
    RIGHTS OF LESSORS UNDER UNDER UNDEVELOPED OIL AND GAS LEASES.
    Common Pleas Court of Wayne County.
    Maurice J. Landers, et al. vs. Ohio Oil Company.
    Decided, December, 1921.
    
      Forfeiture of Oil Lease Containing Provision for Delay Rentals— Drilling of a Dry Hole — "Without Effect on Relation of Lessor and Lessee.
    
    The drilling of a '‘dry hole” does not alter rhe relation Between a land owner and the holder of an oil and gas lease of the character involved in the present case, and failure of the lessee to make further explorations entitles the lessor to forfeiture of the lease within a reasonable time after his refusal to accept iurther delay rentals.
    
      E. R. Smith and A. D. Mete for plaintiffs.
    
      Weggandt & Ross for defendant.
   Starn, J.

On the 20th day of March, 1911, the plaintiffs executed and delivered to the East Ohio Gas Company, an oil and gas lease, of which the following, exclusive of the signatures and acknowledgment, is a copy:

“Oil And Gas Lease
“Wayne County.
“IN CONSIDERATION of One Dollar, the receipt of which is hereby acknowledged, we, Ellen Landers, Ella Landers, Maggie Fitzgerald and Maurice Landers, first parties, hereby grant unto The East Ohio Gas Company, second party, its successors and assigns, all the oil and gas in and under the following described premises, together with the right to enter thereon at all times for the purpose of drilling and operating for oil, gas or water, and to erect and maintain all buildings and transportation of oil, gas or water taken from said premises. Excepting and reserving, however, to first parties the one eighth (%) part °f all oil produced and saved from said premises, to be delivered in the pipe line witb which second party may connect their wells, namely: All that certain lot of land.situated in the township of Wooster, County of Wayne, in the State of Ohio, bounded and described as follows: Section No. 11,
Township No......... Range No......... bounded on the north by lands of Wepler, Iiurst and M. Landers; bounded on the east by lands of Ross Koontz, Charles Fetzer and William Sligh, Bounded on the west by lands of Wepler and Delano English, containing 127 acres, more or less.
“To have and to hold the above premises on the following conditions: If gas only i's found second party agrees
to pay Two Hundred ($200.00) Dollars each year, in advance, for the product of each well while the same is being used off the premises.
“Whenever first parties shall request it, second party shall bury all oil and 'gas lines, and pay all damages done to growing crops by reason of burying and removing said pipe line's; .and second party agrees not to drill within 500 feet of buildings or in orchard, exeep t by consent of first parties. In case no well is completed within three months from this date, then this grant shall become null and void unless second party shall pay to said first party thirty one and seventy five one hundreth dollars in advance for each three months thereafter such completion is delayed.
“First parties shall be entitled to enough gas free of cost to heat domestic stove in the residence on said premises so long as second party shall use the gas off premises under this contract, but shall lay and maintain the service pipes at his own expense, and use said gas at hfe own risk, and according to the rules and regulations of the Company.
‘ ‘ The second party shall have the right to use sufficient gas, oil or water, to run all necessary machinery for operating said wells and also may at any time remove all their property and reconvey the premises hereby granted, and thereupon this instrument shall be null and void.
“First parties reserves the right to drill for gas for their own use on the premises.
“All payments under this grant may be deposited to credit of first parties for Ellen Landers, Wooster, Ohio, % Wayne County Natibnal Bank.
“It is understood between the parties to this agreement that all conditions between the parties hereunto shall extend to their heirs, executors and assigns.”

On the 20th day of January 1912, the East Ohio Gas Company sold and assigned said lease to the Ohio Oil Company, defendant herein.

On October 23rd, 1920, the plaintiffs commenced an action in this court against the defendant, seeking a cancellation of said lease.

By their amended petition which was filed February 12, 1921, the plaintiffs, after some formal statements, allege that they are and were at the time and ever since the execution of said lease have been the owners of the land which is described in the petition; allege the execution of the lease, a copy of which is attached and made a part of the petition; that said lease was on January 20, 1912, assigned to the defendant; that the East Ohio Gas Company did not drill or attempt to drill for oil or gas, but it paid the delay rentals provided in said lease until it sold it to the defendant.

