
    Harris v. The Ohio Oil Co.
    
      Lease of land — For obtaining oil and gas — Portion of product delivered to lessor — Implied covenants of lessee — Effect of breach of covenant — Contract law.
    
    1. Where lands are granted, demised and let for the purpose, and with the exclusive right of drilling and operating for oil and gas, in consideration that a certain part of the oil produced should be delivered to the lessor, the lease providing that one well should be completed within six months, and in default the lease to be null and void, the lease being silent as to the drilling of other wells, or the protection of lines: . Held, that in such a lease there is an implied covenant on the part of the lessee, that he will drill and operate such number of oil well s on the lands as would be ordinarily required for the production of oil contained in such lands, and afford ordinary protection to the lines.
    2. Where the forfeiture clause in such a lease is to the effect that a failure on part of the lessee to comply with the conditions, or pay the cash consideration in the lease mentioned, at the time and in the manner agreed, then the lease to be null and void, and not binding on either party; and oil being produced in paying quantities through wells drilled on the lands by the lessee under the lease: Held, that the lessee has a vested interest in the lands; that to work a forfeiture of the lease, there must be a breach of a condition or covenant which is mentioned in the lease; that a breach of an implied covenant does not work a forfeiture of the lease; and that certain causes of forfeiture being specified in the lease, others cannot be implied.
    3. Under such a lease, the remedy for a breach of an implied covenant, is not by way of forfeiture of the lease,, in whole or in part, but by an action for damages caused by such breach.
    (Decided November 23, 1897.)
    Error to the Circuit Court of Wood county.
    The written instrument of which the following is a copy, was duly executed by the parties there bo and-properly recorded:
    “Memorandum of agreement, made and entered into this 16th of December, 1887, by and between William Snyder and Cordelia Snyder, of Hancock county, Ohio, of the first part, and Carey C. Harris, of the second part, witnesseth:
    “That the party of the first part for the consideration of one dollar and other considerations in hand paid, and the covenants and agreements hereinafter contained, have granted, demised and let unto the said party of the second part, for the purpose and with the exclusive right of drilling, operating for petroleum oil and gas, all that certain tract of land situated in the township of Henry, Wood county, Ohio, known and described as follows: The east half of the northeast quarter of section 14, and the west half of the northwest quarter of section 13, in township three north, range ten east, containing 159 acres, more or less.
    “The said party of second part to have and to hold the said premises for the said purpose only for and during the term of five years from the date hereof, and as much longer as oil and gas are found in paying quantities.
    “The said party of the second part, in consideration of said grant and demise, agrees to give to the party of the first part the full equal one-sixth part of all petroleum oil obtained or produced on the premises herein leased, and to deliver the same to the pipe line to the credit of the party of the first part.
    “It is further agreed if gas is found in sufficient quantities to utilize, the consideration in full to the party of first part shall be one hundred dollars per annum for each and every gas well drilled upon the premises herein described and so used, and the privilege of using sufficient gas to heat the house on said premises.
    
      ‘ ‘The party of the first part grants the privilege to the party of the second part of using sufficient water from the premises herein leased, except from wells now on the premises, necessary to the operations thereon, and the right of way over and across said premises to the place of operation.
    “The right to lay pipes, to convey oil and gas, and the right to move any machinery and fixtures placed on said premises by them.
    “Provided that no well shall be bored nearer than three hundred feet of house or barn or in the orchard, except by consent of the first party.
    “Provided in case no well be completed within six months from date of this lease, unavoidable delays excepted, then this lease shall be null and void unless second party shall pay one hundred dollars to first party for each three months it is delayed.
    “Second party agrees to commence and complete one well within six months.
    “It is further agreed by party of first part with party of second part, that the failure on the part of the party of the second part to comply with the conditions or to pay the cash considerations herein mentioned at the time and in the manner agreed, then and in that event this lease shall be null and void, and not binding on either party.
    “It is understood between the parties hereto that all conditions between the parties hereto shall extend to their heirs, executors and assigns.
    “In witness whereof the parties hereto set their hands, the day and year first above mentioned.
    (Signed) “William Snyder.
    “Cordelia Snyder.
    “Carey C. Harris.”
    
