LEASE MAINTENANCE AND TITLE ISSUES ACROSS THE SHALE BASINS: THE BAKKEN FORMATION
| Jurisdiction | United States |
(May 2014)
LEASE MAINTENANCE AND TITLE ISSUES ACROSS THE SHALE BASINS: THE BAKKEN FORMATION
Partner
Crowley Fleck PLLP
Bismarck, North Dakota
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BLAINE T. JOHNSON is a partner with Crowley Fleck PLLP in Bismarck, North Dakota. He practices in the firm's Energy, Environment and Natural Resources Department and concentrates his practice on oil and gas title examination. He also maintains a substantial probate and estate planning practice as well as title curative practice. He received his law degree from the University of Minnesota Law School in 2003, and was name a Rising Star by Minnesota Law and Politics in 2010. Mr. Johnson is a member of the Rocky Mountain Mineral Law Foundation, American Association of Petroleum Landmen, Landman's Association of North Dakota, State Bar Association of North Dakota (Real Property and Probate Section), Minnesota State Bar Association, and the American Bar Association (Real Property, Trust and Estate Law Section).
"Get your facts first, and then you can distort them as much as you please"1
INTRODUCTION
With the leasing and exploration phase in the Williston Basin making the cumbersome transition from adolescence to maturity, and eyes set on obtaining one million barrels a day in production, leasehold maintenance has taken on a dramatic new importance.
While a title examiner may opine on the status of oil and gas ownership and can state affirmatively that a particular lease is of record, the title opinion often comes with the all too familiar comment and requirement:
We have assumed that these leases have been extended beyond their primary terms. Whether a lease has been extended beyond its primary term, however, is a question of fact that cannot be determined from the materials examined. You must assure yourself that these leases have in fact been extended beyond their primary term.
Whether it is to verify production, payment of delay rentals, or continuous drilling operations the continuing validity of a lease is largely fact dependent. While the body of North Dakota law on this particular issue is relatively still undeveloped, this chapter will analyze the current framework of law and provide practical guidance on ensuring the continuing validity of oil and gas leases in the Williston Basin.
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HABENDUM CLAUSE
The habendum clause of a lease defines the extent of the ownership in the real property interest conferred and often immediately follows the granting clause.2 This clause delineates the duration of the lease; dividing it between the primary and secondary terms.3
The habendum clause must be read carefully to determine the requirements of the secondary term. Following are various examples of habendum clauses found in oil and gas leases:
It is agreed that this lease shall remain in force for a term of Five (5) years from this date and as long thereafter as oil or gas of whatsoever nature or kind is produced from said leased premises or on acreage pooled therewith, or drilling operations are continued as hereinafter provided.
"...for a primary term of five years and as long thereafter as oil and/or gas may be produced in commercial quantities."
This Lease shall remain in full force and effect for a term of _______________ years and as long thereafter as oil, gas, casinghead gas, casinghead gasoline or any of the products covered by this Lease is, or can be produced.
Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of Three (3) years, hereinafter called "primary term", and as long thereafter as operations, as hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.
The specific language of the habendum clause can create consternation between lessors and lessees as each word is interpreted by the parties in a way most favorable to one's position. It, however, sets the framework for the obligations of the lessee to maintain the oil and gas lease. The habendum clause will vary from lease to lease: dictating what substances are required to be produced, to what extent production must be obtained, and when production has yet to be obtained what other actions may be taken to save the lease from termination.4
MAINTAINING THE LEASE DURING THE PRIMARY TERM
PAYMENT OF RENTALS
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Most contemporary oil and gas lease forms contain requirements for maintaining the lease in effect during the primary term.5 These clauses typically provide that the lease will terminate unless certain conditions are met. North Dakota has adopted the position that an "unless" clause in an oil and gas lease, providing that the lease shall terminate one year from the date thereof unless the lessee shall, within that time, commence drilling operations or pay delay rentals, states a common law or special limitation upon which the interest of the lessee terminates immediately, ipso facto, without any notice or demand on the part of the lessor.6
In Schank v. North American Royalties, Inc., the Shanks and E. F. Rakowski, lessors of two oil and gas leases, brought an action against North American Royalties, Inc., as lessee, claiming the leases had terminated for failure to pay delay rentals or drill a well.7 The leases were obtained on May 28, 1969, and became effective July 1, 1969 and July 2, 1969, respectively, and covered the SE1/4 of Section 15 and other lands.8 The leases contained the usual "unless" clause:
If no well be commenced on said land on or before July 1, 1970 [and July 2, 1970] this lease shall terminate as to both parties, unless the lessee on or before that date shall pay delay rental which shall operate as a rental and cover the privilege of deferring the commencement of a well for twelve months from said date. In like manner and upon like payments or tenders the commencement of a well may be further deferred for like periods of the same number of months successively.
