Opinion ID: 882219
Heading Depth: 2
Heading Rank: 2

Heading: The Implied Covenant to Reasonably Develop the Leasehold.

Text: As their second issue, the Sundheims argue that the District Court erred in granting summary judgment on their claim that Reef Oil and Frank Hiestand breached the implied covenant to reasonably develop the leasehold. The District Court held that this covenant was not breached because the Sundheims accepted delay rental payments. As further justification for its ruling, the court held that the covenant to reasonably develop does not arise until after production has been obtained on the leasehold. Because we uphold the lower court based upon the prior reasoning, we will not review the latter. In short, the Sundheims maintain that their acceptance of delay rental payments does not excuse the defendants from fulfilling their duty to reasonably develop their leasehold. They argue that because oil was discovered and pumped in paying quantities from the Sundheim No. 1 well, Reef Oil and Frank Hiestand had a continuing duty to further develop the leasehold. According to Sundheims, the payment of delay rentals has no bearing on this duty. We need not dwell upon the legal intricacies of the Sundheims' argument. The issue can be resolved through resort to the clear wording of the leases. Paragraph 2 of these leases states: 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 of whatsoever nature or kind or either of them is produced from said land or premises pooled therewith or drilling operations are continued as hereinafter provided. If prior to discovery of oil or gas on said land or on acreage pooled therewith, lessee should drill a dry hole or holes thereon, or if after discovery of oil or gas production thereafter should cease for any cause, this lease shall not terminate if lessee commences additional drilling or reworking operations within sixty (60) days thereafter or (if it be within the primary term) commences or resumes the payment or tender of rental on or before the rental-paying date next ensuing after expiration of three (3) months from the date of completion of a dry hole or cessation of production. (Emphasis added.) Paragraph 4 of the leases states: If operations for the drilling of a well for oil or gas are not commenced or if there is no oil or gas being produced on said land or on acreage pooled therewith as hereinafter provided on or before one year from the date hereof, this lease shall terminate as to both parties unless the lessee on or before that date shall pay or tender to the lessor ... the sum of $320.00 which shall operate as a rental and cover the privilege of deferring the commencement of operations for drilling of a well for twelve months from said date. In like manner and upon like payments or tenders the commencement of operations for drilling of a well may be further deferred for like periods of the same number of months successively. According to these two sections of the Sundheim leases, Reef Oil had a duty to explore for or produce oil and gas from the Sundheim leasehold. If it failed to adequately carry out this duty, the terms allowed the Sundheims to terminate the lease. However, Reef Oil could, instead of engaging in drilling or production operations, make delay rental payments of $320.00 per year. Upon payment of this sum, Reef Oil was excused from the drilling and operating requirements contained in the lease. It is undisputed that the delay rental payments were made by Reef Oil and were accepted by the Sundheims. Therefore, by the terms of the contract, Reef Oil was not impliedly required to engage in further development of the Sundheim leasehold. The rental clauses contained in the lease were presumably bargained for and are supported by consideration. We will not look beyond these express provisions in order to impose a duty upon Reef Oil which is in contravention of their terms. In short, the rental clause contained in the Sundheim leases relieves Reef Oil of all drilling obligations save that of offset drilling. Williams & Meyers, Oil and Gas Law § 835.1 (1990). See also Hemingway, Law of Oil and Gas § 8.10 2d Ed. (1983). The duty to drill an offset well is imposed through the covenant to protect, not through the covenant to reasonably develop. Therefore, there was no breach of the development covenant and summary judgment on this issue was properly granted.