Waddle v. Lucky Strike Oil Co., Inc.

551 S.W.2d 323 (1977)

Fannie WADDLE, Petitioner, v. LUCKY STRIKE OIL COMPANY, INC., Respondent.

Supreme Court of Tennessee.

April 18, 1977.

*324 R.L. Johnson, Gainesboro, for petitioner.

John E. Acuff, Crawford, Barnes & Acuff, Cookeville, for respondent.

OPINION

FONES, Justice.

This action was instituted by plaintiff, as lessee, seeking a declaration that an oil and gas lease remains in full force and effect and for other relief. The Chancellor denied the relief sought and the Court of Appeals reversed. We granted the writ of certiorari.

The issues are whether lessee was in default in failing either to drill or to pay delay rental, and, if so, whether the lease terminated by its own terms, without the necessity of "a final determination" of default, followed by a reasonable time within which to comply.

The oil and gas lease was entered into on December 3, 1971, between defendant, Fannie M. Waddle, as lessor, and Mid-Western Petroleum Corporation[1], as lessee. Plaintiff is an assignee of a successor corporation of Mid-Western. John Kramer of New York, Pennsylvania, an officer of the original lessee and of its successor, represented the corporation in the negotiations with lessor, and the lease bears the hand-written notation that it was prepared by him. A "cash bonus"[2] of fifteen hundred ($1,500) dollars was paid for a primary term of ten (10) years.

The obligations imposed upon the lessee by the terms of the lease that involve the issue of termination follow:

(1) "... this lease shall terminate ... unless... lessee shall ..." begin operations for the drilling of a well within six months of December 3, 1971, or pay $75 per annum for the privilege of deferring drilling operations; (2) In the event of a dry hole, or holes, prior to the discovery of oil or gas, ". . this lease shall not terminate, provided ..." operations for the drilling of a well were commenced, or $75 per annum paid, as delay rental, by the next rental paying date; (3) If production ceased for any cause, "... this lease shall not terminate, provided ..." operations for the *325 drilling of a well were commenced or $75 per annum paid, as delay rental, by the next rental paying date; (4) To pay $50 damages before drilling each well.

Lessee drilled well number one on lessor's land within six (6) months of December 3, 1971. It disclosed traces, but no commercial oil, and was declared a dry hole and plugged. A few months later well number two was drilled and "demonstrated a surplus of oil" sufficient to cause lessee to go forward with the installations necessary to begin commercially pumping oil. However, the Tennessee Oil and Gas Board "redtagged" the well before any oil was pumped. According to Kramer, the drilling contractor encountered a boulder, and moved the location of the well twenty-one (21) feet "in the middle of the night." Instead of being moved west, it was moved south and east, too close to property owned by Wesley Flatt, Jr. and others, in violation of State regulations. Kramer's interpretation of the consequences of a well too close to adjoining property was that, if the owner of more than a fifty (50%) percent interest therein would not consent to removal of the red-tag, a hearing before the State Board could be requested and "it has been their custom to allow you to pump it."

Kramer's only explanation of why the red-tag had not been removed, or of lessee's efforts to do so was the following:

"Well, we've been putting out a lot more brush fires like this in between, and it is not the next logical step. We attempted to get it from Wesley Flatt, if that's what you're asking."

Parenthetically, the record reveals that Kramer's corporation had a fifty (50%) percent interest in an oil lease on the Flatt property, and plaintiff corporation also procured an assignment of that lease. No further details of that transaction were developed, nor does either party assert that it had any impact on the issues in this litigation.

On March 8, 1974, lessee[3] assigned its interest in the Waddle oil and gas lease to plaintiff, Lucky Strike Oil Company, Inc. in consideration of ten thousand ($10,000) dollars.

Fred Hull, President and owner of plaintiff corporation, and Ray Bostick, who was representing John Kramer, called on Mrs. Waddle at her daughter's home on March 13, 1974. Hull testified they went, "to see where [sic] she objected." She informed them, in essence, that the lease was terminated because Mr. Kramer had not done what he had promised. They returned the following day, and either handed her or merely left on a table with other papers a Bank of Celina receipt showing a deposit of two hundred fifty ($250) dollars to the credit of lessor. Lessor testified that she did not learn of the deposit until after they had left. Under date of March 15, 1974, her check for two hundred fifty ($250) dollars payable to plaintiff was mailed with a covering letter stating in part, that: "My lease is out and I do not want to lease again."

No further drilling was commenced on lessor's property after November 27, 1972, and no delay rental was paid lessor until the deposit to her account on March 14, 1974. Hull and Bostick had slightly different versions of what the sum of two hundred fifty ($250) dollars represented. Kramer said that it represented two years delay rental and fifty ($50) dollars damages or "cleanup" for each of the wells drilled on lessor's property. As a witness, Kramer insisted that nothing was due lessor, because the lease was "held by production," and that lessee was entitled to notice or a "determination" and reasonable time thereafter to pay rental or "to do whatever is wrong [sic]."

Defendant insists that the lease terminated by its own terms when lessee failed to *326 drill or to pay delay rental after well number two was red-tagged.

In this Court, plaintiff relies entirely on the reasoning of the Court of Appeals.

The Court of Appeals was of the opinion that the only specific obligation imposed on the lessee was that either of commencing operations for digging a well within six (6) months or of paying seventy-five ($75) dollars per year; that having drilled a well within six (6) months the rights of the lessee were fixed without further payment for a period of ten (10) years.

We disagree with that interpretation.

First, we agree with the majority of courts that have passed upon the term "production" in this context, and hold that it is equivalent to the phrase "production in paying quantities" and also embraces the ability to market the product at a profit. See Gulf Oil Corporation v. Reid, 161 Tex. 51, 337 S.W.2d 267 (1960); W. Summers, Oil and Gas (1959) § 293.