      Said Carey C. Harris having taken possession of said premises under said instrument, and drilled and operated nine oil wells thereon, assigned all his interest in said lease to the Ohio Oil Company on the 22d day of February, 1889, and delivered possession to said company, and it has been in possession ever since, and has drilLed and operated three additional oil wells, and all the wells have at all times produced oil in paying quantities, but have produced no gas.
    On the 5th day of January, 1892, said Carey C. Harris purchased said lands from said William Snyder and wife, and he has continued to own the same ever since, so that- in legal effect he is the lessor, and the Ohio Oil Company the lessee.
    The plaintiff in error, Mr. Harris, claimed that at least ten additional oil wells should be drilled upon said lands in order to reasonably and properly develop the same, protect lines, and prevent the wells on the surrounding lands from draining the oil from under his said lands to his injury, and he notified the company to drill more wells, and notified it that unless such additional wells should be drilled within a reasonable time, sixty days, that he should regard the lease forfeited as to the undrilled parts of said lands, and should proceed to drill wells on said parts of the lands himself.
    The company refused to comply with his notice, and claimed that it had the exclusive right to drill wells on said lands by virtue of said lease.
    After repeated notices on his part, and refusals on part of the company, he made preparations to drill a well on the undrilled part of said lands, and the company thereupon filed its petition and obtained a temporary injunction against the defendant below, and he filed his answer, averring that at the time the lease was made, there existed a well known custom throughout said county of Wood to the effect following:
    “I. That the grantee or lessee should protect the lines of lands so leased or granted for said purpose from wells on adjoining lands — in all cases where on adjoining lands, wells were, or should be operated so near the same as to draw oil or gas from lands so leased or granted — by drilling and operating wells near the same immediately on lands so leased.
    II. That upon the completion of the first paying well at the time stipulated in the lease or grant, without delay others must be- completed and operated so as to develop and operate the lands so leased or granted, and particularly so, where adjoining lands are being operated.
    III. That to operate such lands for said purpose, one well at least should be drilled and operated on each five acres of the lands so leased or granted for said purpose.”
    The following averment was also contained in the answer:
    “That plaintiff owns and operates the lands adjoining said lands in the petition described on every side, and has operated the same ever since the said 22d day of February, 1889; that on the 160 acres on west of said lands, plaintiff owns and operates twenty oil wells; that on the 80 acres on east, it owns and operates ten oil wells; that on each of the quarter sections on north, northwest and southwest, it owns and operates nineteen oil wells, and within a distance of about one-half a mile from said lands of defendant, plaintiff owns and operates over 120 oil wells. That many of said wells are near the lines of defendant’s said lands, and draw the oil from under and in his said lands, and do him irreparable injury.”
    Also the following:
    “Defendant says the said wells now on said • land, are located as follows: Six are located along the east line of said farm at a distance of from thirty to two hundred feet of said line; four are located along west line of said lands, at a distance of from 200 to 300 feet of said line, of which the north one being 520 feet from the north line of said lands.
    “One of said wells is 200 feet.from south line, and 700 feet from said east line.
    “One of said wells is about 200 feet west of center of said farm.
    “With the exception of said last well, no drilling has been done on the middle of said -farm — more than eighty acres.”
    There was an averment in the answer that ah oil well could be drilled and completed in thirty days, and there were also other averments in the answer which are not material here, as the court. found them not to be true.
    The reply of plaintiff was as follows:
    “For reply to the answer filed in this cause, the plaintiff admits that oil wells in the Wood county field, should be drilled 1,200 to 1,300 feet deep; that a well can be completed, barring accidents, in thirty days; the exclusive right of plaintiff to mine on the lands for oil and gas, so long as the same may be found in paying quantities; the number, location and dates of drilling the wells thereon; that plaintiff owns and operates wells on adjoining lands, but not to the extent nor in .the manner alleged in the answer; that some of the wells on adjoining lands are near the line of defendant’s lands; that defendant has requested plaintiff to drill other wells; its refusal to drill the number requested by defendant; that it has prevented, aud intends to prevent defendant from drilling on said lands during the continuance of the lease set forth in the petition.
    “It denies every other allegation in the answer. ” The cause was tried in the circuit court on appeal, and the following decree rendered, to-wit: “This day came the said parties with their attorneys and submitted this cause to the court upon the pleadings and the evidence, and the same was argued by counsel.
    “Upon consideration whereof, and being fully advised in the premises, the court find that all and singular the matters and things alleged in the petition are true; that the matters and things set up by way of defense in the answer and cross-petition of the defendant are not true; and that the equities of this cause are with the said plaintiff.
    “It is, therefore, adjudged, decreed, and ordered, that the said plaintiff be, and it hereby is quieted in its exclusive right to drill for and produce oil and gas, in and upon the lands described in the petition under the lease mentioned and referred to in the pleadings in this cause, and that the defendant be, and hereby is perpetually enjoined from drilling for, or producing oil or gas, upon, or in said lands, or any part thereof, during the continuance of the said lease and under the terms thereof, and from in any manner interrupting’ or interfering with the plaintiff in the exercise of its exclusive right to drill for and produce oil and gas upon said lands, and that the cross-petition of the said defendant be, and it is dismissed.”
    A motion for. a new trial was filed and overruled and exceptions taken, and a bill of exceptions containing all the evidence was allowed, and made part of the record.
    Thereupon Mr. Harris filed his petition in error in this court, seeking to reverse the judgment of the circuit court.
    
