Court Opinion

ID: 9549586
Source: CourtListenerOpinion
Date Created: 2023-08-07 18:21:37.985408+00
Date Added: 2024-06-11T15:20:34.440337
License: Public Domain

Wedell, J.
(concurring in part and dissenting in part): In my view this is an important but not a difficult case. In the light of other pressing duties and without time to analyze and review cases I shall state my general views on the subject of the cancellation of oil or gas leases such as the instant one during the primary term. I know there is some slight conflict in the decisions. My views are based upon what I regard as the sounder decisions and the weight of authority and are limited strictly to cancellation during the primary term of a lease contract such as the one before us.
The first question is what relief did the plaintiff seek in this suit? I cannot agree with the statement in that respect contained in the first paragraph of the court’s opinion. The petition plainly alleged plaintiff had demanded additional development during the primary term, the lease owner failed to comply with the demand and that plaintiff was entitled to cancellation of the lease. The relief prayed for was cancellation of the undeveloped portion of the lease. It was not for an order requiring further development or cancellation in the alternative. The court denied cancellation during the primary five-year term. From that judgment plaintiff appeals. This court is reversing the trial court and holding plaintiff was entitled to cancellation during the primary term of the lease. Inconsistent directions in the body of the opinion will receive attention presently.
In the trial court’s memorandum opinion it stated it would deny the request for cancellation during the primary term of the lease but plainly indicated a different situation might arise after the expiration of the primary term. With that statement I agree.
The real question is whether we should reverse the trial court’s *290refusal to forfeit, during the primary term, the undeveloped portion of the lease. I shall first consider the contract of the parties before dealing wth the equitable doctrine of implied covenants. The instant lease provides:
“It is agreed that this lease shall remain in full force for a term of five years from this date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.”
Two wells were drilled. The first continues to be a producer in paying quantities. The second was a dry hole. There was no drainage of the lease by other wells. Under other provisions the lease owner was not obliged to drill any well during the primary term but was privileged to pay rentals of $1 per acre or $160 annually in lieu of drilling. The lease contains another significant agreement, which reads:
“If the lessee shall commence to drill a well within the terms of this lease or any extension thereof, 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 froce with the like effect as if such well had been completed within the term of years herein first mentioned.” (Our italics.)
The term first mentioned was five years.
From these provisions it is clear the lease owner, under the plain agreement of the parties, might have started drilling the first well near the end of the primary term or even during an extension thereof, if granted. He was not required to complete any well during the primary term. If a well was merely commenced during such term, or any extension thereof, and oil or gas was found in paying quantities the lease remained in full force and effect the same as though a well had been completed during the primary term. These provisions constitute the contract of the parties. Not only one but two wells were drilled during the primary term.
Did the fact the lease owner, without contractual obligation, completed the drilling of two wells during the primary term to the substantial benefit of the plaintiff compel the lease owner to drill additional wells during the primary term? I do not think so. Was the penalty for failure to drill wells, not required by the contract, forfeiture or cancellation of all the undeveloped portion of the lease? If so the lease contract, in my opinion, was utterly meaningless.
Does the fact some witness or witnesses believed, if they owned the lease, they would drill additional wells, nullify plaintiff’s contract with the lease owner? If so I am not aware of the rule. Any *291testimony that the drilling of two wells during the primary term did not constitute development of the lease could not vitiate the express terms of the contract on which the parties had agreed. It is well to remember there is no contention here of fraud or mistake in the execution of the lease contract.
The trial court’s memorandum brief discloses that in denying cancellation during the primary term it also considered all other circumstances in addition to the provisions of the lease contract, previously mentioned.
That court, in part, said:
“The lessee’s (the working) interest had at the time of the trial recovered the drilling costs on both wells from the production from the first well and some $3,500.00 besides, as compared to royalties received by the plaintiff of $4,711.00 from his one-eighth.”