The amended petition further states:

“That said defendant, The Ohio Oil Company, never drilled or attempted to drill a well for gas or oil upon said premises, but simply delayed doing so until about the month of March, 1919, when said defendant did erect a derrick and drill for nil or gas upon said premises and abandoned and plugged up said well so drilled upon the claim that it was not productive of either oil or gas and utterly abandoned said well so drilled sometime in June 1919.
“Plaintiffs further say that since drilling of said well by defendant, said defendant has made aro attempt to drill for oil or gas upon said premises, although requested to do so by the plaintiffs several times. That said premises is iaa a productive oil field of Wayare county, and that many wells have beear drilled, and have been for a long time oil producing wells adjacent to and on adjoining farms of said premises of the plaintiffs. That said defeaidaait company, have not only drilled, but are operating and have producing oil wells on the lands just adjoining and south of the plaintiffs premises and east of plaintiffs premises, and that defendant’s oil wells are so near and adjacent to the premises of the plaintiffs that said oil wells operate to drain the oil from the premises of the plaintiffs, and that no well by defendant has been completed within three months from said date of June, 1919, and that said defendant has not commenced to drill any well upon said premises since June 1919, and therefore, no well beguai since said date, and a reasonable time has elapsed.”

The petition further alleges in substances, that the defendant is arbitrarily and intentionally delaying the completion or drilling of a well for oil or gas and arbitrarily and in violation of the spirit and plain intent and purpose of the provisions and covenants of said lease, holding the same without drilling, and depriving the plaintiffs of the use and the means and opportunity of leasing said premises to others. They pray judgment for the possession of said premises and the cancellation of said lease, and for all proper relief.

To'this amended petition a general demurrer is interposed.

Counsel for plaintiffs contended in oral argument that after the drilling of the well in June, 1919, which proved to be a “dry hole,” the defendant was oblidged to promptly continue further explorations and drill an additional well within three months thereafter, and that its failure to do so terminated the lease.

To support this claim, counsel cited, Aye vs. Philadelphia Co. 44 Atl. 555; Henne vs. So. Penn. Oil Co. 43 S. E. 147.

These authorities do not support counsel’s contention. The facts are materially different. In the Aye case, the condition of the lease was that the leasee should drill a test well within the vicinity within six months and, if oil was found, to then complete a well on the leased premises within the next six months or pay a yearly rental per acre for delay. The lease was given in 1887. Two dry holes were drilled on farms in the vicinity and operations then ceased without drilling on the leased premises. The suit was begun in 1897. During all those ten years no. further drilling was commenced by the lessee, and no rentals for delay were ever paid.

In the case at bar, the petition states that the last delay rental was paid March 20, 1920, which extended the lease to September 20, 1920. This delay rental was accepted by the plaintiffs.

In the Henne case, under a similar lease, the delay rental was paid until a well was drilled, which was a dry hole. The lease 'contained a provision that the completion of a well should be and operate as a full liquidation of all rental during the remainder of the term of the lease. The drilling of a dry well, the court held, was a compliance with the terms of the lease and payment of delay rentals thereafter was not necessary to prevent forfeiture. The court further held that the lessee was entitled to a reasonable túne to return a.nd make further developments.

‘! If a lessee drill a well which turns out to be a nonproductive one, that does not necessarily terminate his lease; for he may within a reasonable time, either make additional exploration, or pay commutation or land rental money for delay, if the lease provided for said payment.” Thornton On Oil And Gas, Section 813.

In the case at bar, the lease provided for delay rental and thite rental was paid. See also: Stahl vs. Van Vlick 53 O. S. 136.

Therefore the drilling of this “dry hole” did not alter the rights of the parties under the lease, but left them just as they would have been had no well at all been drilled.

The important question raised by this demurrer is whether or not the defendant can without further drilling continue the lease in force indefinitely by paying the delay rentals, no time being mentioned in the lease during which it shall continue in force. Is the lease perpetual at the option of the lessee? Or can the lessors by notice and refusal to accept further payment of delay rentals require the lessee to either drill or forfeit the lease?

The demurrér admits the truth of all of the material allegations of the petition.

The rights and remedies, of the parties must be determined by these admitted facts and the terms and conditions of the lease in question.

In the case of Brown et al., vs. Fowler, et al., 65 O. S., 507, the habendum clause in the lease was, “to have and to hold the same.....for a term of two years and as long thereafter as oil or gas is found in paying quantities,” and no oil or gas having been found within said two years, the court held the lease terminated absolutely at the end of two years, and that the right to drill ceased at the end of that time.

In that ease, the lease contained a provision that ‘ ‘ In case no well shall be drilled on said premises within 12 months from the date hereof, this lease shall become null and void, unless the lessee shall pay for the further delay at the rate of one dollar per acre, at or before the end- of each year thereafter until a well shall be drilled.”