      A. & F. P. & R. A. Blackford, for plaintiff in error.
    
      M. F. Elliott and Troup & Dunn, for defendant in error.
   Burket, C. J.

The matters and things set up in the answer and cross-petition, and expressly admitted to be true -by the reply, must be regarded as conceded by the parties, and therefore true, notwithstanding the finding of the circuit court to the effect “that the matters and things set up by way of defense in the answer and cross-petition are not true. ”

The case therefore stands the same as if the facts expressly admitted by the reply to be true, had been found by the court in addition to the finding’ as made; and the rights and remedies of the parties must be determined by the terms and conditions of the written instrument and the facts, both as found by the court, and as expressly admitted in the reply.

While the written instrument must be construed in the light of the surrounding circumstances, no new terms or conditions can be injected into such instrument, and no existing terms or conditions can be taken therefrom by averment in a pleading. In Kellogg v. Larkin, 3 Pinney (Wis.,) 123, 56 Am. Dec., 164; it is said: “No averments can give to an agreement character it had not, and no admission can take from it the character it had.” The effort to bend and change the construction of the written instrument in question, by averments in the pleadings, as to its true construction and meaning, must therefore fail, and the instrument must be construed, and its legal effect declared from the language used when read in the light of the surrounding circumstances. The facts found, and those admitted by the reply, are not such as to bend or vary in any respect, the construction or legal effect of the language used in the written instrument, and therefore a consideration of the terms and conditions, and legal effect of the written instrument itself, is all that is required.

It is not claimed by the plaintiff in error, that the oil company is in default as to the one-sixth of the royalty, nor as to the payment for gas, nor as to completing one well within six months, nor as to cash payments for delay. His only complaint is, that the company has failed to drill the number of wells necessary to properly develop the lands and so protect the lines as to prevent wells on adjoining lands from draining the oil from under his lands; and for this alleged default he seeks to forfeit the lease as to so much of the land as has not been sufficiently drilled. What are his rights in this regard under the lease? Is he entitled to the remedy he seeks? These questions are fairly made in the record, and are of great interest to the oil producing, and oil land interests of the state.

There is no express covenant, condition, or agreement, in the lease as to the extent to which the lands should be developed, nor as to the number of wells that should be drilled after completion of the first well. Is there an implied covenant, condition, or agreement, as to such development, or as to the drilling of a reasonable number of wells?

On principle, it would seem that there is such implied covenant in the written instrument. When no time is fixed for the performance of a contract, a reasonable time is implied. When a contract for the erection of a house or other structure, is silent as to the quality of the materials or workmanship, it is implied that the same should be of a reasonable quality. In a lease of a farm for tillage on the shares, it is implied that the tenant shall cultivate the farm in the manner usually done by reasonably good farmers. So under an oil lease which is silent as to the number of wells to be drilled, there is an implied covenant that the lessee shall reasonably develop the lands, and reasonably protect the lines. The development and protection of lines which is thus implied when the lease is silent, is such as is usually found in the same business of an ordinarily prudent man, neither the highest nor lowest, but about medium or average.

We therefore hold, both on principle and authority, that there is an implied covenant in this lease to reasonably develop the lands by drilling and operating such number of wells as would be ordinarily required for the production of the oil contained in such lands, and afford ordinary protection to the lines. Glasgow v. Chartiers Oil Co., 152 Pa. St., 48; Koch’s and Balliet’s Appeal, 93 Pa. St., 434; Mc Knight v. Manuf. N. Gas Co., 146 Pa. St., 185.

The extent of the development, and number of wells to be drilled, and as to the protection of the lines, is often, if not usually, expressed in the lease, and that is certainly the better practice. When the extent of the development and protection of lines is provided for in the lease, there can be no implied covenant for further development and protection of Tines. The implied covenant arises only when the lease is silent on the subject.

There being such implied covenant in this lease, and conceding, but not deciding, that a breach of that covenant is shown by the record, the question arises as to whether such breach works a forfeiture of the lease in whole or in part? And as to whether the plaintiff in error could, by notice to the oil company, secure to himself the right to drill oil wells on the undrilled part of said lands ?

This lease is in its terms, an entire contract without any words of severance; and there is no implication of severance, as is sometimes the case when all wells are to be drilled within a shorter time than the period of the lease. In such cases, even though the lease is in terms a sale of all the oil contained in the lands, whatever oil remains in the undeveloped parts of the land at the expiration of the time in which drilling can be done by the terms of the lease, inheres in the land and lapses into the fee, and remains the property of the land owner, the same as standing trees which are sold to be removed within a given time, remain the property of the owner of the land after the expiration of such time. Clark v. Guest, 54 Ohio St., 298.