The district court further said:
“The acreage is not large and the field is not one of intensive development or large production. There is no substantial production on near-by acreage to warrant expectations of spectacular or even tempting results. There are no off-set wells through which the minerals are being lost to those not entitled to them. The lessee has made a substantial investment and has made the property productive, more so to the lessor than to himself. His development has been conservative and more consistent with conservation than with waste. The initial term has not expired. The lessee expects to develop further when time seems prudent. Perhaps his present decision may be influenced somewhat by his overriding royalty obligations, but his policy does not seem unreasonable or presently detrimental to the lessor. All of these considerations are important.”
It, of course, is conceded that the fact a lease owner has reduced his income from production by granting overriding royalties on his working interest does not constitute a defense to a failure to drill additional wells, if such additional wells are required by the contract. But where additional wells are not required, during the primary term, as here, the subject of overriding royalties cannot control or determine the basic problem here presented. It is wholly immaterial why the lease owner did not explore and develop the entire lease, or more of it, during the primary term when he was relieved from doing so by the lease contract. The trial court, however, considered the matter of overriding royalties together with other circumstances, as previously indicated. I am convinced this court should not reverse the decree denying cancellation during the primary term.
Forfeitures for failure to comply with implied covenants are not *292favorites of the law. Conditional cancellation during a primary term might be a proper remedy under some circumstances notwithstanding the terms of the lease contract, as for example, in the case of drainage by wells on adjacent land which is not the case here. Rut surely the equities in favor of cancellation should be clear and compelling in order to override and invalidate the express terms of a contract fairly and intelligently made.
This lease does not contain, and plaintiff does not contend it contains, a provision for reasonable exploration and development of the land during the primary term. Plaintiff therefore must and does rely solely on so-called implied covenants to explore and develop the lease during such term irrespective of the contrary terms of the lease contract concerning the duty of the lease owner to drill during that term. As heretofore stated the only relief plaintiff sought was outright cancellation during the primary term. His prayer is clear and unmistakable. It reads:
“Plaintiff prays that the oil and gas mining lease executed on the 4th day of June, 1947, . . . except for ten acres in square form immediately surrounding the one producing oil and gas well thereon, be cancelled, set aside and held for naught, and that said defendants be ordered and directed to release the same of record; and that in the alternative the decree of this court operate as a cancellation and release of said lease in so far as the same covers the last above described tract of land; that plaintiff have judgment for his costs herein expended and such other and further relief as may be just and equitable in the premises.”
It is crystal clear plaintiff did not seek additional development during the primary term but was demanding cancellation and any additional relief to which he might be entitled. That is the relief the district court denied during the primary term. That is the decision this court reverses. (See syllabus.) I am not willing to reverse the decision of the district court on the single issue presented to it where the decision is based on an accurate analysis of the terms of the lease and the evidence as that court had a right to interpret it.
I also pause to observe plaintiffs declared right to cancellation during the primaiy term, in my opinion, is contrary to the common operative interpretation of leases of this character by both lessors and lessees over a long period of years. The decision renders literally hundreds of oil and gas leases so interpreted and operated subject to cancellation.
This, as previously stated, is an important decision. It purports to be based on an equitable doctrine that a landowner is entitled *293to have the lease reasonably developed during the primary term, if the lease owner undertakes to drill and obtains one producing oil well during such term, instead of paying rentals. The right to cancellation is declared to be equitable notwithstanding the fact the producing well provides a much more substantial return to the landowner than payment of annual rentals. In other words, the decision means the lease owner, in equity, is to be penalized for having provided a much greater return to the landowner out of production during the primary term than the parties agreed the landowner was entitled to demand.
But this is only part of the inconsistency of the right to a decree of cancellation on equitable grounds presently announced. Let us pursue this so-called equitable doctrine with a view of ascertaining whether its practical application reasonably may be expected to redound to the benefit of landowners. Although it may temporarily have that effect in those limited cases where a lease owner has already drilled one or more wells under a similar lease, the effect of the decision in the long run, in my opinion, will operate squarely against the interest of landowners generally.