Notwithstanding this provision, the lease terminated at the end of two years, and the lessee could not continue it in force beyond the two years by the payment of delay rentals.

To the same effect is the case of Gas Co. vs. Tiffin et al., 59 O. S. 420, except in that case the term was for five years instead of two. The seond paragraph of the syllabue is as follows;

“Such a lease or license granted for a specified term of years and as much longer as oil or gas is produced or'found in paying quantities on the. land, expires at the end of the specified term, unless within that time oil or gas is obtained from the land in the designated quantities.”

See also Court’s Opinion, bottom page 442 and 443.

The difference between the leases in these two eases and the lease in question here is that no time is mentioned in either the granting or habendum clauses in this lease.

It is a well settled proposition of law that the primary purpose. of a lease of this kind is to develop production. Morrison Oil & Gas Rights, page 82: Vendocia Oil & Gas Co. vs. Robinson, 71 O. S. 302; Lowther Oil Co. vs. Guffey, 43 S. E; Court’s Opinion, page 102; Consumers Gas Trust Co. vs. Littler, 70 N. E. 363.

There are many other cases to the same effect.

In an oil and gas lease which reserves to the lessor substantial .royalties in kind and in money of the oil produced and the gas used off the premises, the promise of these royalties is the controlling inducement to the securing of the lease.

Now, the primary purpose of a lease being the development of production, and the controlling inducement to the granting of the premises being the promise of the royalties, it necessarily follows that the intention of the parties was that the drilling for oil or gas should be commenced at some time, notwithstanding that no time is mentioned in the lease, either in the granting or habendum clauses, and the lease can not be extended indefinite'ly by the payment of delay rentals against the wiishes of the lessor.

Where no time is mentioned for the performance of a contract, a reasonable time is all that is allowed. This proposition is well settled and needs no citation of authorities. What is a reasonable length of time depends upon the circumstances of each case.

In this case, the lease was executed in March, 1911, and this action was commenced on October 23, 1920. The premises leased are in a productive oil field1 of this county, and- many wells have been drilled and have been for a long time oil producing wells adjacent to and on adjoining farms of these premises. The defendant itself has drilled and is operating producing oil wells on lands adjoinitag and south and east of the plaintiffs’ lands. These wells are so near and adjacent to the plaintiffs’ . premises that they drain the oil from the lands of the plaintiffs, according to the allegations of the petition. In the fall of 1919, through their attorney, they demanded in writing, the drilling of a well or the cancellation of the lease. Thereafter, on March 20, 1920, the plaintiffs accepted delay rental for another six months. By so doing they waived or postponed their right to require drilling until September 20, 1920, but on June 10, 1920, plaintiffs again in writing notified the defendant that they would not accept further delay rentals, and that defendant should either commence drilling or cancel and surrender the lease.

Under such circumstances, more than a reasonable time has elapsed since the execution of the lease and until the time of the bringing of this action — nearly ten1 years. The plaintiffs were therefore justified in refusing to accept further delay rentals, and in demanding drilling or a surrender of the lease. Notice to this effect was given to the defendant, but the defendant neither cancelled and surrendered the lease, nor commenced drilling, and by its conduct in response to the notice informed the plaintiffs that it intended to hold the lease by a continued payment of rentals, and did not intend to commence drilling.

By its conduct the defendant has worked a breach of its contract. What is the remedy of the plaintiffs % Are they required to seek damage for such breach or are they entitled to have the lease cancelled ?

In the case of Consumers Gas Co. vs. Littler) 70 N. E. 363, a similar lease was interpreted by the court. In that ease as in this, no time was fixed for the performance of the contract. The court- held:

“By a written contract the first party agreed to sell all the oil, and gas underlying’ his land to the second party..... no timo being fixed for the beginning of operations, nor for the completion of well, and no express provision being made that a well should ever be drilled ; but it was agreed that a sum should be paid annually by the second party until oil or gas was found, or until in the judgment of the second party, they could not be found. If they were found, the first party was to receive a share. Held-. That there was an implied engagement ,by the second party to explore for oil and gas, which, if not performed in a reasonable time, entitled the first party to a forfeiture.”