In such cases the lease is severable by implication, at the end of the period in which drilling is allowed; but there is nothing in this lease to indicate a severable character, and therefore the rule of law applicable to the breach of conditions of entire contracts, would seem to be applicable here. That rule is, that a condition must defeat or determine the whole estate or contract, to which it is annexed, and not only a part of it, unless otherwise .expressed. 2 Cruise on Real Prop erty, 5.

The case of Masson v. Bovet, 1 Denio, 69; 43 Am. Dec., 651, is authority to the effect that a rescission of a contract must be in toto, or not at all. See also, Trimble v. Doty, 16 Ohio St., 129. The same rule of law applies as to forfeitures of contracts.

■ The rights and remedies of the parties to an oil or gas lease, must he determined by the terms of the written instrument, and the law applicable to one form of lease may not be, and generally is not, applicable to another and different form. Such leases are contracts, and the terms of the contract with the law applicable to such terms, must govern the rights and remedies of the parties.

By the terms of the lease in this case, the lessor for a valuable consideration granted, demised and let the lands described to the lessee, for the purpose and with the exclusive right of drilling and operating for petroleum oil and gas, for five years, and as much longer as oil and gas are found in paying quantities. In this case, as in the case of Crawford v. Woodland Oil Company, 55 Ohio St., 161, it is the land that is granted demised, and let for the limited purpose and period named in the lease. An instrument in such form is more than a mere license; it is a lease of the land for the purpose and period limited therein, and the lessee has a vested right to the possession of the land to the extent reasonably necessary to perform the terms of the instrument on his part.

In this case, possession .was delivered to the lessee and operations commenced, wells drilled, and oil produced in paying quantities, and in such cases it cannot be doubted that the lessee has a vested, though limited, estate in the lands for the purposes named in the lease. Venture Oil Company v. Fritts, 152 Pa. St., 451.

■ What the exact rights of the parties were after the execution of the lease, and before oil was found in paying quantities,' is now immaterial, because oil was found, and is still being produced in paying quantities; and for the additional reason that the duty imposed by implication upon a lessee in a leasehold operated for gas, can not be measured by the same rule applied in the same manner, as in the case of a leasehold operated for oil; the peculiar characteristics of the business of producing and transporting natural gas being such as to distinguish it for some purposes from operations for oil. McKnight v. Manufacturers N. Gas Co., 146 Pa. St., 185.

While the period of five years that the lease was to run has expired, the lease is still in full force, because it provides that it shall continue as much longer as oil and gas are found in paying quantities. This provision extends and limits the period of the lease to such time in the future, as oil and gas shall cease to be produced in paying-quantities on said lands. When that period shall arrive, whether caused by exhausting the oil and gas, or by the permanent abandonment of production, the lease will cease, and the whole estate in the premises will become the property of the • owner of the fee, not by forfeiture, but by virtue of the terms of the lease.

A breach of the implied covenant to reasonably develop and protect lines, does not have the effect to forfeit the lease in whole or in part, nor is it good cause for a court to declare such forfeiture, unless the lease in express terms provides that a breach of such implied covenant shall avoid or forfeit the lease. Koch’s and Balliet’s Appeal, 93 Pa. St., 434; McKnight v. Kreutz, 51 Pa. St., 232; Janes v. Emery Oil Co., 1 Pa. S. C. Reports by Pennypacker, 242; Blair v. Peck, Ib., 247; Paschall v. Passmore, 15 Pa. St., 295.

It is strongly urged, that it is inequitable for the lessee to hold on to his lease and still fail to so operate the premises as to produce reasonable results, and that he should either reasonably operate the premises or get off and permit his lease to be forfeited. The answer is, that while there is an implied covenant to reasonably operate the premises, there is no implied or express covenant to get off and forfeit his lease for a breach of such covenant.

The lease in question provides for a forfeiture for the failure to comply with the conditions, or to pay the cash consideration in the lease mentioned, at the time and in the manner agreed; but the implied covenant, to reasonably operate the premises, is not mentioned in the lease, and is therefore not included in the causes of forfeiture. Some causes of forfeiture being expressly mentioned, none other can be implied. McKnight v. Kreutz, 51 Pa. St., 232.

The remedy for a breach of the implied covenant to reasonably operate the premises, is therefore not by way of a forfeiture of the lease in whole or in part, but must be sought in a proper action for a breach of such covenant. Blair v. Peck, 1 Pennypacker, 247.

As to the rule of damages in such cases, see Bradford Oil Company v. Blair, 113 Pa. St., 83.

Judgment affirmed.  