Many lease owners who have contemplated drilling one or perhaps a few wells during the primary term, in harmony with the desire of landowners, will be obliged to refrain from doing so, to the detriment of the landowners, until near the end of the primary term. The reason is obvious. It costs money, big money, to drill oil and gas wells now. The cost of the instant producing well was $15,633.10 and that of the second, a dry hole, was $9,250.43, the total drilling cost alone being $24,883.53. And that is a very small amount in comparison with the cost of many wells, yet a substantial outlay for the average man. The small independent oil operators, of whom we have a great many in this state, who have acquired a lease or two but whose initial finances are too limited to permit them to drill a large number of wells during the primary term will be compelled to postpone drilling operations until near the end of the primary term with the hope of acquiring sufficient capital in the meantime from other sources in order to enable them to continue development after drilling the first well. The result is landowners will be deprived completely of royalties during the primary term, whether it be five, ten or more years. Here the annual rentals to which the landowner was entitled were only $160. His royalty from the one producing well was $4,711.07. The net profit of the working interest, deducting costs of drilling and operation, was only $3,590.95.
*294If instead of canceling the lease the lease owner is permitted to drill one or a few wells during the primary term, and if he succeeds in obtaining a producer or two, he is benefiting landowners immediately and he also may acquire sufficient capital from operations during the primary term to enable him to continue development with reasonable diligence after such term has expired. This is the well known history of hundreds of small operators in this state who have materially aided landowners by providing them some royalty immediately and much greater returns after the primary term.
The decision that plaintiff was entitled to cancellation during the primary term is the most staggering blow that could be dealt to the small independent oil and gas lease operators in this state. I likewise have no doubt experience will prove the decision will not, over the long run, inure to the benefit but will result in substantial loss to landowners generally. Its effect is to reduce competition in the development of leases. Only the large oil and gas interests and others with substantial reserve capital will be able to proceed with development after drilling one well during the primary term. The decision in the long run can benefit only the latter. They are not required to start drilling operations until near the end of the primary term. Naturally they will not do so unless it is to their own interests irrespective of the interest of landowners. They can afford to pay rentals and postpone development while the operator with small means needs to obtain some production out of which he may finance further development after the primary term. These are only some of the practical considerations which, in my judgment, do not support a decree of cancellation on equitable grounds during the primary term. This is true even if the benefit of landowners alone were considered which, of course, never has been the rule. The test always is one of mutual benefit.
Moreover, in my view, this court is also entirely inconsistent with its own decision and opinion in which it reverses the trial court for failure to cancel the lease during the primary term.
Let us see what the final decree of this court really is. Does this court now cancel the lease in harmony with its decision reversing the trial court? Not at all. The primary term expired June 4, 1952, after the appeal was perfected. This court now, even after the primary term has expired, grants the lease owner additional time beyond the primary term within which to proceed with development. But such final decree in this case is made no part of the law of the case. (See syllabus.) The legal effect of this court’s final *295decree is that the lease will not be canceled if the lease owner within the time therein stated commences another well and proceeds with due diligence to develop the lease in good faith as a prudent operator for the mutual benefit of the parties. (See concluding paragraph of court’s opinion.)
My views may be summarized as follows:
First. The trial court’s finding No. 1 was:
“1. That under the terms and provisions of the lease in question, there is no implied covenant for further development during the primary term of the lease.”
If the trial court by this finding intended to say the doctrine of implied covenants to develop cannot be applied during the primary term of a lease irrespective of the facts and circumstances that may arise, the statement is inaccurate.
Second. The trial court’s second finding was:
“2. That even if there should be such an implied covenant, defendant has, under the circumstances and conditions set out in the evidence operated the lease in a manner sufficiently prudent to avoid the cancellation sought here.”