The court in that ease, further held that the acceptance of delay rentals was a waiver of performance for one year, and where such performance was waived, that the lessor could not at the end of the year declare a forfeiture without having first given notice of his intention to do so, but that the lessee was entitled to a reasonable time after the expiration of that period to perform the contract by drilling a well, and because such notice and reasonable time was not given, the relief was not granted to the lessor. However, the court holds that the lessor would be entitled to a forfeiture of the lease upon notice and within a reasonable time after the expiration of the delay period. A similar lease was under consideration in the ease of Carper vs. United Fuel Gas Co., 89 S. E. 12. The third paragraph of the syllabus is as follows:

“But there is an implied condition that in the event of such drainage or imminent danger thereof, the lessee will, upon the demand of the lessor, drill a well on the leased premises for such purpose,, within the last period for which the delay rental has been or shall be accepted, or commence one within said period and diligently prosecute the work on it, accompanied by notice of intention to refuse to receive, further payments of rentals, and declare a forfeiture of the lease for failure to drill the same.”

This is a. very instructive ease, and deserves careful consideration. In that case the court held that the lessor having accepted delay rentals, could not thereafter bring an action for damages against the lessee for failing to drill wells to protect the lines, for the simple reason that the lessor had accepted payment and thereby waived performance of the contract during that period, and he therefore could not be inconsistent and complain because the lessee did not do that which he expressly waived by the acceptance of money for delay in the performance of the contract. But the court holds that if the lessor does not desire to permit further delay in the drilling of wells, either for the purpose of production or protection of lines, that it is his duty to notify the lessee that he will not accept further delay rentals and will require the lessee to drill or surrender the lease. Upon such notice the court holds that it is the duty of the lessee to drill wells in accordance with the notice, during the period for which the delay rentals have extended the time. That on failure of the lessee to drill during that time, the lessor then, at the end of the period, has a right to declare a forfeiture of the lease.

The courts of Kentucky in construing a similar lease, have held to the same effect in the case of Ocala Oil Co. vs. Hughes et al., 219 S. W. 799. The first paragraph of the syllabus is:

“An oil lease reserving only nominal rent pending the drilling of a well, can npt be cancelled for lessee’s failure to develop the property until after lessors have refused to accept the rent and demanded that lessee proceed with development.”

The fourth paragraph of the syllabus is as follows:

“After lessor demands that the lessee proceed to drill for oil under the lease, lessee has a reasonable time to comply. with the demand before the lease can be cancelled.”

On page 800 of the Court’s Opinion, it is stated:

“However, in order for the lessor to avail himself of the right to insist upon a forfeiture, he must not only refuse to accept the rentals, but he must make a demand on the lessee to develop "the premises and if the latter fails to do so within a reasonable time thereafter, the lease will in some instances be forfeited, and in others a forfeiture will be decreed by the court having jurisdiction over the subject matter. Under the doctrine referred to, there could be no doubt of -the correctness of the judgment appealed from, if the testimony showed the conditions authorizing an application of the doctrine. But we are convinced that the testimony wholly fails to establish such conditions. ’ ’

Under this case, which was decided in 1920, it is clear that the court holds the law to be that upon such conditions as are set forth in the ease at bar, the lessor would be entitled to a forfeiture.

Our own Supreme Court has in effect, held the same as the courts of Indiana, West Virginia and Kentucky in the cases above cited, in Vendocia Oil & Gas Co. v. Robinson, 70 O. S. 302. In that case the court held .that under such a lease, there is an implied engagement by the lessee to develop the premises for oil and gas. It further holds that the time within which this engagement must be performed is postponed by acceptance of the sum specified in the lease, and that the time does not commence to run until the end of the period for which payment is accepted, and the lease does not become null and void at the end of such period upon refusal of the grantor to accept payment for a longer period, but in effect it is held that the lease would become null and voi'd within a reasonable time after the expiration of such period on notice and refusal of the lessee to perform the engagement.

On page 316 of the Court’s Opinion, in commenting on the Indiana case, supra, the court says that, "At the expiration of such period the relation of the parties then stood with respect to the lessor’s right of forfeiture, precisely as they were at the moment the contract was executed. ’ ’

The court then further says:

‘1 This gives effect to the agreement according to the intention of the parties. In case of default after demand, the lease by its express terms is at an end. By accepting the rental stipulated, performance of the implied engagement to develop the premises was waived, to the end of each year for which it was accepted, and by refusing to accept the rent tendered on March 2, 1903, the lessor refused longer to waive performance.”

By reason of the lessor at that time refusing longer to waive performance, it 'became the duty of the lessee to within a reasonable time, enter upon the.premises and commence -drilling. In the case just referred to, that is what the lessee did. When the lessor on March 2, 1903, refused to accept further delay rentals, the lessee immediately entered into possession and commenced drilling, and the court held that it had the right to do so, because upon refusal to accept further delay rentals, it was the duty and it had a right to within a reasonable time, perform its engagement; otherwise, the lease by its express terms would be at an end.

