Lease Perpetuated Beyond Primary Term Without Production in Paying Quantities

Co-author David Leonard

If perpetuation of a mineral lease beyond the primary term is contingent upon continuous operations, do traditional notions of “production in paying quantities” always matter? Spoiler: No.

In Thistle Creek Ranch, LLC v. Ironroc Energy Partners, LLC, an appellate court affirmed partial summary judgment in favor of lessee Ironroc Energy Partners under these odd clauses in the Kettler lease.

The habendum clause:

Unless sooner terminated ...  this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term,” and as long thereafter as operations, hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.

The lease defined “operations” as:

“ ... any of the following: drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in search for or in any endeavor to obtain production of oil [or] gas, ...  production of oil [or] gas, ... whether or not in paying quantities.

The oddity, of course, is that the lease could be perpetuated by operations, whether or not there was production in paying quantities.

The court dismissed claims by lessor Thistle Creek Ranch that the lease had terminated pursuant to the habendum clause.

Facts

Gas had been produced with no cessation of operations greater than 90 consecutive days, but production had not been in paying quantities for more than one year. Because production was not in paying quantities Thistle Creek alleged the Kettler lease terminated.

Ironroc moved for partial summary judgment seeking a ruling that the lease was “valid and in full force and effect”.

In affirming the trial court’s ruling that the lease remained in effect, the court of appeals applied general contract construction principles, with a particular emphasis on “the law’s strong public policy favoring freedom of contracts”.

The court commented that a “typical” habendum clause “divides the lease’s duration into a primary term for a fixed period of time and a secondary term that continues after the primary term expires for a for ‘as long thereafter as oil, gas, or other mineral is produced.’” The court emphasized the Kettler lease’s habendum clause was not “typical” because the duration of the lease was not premised upon production, but rather continuous operations.

In response, Thistle Creek cited “well-settled case law interpreting the word produced or production in a mineral-lease habendum clause to mean production in paying quantities.” (citing Clifton v. Koontz), arguing that the lease must have expired since there was no production in paying quantities.  Lessee also argued Lessor had the burdenof showing that there was production in paying quantities in order for the lease to remain in force.

The problem with the lessor’s approach was that the habendum clause said nothing about “production” so as to implicate the usual paying quantities standard.  Instead, perpetuation of the lease was premised upon “operations,” which included operations not in paying quantities. The court therefore concluded the Kettler lease clearly expressed that its term was premised upon continuous operations, regardless of whether production was in paying quantities.  Since gas had been produced under the Kettler lease with no cessation greater than 90 consecutive days, the lease was in force and effect.

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