This finding presents the real question for our review. Appellant’s counsel are commendably frank about that fact. They concede the only relief sought from the trial court was forfeiture of the undeveloped portion of the lease and that the relief sought was not an alternative decree for additional development or cancellation. They admit that is the only issue on appeal. They further frankly admit they know of no case in this state in which an outright decree of forfeiture has been granted during the primary term but nevertheless contend it should be decreed. My view on that point, briefly stated, is: The district court had the right and it was its duty to take into account all the facts, including the mutual interest of both parties, and not merely those of the landowner whose money would not be risked in experimental exploration; there had been no abandonment of the lease; the lease owner desired to engage in further development as soon as he felt able to do so; although the evidence possibly disclosed some tardy development the lease owner had made a substantial investment; the lease was not being drained by any surrounding production; under the circumstances the income from royalties to the landowner was not lost but only deferred; the evidence was not sufficiently strong to compel this court to reverse the trial court’s refusal of immediate and outright forfeiture; the decision of the trial court should, therefore, be affirmed and not reversed.
*296Third. Obviously it is entirely unnecessary to labor the last preceding point. This court’s own action, its final decree, granting additional time for development before decreeing cancellation, constitutes a clear recognition of the correctness of the trial court’s refusal to decree outright forfeiture.
Fourth. It is my opinion paragraph 1 of the syllabus of the court’s opinion is entirely too broad as a general statement of law, first, because it completely ignores the possible terms of lease contracts, pertaining to development during the primary term, and second, it nullifies an express agreement of the parties under the instant lease. If a lease owner drills a well he thereby starts, he “undertakes to develop the leased premises,” irrespective of whether his operations result in a producing well or a dry hole. The parties have a right to contract concerning the effect of an undertaking to develop during the primary term. They did so here. The lease provides:
“Should the first well drilled on the above described land be a dry hole, then, and in that event, if a second well is not commenced on said land within twelve months from the expiration of the last rental period for which rental has been paid, this lease shall terminate as to both parties, unless the lessee on or before the expiration of said twelve months shall resume the payment of rentals and in the same amount and in the same manner as hereinbefore provided. And it is agreed that upon the resumption of the payment of rentals, as above provided, that the last preceding paragraph hereof, governing the payment of rentals and the effect thereof, shall continue in force just as though there had been no interruption in the rental payments.”
True the first well here was a producer but paragraph 1 of the syllabus is not limited to a producing well. The mere undertaking of development under the terms of the instant lease could not justify invoking the equitable doctrine of implied covenants to continue drilling during the primary term and clearly discloses the statement in syllabus 1 is too broad.
Fifth. Failure alone to continue drilling, after discovery of a producing well during the primary term, does not, in equity, compel outright forfeiture of the undeveloped portion of leased premises without regard to the terms of a lease contract and the facts of a particular case.
Sixth. On the single issue of outright forfeiture presented to the district court appellant is not entitled to an alternative order from this court directing further development or cancellation. In Greenwood v. Texas-Interstate P. L. Co., 143 Kan. 686, 56 P. 2d 431, the action was filed almost two years after the primary term of the *297lease had expired seeking forfeiture of the undeveloped portion of the lease. Notwithstanding paragraph 1 of the syllabus in that case, quoted in the majority opinion, this court affirmed the trial court’s refusal to decree a forfeiture. This court also refused to make an alternative order for further development or forfeiture for the reason the only relief sought in the district court was cancellation. It said:
“Although not urged by appellant, the question arises whether the court should have made an order that lessee either extend development or surrender parts of the leased premises which it does not desire to develop. There are perhaps two answers. One is that appellant did not seek such an order.” (p. 694.)
Seventh. Since a majority of this court has now concluded to adopt a different rule in the instant case and has decided to go beyond the single issue presented to and decided by the trial court I, of course, am bound by such decision. Under these circumstances my concurrence is limited to the concluding paragraph of the court’s opinion granting the lease owner additional time to develop before decreeing a forfeiture. However, under the decision of this court the judgment of the district court should not be reversed but affirmed and modified as directed.
Eighth. The granting of overriding royalties on the working interest of a lease owner, thus reducing his income from production, does not alone constitute a ground for forfeiture but properly may be considered by a court of equity in connection with the terms of a lease and all other facts and circumstances in determining its decree.