law is firmly settled that the result in each case must depend upon the circumstances that surround cessation. Our view is no doubt influenced in part by the strong policy of our statutory law against forfeiture of estates. The terms of 23 O.S. 1971 § 2 clearly mandate that courts avoid the effect of forfeiture by giving due consideration to compelling equitable circumstances. [4]       In short, the lease continues in existence so long as the interruption of production in paying quantities does not extend for a period longer than reasonable or justifiable in light of the circumstances involved. But under no circumstances will cessation of production in paying quantities ipso facto deprive the lessee of his extended-term estate. A decree of lease cancellation may be rendered where the record shows that the well in suit was not producing in paying quantities and there are no compelling equitable considerations to justify continued production from the unprofitable well operations. 604 P.2d at 858 (Emphasis in original) (Citations omitted). Finally, in State ex rel. Comm'rs of the Land Office v. Amoco Production Co., 645 P.2d 468 (Okla. 1982), we held: The provision about paying quantities adds little to the term production since it is settled that production must be in paying quantities even though a lease contains no such provision ... It is the ability of the lease to produce that is the important factor rather than the actual production applied, as an example of ability to produce a shut-in gas well will hold a lease as long as the operator seeks a market with due diligence.  645 P.2d at 470 (Citations omitted) (Emphasis added). [5] Therefore, the lease in the case at bar cannot terminate under the terms of the habendum clause because the parties stipulated that the subject wells were at all times capable of producing in paying quantities. The habendum clause of these leases is satisfied.