On May 18, 1970, Cardinal Petroleum, who owned leasehold interests from other undivided mineral interests in the same land, commenced drilling operations on the leased lands.9 The well was completed on June 8, 1970. On June 18, 1970, Cardinal made application to the industrial commission for a pooling order pooling all interests in the S1/2 of Section 15. The industrial commission denied the application and instead pooled all interests in the E1/2 of Section 15 and required all interested parties to participate in the proportionate share of the costs of drilling, completing and producing the well.10 The trial court determined that North American was not obligated to pay delay rentals to the lessors because under the pooling order it was required to reimburse the costs of the well to Cardinal Petroleum. On appeal, the Supreme Court ruled that the leases had terminated because North American Royalties, Inc. failed to pay delay rentals and
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did not participate in the drilling of the well according to the terms of said leases.11 Until such interests were effectively pooled the responsibility under the leases to drill a well was that of the lessee and that North American's "passive acquiescence" in the drilling a well by a cotenant lessee of other fractional interests in the land was insufficient.12 Had the interest been pooled prior to July 1, 1970, the lease would have been saved.
Courts typically strictly construe the "unless" clause to require payment of delay rentals within the time period specified by the lease and in the correct amount.13 Equitable rules against forfeiture are generally not applicable in determining whether or not the lease is terminated.14 In Norman Jessen & Associates, Inc. v. Amoco Production Company, the North Dakota Supreme Court addressed the question of whether equitable remedies were available under certain circumstances for failure to properly pay delay rentals. In that case, Amoco obtained, by way of assignment from its broker, oil and gas leases covering all of Section 17. Each lease contained an "unless" clause stating as follows:
If no well be commenced on said land on or before the 14th day of September, 1973, this lease shall terminate as to both parties, unless the lessee on or before that date shall pay or tender to the lessor...15
The six lessors had obtained their interests by virtue of a final decree of distribution of the Estate of John O'Brien. However, prior to execution of the oil and gas leases, two of the heirs conveyed their interests to the remaining four, so that while all six heirs of John O'Brien executed leases, only four of them actually held title to the oil and gas interests. Amoco paid delay rentals in the amount of $106.67 to each of the six without taking into account the conveyance from two of the heirs. The delay rentals were accepted without objection until 1979, after the four mineral owners had executed top leases to Norman Jessen & Associates. Upon learning of the error, Amoco attempted to deposit $160.00 into each of the lessor's accounts for the year 1979. These payments were returned by the lessors who then requested that Amoco release the oil and gas lease for insufficient payment of delay rentals.16
Jessen, as top lessee, commenced an action to quiet title to the leasehold interests on the property in its favor and was successful on summary judgment. Amoco argued on appeal that the
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doctrines of estoppel and mutual mistake were applicable to an oil and gas lease containing an "unless" clause.
The North Dakota Supreme Court reasoned that the doctrine of estoppel may be applicable where the lessee has acted in good faith on the belief that its lease was valid in all respects. The court acknowledged that Amoco had consistently paid the delay rentals on time and to the proper parties; that the dispute was only as to the proper amount. The court also took into consideration...
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