In the ease at bar, on the 10th day of June, 1920, the plaintiffs notified the defendant that they would not accept further delay rentals and demanded of the defendant that it either commence drilling or cancel and surrender the lease. This was notice to the defendant that it would be obliged to commence drilling during that delay period or at least within a reasonable time after the expiration, or the lease by its express terms would be at an end. The defendant did not. drill during that period, neither did it commence drilling after the expiration of the period and until the commencement of this action on the 23rd day of October, 1920, and by its conduct showed that it did not intend to commence drilling.

Under the authorities just referred to, the lease, therefore, by its express terms, was at an end, and the plaintiffs are entitled to have it cancelled on the records providing upon a hearing of the case the allegations of the petition are sustained by the evidence.

Por a further discussion of the rights of the parties under such a lease, reference is made to the case of Brewster vs. Lanyon Zinc Co., 140 Federal Reporter, 801.

Many authorities were cited by counsel, some of which have application to the question involved in this case, but many of them do not. It is claimed by counsel for defendant that i'f plaintiffs have any right of action at all, that their action must be one of damages for breach of the contract, and not by way of forfeiture, and for this contention rely principally on the ease of Harris vs. Ohio Oil Company, 57 O. S. 118.

The court in that case holds that the remedy for a breach of an implied contract is not by way of forfeiture in whole or in part, but should be for damages for breach of the contract. That case was for a breach of an implied covenant to fully develop and protect the lines after producing wells, had been drilled, and not like the case at bar, where no producing wells at all had been drilled,

In the case at bar, the rights of the parties are determined by the conditions of the contract itself, which conditions are expressed in the contract and determine the rights of the parties before any producing wells are drilled, and not by implied conditions which arose after the drilling of producing wells.

The forfeiture in the case at bar is not on such implied covenant, but by reason of the express terms of the contract itself, as stated in Venedocia Oil Co. vs. Robinson, supra.

The facts in the case, of Kachelmacher v. Laird., 92 O. S., 324, are very materially different from the facts in the case at bar, and the cases above referred to. Tn the Kachelmacher case, the court in its opinion on page 333 says:

“The facts disclosed by the record, and appearing in the finding of facts of the court of appeals, indicate the reasons which probably moved the parties to agree upon the terms of this lease. That territory was what is called ‘wildcat’ territory, being then undeveloped. The premises of the< lessors consisted of less than an acre, while one well drains oil from fifteen to twenty acres. It must be concluded that the parties did not contemplate that more than one well should be drilled upon these premises, and, hence, the contract in reference to the drilling of this one well covers the whole subject matter comprehended by this lease. The customary rental ib that territory, at the time this lease was executed, was from twenty five cents to one dollar an acre a year. It is fair to assume- that the extraordinarily high rental stipulated, $50. a year, was agreed upon by the parties in lieu of an express covenant to drill and a clause requiring forfeiture for failure to do so, and that the lessors considered they would be amply remunerated by payment of the agreed rental.”

In that case the action was commenced within less than one year from the giving of the lease, and about half a year after the payment of the annual delay rental, whereas in the case at bar, the lease was given about ten years prior to the commencement of the action.

In the Kachelmacher case, the customary delay rental in that vicinity was from 25 cents to $1.00 per acre, but there the lease provided. for the payment of about 60 times the customary rental. The territory leased was 8 tenths of an acre. Not more than 5 per cent of the oil or gas produced from the well on this lot would come from the land of the lessor. This extraordinary high delay rental, the Supreme Court holds was agreed to by the parties in lieu of an express covenant to drill. From these facts it must be assumed that in that ease the primary purpose of the giving of the lease was not necessarily the drilling of a well, like the case at bar and the other cases referred to. For these reasons, to wit: That the facts are so materially different from the case at bar and the other cases referred to, and the resultant difference in the purpose of the giving of the lease, the court was obliged to hold as it did in that ease.

The court has given careful consideration to this question and read and studied many authorities, and while some authorities seem to hold contrary to this opinion, yet a careful study of such cases will show that facts in those cases were different from the facts related here, and therefore required a different conclusion.

The court feels satisfied that if the evidence sustains the claims made by the plaintiffs, that they are entitled to the cancellation of this lease.

The demurrer 'will therefore be overruled, to which the defendant may have its exceptions.  