What Surface Interest Owners Should Know Before Aquiring Oil and Gas Interests-part I
| Publication year | 1993 |
| Pages | 2409 |
1993, November, Pg. 2409. What Surface Interest Owners Should Know Before Aquiring Oil and Gas Interests-Part I
Recently, oil and gas drilling activity has picked up in Colorado, much to the dismay of landowners whose use of the surface is disrupted by this renewed activity. An oil and gas operator(fn1) may use only as much of the surface as is reasonably necessary to conduct drilling and production operations.(fn2) Nevertheless, questions arise in situations where the lessee uses a reasonable amount of surface but does so in a way that interferes with the surface owner's use. For example, a lessee may reasonably require a road to the proposed well but may build the road in a way that fills in the surface owner's irrigation ditches. In such cases, the issue is not how much land is used, but the way in which it is used.
The surface owner who also owns an underlying mineral interest can look to the oil and gas lease to see whether the lessee has, by its drilling operations, breached either the lease terms or any covenants implied therein. However, the surface owner who has no mineral interest has no lease to protect him or her. Because the surface interest is subservient to the mineral interest, the question becomes whether the surface-only owner should acquire a mineral interest so that he or she also can sue on any of the lessee's breaches of the lease.
Part I of this article addresses the express lease terms and breaches thereof that the nonspecialist should look for before advising the aggrieved surface-only owner to buy or not to buy a mineral interest. Part II, to be published in the January 1994 issue, will examine the "implied covenants" inherent in all oil and gas leases, and the breaches thereof which can deprive the lessee of his or her right to drill.
Although the term "lease" is often used to describe the contract between the mineral owner and the lessee, the common law causes of action that ordinary landlords have against ordinary tenants generally do not apply to oil and gas leases. Most jurisdictions hold that.
[g]as and oil leases and contracts are a part by themselves. There is scarcely any comparison between them and the ordinary farm or house lease,. . . [I]n determining the scope and legal effect of an instrument giving rights and privileges to mine or take minerals, oil, or gas, it is immaterial by what name it is called; the court will look to the language used in the instrument. . . to determine its legal effect.(fn3)
These decisions reason that
[i]n a [normal] landlord/tenant situation, . . . the tenant is . . . only concerned with possession, and as long as that is undisturbed, the tenant has no complaint. Further, the tenant in taking a lease undertakes to deliver the premises back intact. . . . [A]n oil and gas lease conveys to the lessee an interest in the land. . . . unlike an ordinary tenant, a mineral lessee is not concerned with possession alone. He does not merely undertake. . . "to preserve the possession of the landlord and re-deliver it." Instead, both parties to the lease intend and hope that the lessee will re-deliver the premises only after the oil, gas, coal, or other minerals have been removed with payment of royalties to the lessor. Thus the lessee is a purchaser as well as an occupant. . . .(fn4) [Emphasis added.]
Colorado adopted this position in Hill v. Stanolind Oil & Gas Co.(fn5) In Hill, the oil and gas lease left blank the number of months for which the "delay rental" (discussed below) would extend the privilege of not drilling on the lease. The lessee, therefore, claimed that it didn't have to pay delay rentals. The court disagreed, stating:
The "rental" provided for in the lease is not rental in the true sense of the word. Rental is compensation for use of land. The term as used here was compensation or penalty for delay in its use and development while lessee was not even in possession of the land.(fn6)
In oil and gas leases, then, rent often serves the opposite function it serves in the world of ordinary landlord-tenant law. Given Hill and the number of cases adopting similar views,(fn7) the Colorado mineral interest owner probably has only those remedies for (1) breaches of the express lease contract provisions and (2) breaches of the covenants implied in all oil and gas leases.
The "habendum" clause states the term of the lease. A typical habendum clause provides that the lease shall remain in full force for a term often years from the date of execution "and as long thereafter as oil or gas or either of them is produced from said land." The tenyear period is known as the primary term; the quoted language is known as the secondary term.
The primary term of an oil and gas lease is usually subject to a second clause, the "delay rental" clause. A typical delay rental clause provides that if the lessee does not commence drilling a well on the lease within a specified time, the lease terminates as to both parties unless the lessee pays the lessor a certain amount of money. For the most part, oil and gas leases are interpreted just like other contracts.(fn8) However, there is an exception. While other contracts require "substantial" performance, most jurisdictions hold that anything short of absolutely perfect payment or tender of delay rentals automatically terminates the lease and that "equitable principles with respect to forfeitures have no application."(fn9) The delay clause is the first place to look for non-compliance by the lessee.
Unfortunately for Colorado lessors, however, courts have been lenient on lessees who fail to pay delay rentals properly. In Kugel v. Young,(fn10) the lessee undercalculated the acreage covered by its lease but correctly paid the delay rentals due on the acreage calculated. The court held that although a lessee's good faith mistake does not excuse failure to comply strictly with the delay rental clause, the lessor's acceptance of an amount less than the full delay rental amounted to an offer by the lessee to continue that portion of the lease covered by the money actually paid and to surrender the portion of the lease not covered by the delay rental tendered.(fn11)
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