Thus, in our opinion, well number two is in the same category as a dry hole as long as the red-tag placed thereon, prior to any pumping or production, remains in force.

The dry hole clause of this lease is prefaced by the phrase, "if at any time prior to the discovery of oil or gas . ." It is a fact, under this record, that oil, in apparent commercial quantities, was discovered on lessor's land. But, we are not disposed to allow that expression to thwart what we believe to be the obligation of the lessee under the terms of this lease. In Mountain States Oil Corporation v. Sandoval, 109 Col. 401, 125 P.2d 964 (1942), the Supreme Court of Colorado, quoted the following from its earlier opinion in Lanham v. Jones, 84 Col. 129, 268 P. 521 (1928):

"... instruments of this character are construed most favorably to development, ... time is the essence of the contract, and the real motive for the giving of such instruments is the development of the leased property. Therefore such a lease or option is properly construed strongly against the lessee, so as to secure such speedy development." 125 P.2d at 967.

We approve that statement, and as applied to this lease are of the opinion that it requires a construction that lessee on the next ensuing rental date after the red-tagging on November 27, 1972, was required either to commence drilling another well, to pay delay rental or to remove the red-tag and bring well number two into production in paying quantity. Upon failing to do so the lease terminated by its own terms.

It may very well be that upon a showing of good faith effort by the lessee to remove the red-tag, equitable consideration would sanction deferring the due date of these obligations, where, as here, the event that triggered them was only a few days prior to the annual rental date. However, there is no justification whatever in this record for that relief. A second annual rental date passed on December 3, 1973, and three additional months, before lessee attempted to pay delay rent. The only other evidence of any effort to perform was Kramer's statement that Flatt's permission was sought, which presumably would have caused the State Oil and Gas Board to remove the red-tag.

The Court of Appeals held that "the mere statement of the lease that it shall not terminate if certain conditions are met does not mean that it shall terminate (automatically) if the conditions are not met."

An oil and gas lease is subject to the well established rule that in the construction of contracts, wills, deeds and other instruments in writing, the court seeks to ascertain the intention of the parties from the language used. Lamczyk v. Allen, 8 Ill. 2d 547, 134 N.E.2d 753 (1956). While it may be preferred draftsmanship to state *327 termination clauses in the affirmative, we are of the opinion that the meaning of the language used, and thus the intention of the parties, is the same, and if the conditions expressly provided to avoid termination are not performed, then termination is the result, whether the language used is, "this lease shall not terminate, provided ..." or "this lease shall terminate, unless ..."

This brings us to a consideration of the effect of the following provision of the lease, said by plaintiff and the Court of Appeals to prevent termination:

"It is agreed that this lease shall never be terminated, forfeited, or cancelled for failure to perform in whole or in part, any of its implied covenants, conditions or stipulations, until it shall have been first finally determined that such failure exists, and after such final determination, lessee is given a reasonable time therefrom to comply with any such covenants, conditions or stipulations."

Implied covenants against the lessee comprise an important phase of the law of oil and gas. While there is some difference of opinion as to the best classification of these implied covenants, Merrill and Kulp discuss the legal problems involved under the following descriptive titles: (1) to drill an exploratory well; (2) to drill off-set wells; (3) to drill additional wells during and after the exploratory period; and (4) to diligently operate and market. M. Merrill, Covenants Implied in Oil and Gas Leases, (2nd ed. 1940) § 4 Kulp, Oil and Gas Rights (1954) §§ 10.66-10.71.

The provision quoted above, and others of similar import, are designed to give lessees relief from the legal effects of these implied covenants in oil and gas leases. We are cited to no authority and our independent research has disclosed none, holding that this provision has any relevance to a default in the obligation to drill or to pay delay rental under specific conditions set forth in the lease.

The validity of such a provision, where the issue is the performance by lessee of one of the implied covenants of an oil and gas lease, is questionable.

In Frick-Reid Supply Corporation v. Meers, 52 S.W.2d 115 (Tex.Civ.App. 1932), a similar no forfeiture or termination clause until "a final judicial ascertainment" was held void and unenforceable. See also Lamczyk v. Allen, supra; Guerra v. Chancellor, 103 S.W.2d 775 (Tex.Civ.App. 1937); Mountain States Oil Corporation v. Sandoval, supra; Clovis v. Carson Oil & Gas Co., 11 F. Supp. 797 (E.D.Mich. 1935); Melancon v. Texas Company, 230 La. 593, 89 So. 2d 135 (1956); and Smith v. Sun Oil Co., 172 La. 655, 135 So. 15 (1931).

We conclude that this lease required lessee to drill, to pay delay rental, or to be in production in paying quantities on the "rental paying date[s]," or the lease terminated by its own terms. Under the facts of this case, the no termination or forfeiture clause has no application to those obligations.

The judgment of the Court of Appeals is reversed and the decree of the Chancery Court of Clay County, Tennessee dismissing the plaintiff's suit is affirmed. Costs are adjudged against plaintiff, Lucky Strike Oil Company.

COOPER, C.J., and HENRY, BROCK and HARBISON, JJ., concur.

*328

NOTES

[1] A copy of the lease is appended to this Opinion.

[2] Oil and gas lease terminology for one of the three (3) usual sources of revenue to the lessor. The other two (2) are "delay rental" and "royalty." Kulp, Oil and Gas Rights, (1954) § 10.36.

[3] successor corporation of Mid-Western Petroleum Corporation, Bon-Terre Petroleum Corporation, was the assignor.