No. 80CA0823.

637 P.2d 398 (1981)

E. B. O'HARA, Plaintiff-Appellant, v. Donald G. COLTRIN, Patricia Roberts Walker and Peter C. Bowes, as Trustees of the Spool Trusts; Creek Cattle Co., a Texas Corporation; Globe-News Publishing Company, Inc., a corporation; Adolph Coors Company, a Colorado corporation; David F. Lawrence and Thomas G. Vessels, also known as Tom Vessels, Defendants-Appellees, and Beaver Mesa Exploration Co., a Nevada Corporation; Lucy K. Veet and James M. O'Kean, as Trustees and Continental Illinois National Bank and Trust Company of Chicago; W. R. Grace & Co., a Connecticut Corporation; W. C. McBride, Inc., a Delaware Corporation; Mountain Production Corporation, a California non-profit corporation; Panhandle Eastern Pipe Line Co., a Delaware Corporation; and Teal Petroleum Company, a Delaware corporation; and all unknown parties who may claim an interest in the subject matter of this suit, Defendants.

Colorado Court of Appeals, Div. II.

Rehearing Denied July 9, 1981.

Certiorari Denied November 16, 1981.

Attorney(s) appearing for the Case

Maurice T. Reidy, Denver, William E. Shade, Greeley, for plaintiff-appellant.

Holland & Hart, Dennis M. Jackson, Thomas E. Gebow, Robert E. Benson, Denver, Houtchens, Houtchens & Daniel, Barnard Houtchens, Greeley, for defendants-appellees Donald G. Coltrin, Patricia Roberts Walker and Peter C. Bowes, as trustees of The Spool Trusts, Creek Cattle Co. and Globe-News Pub. Co., Inc.

Charles A. Redpath, Jr., Denver, for defendants-appellees Adolph Coors Co., David F. Lawrence and Thomas G. Vessels, also known as Tom Vessels.

PIERCE, Judge.

Plaintiff appeals a judgment granting defendant's motion for summary judgment on plaintiff's first and second claims for relief. We affirm.

On July 1, 1971, plaintiff, E. B. O'Hara, acquired the lessor's interest in an oil and gas lease initially executed on January 4, 1965. This original lease, under which the parties claim their respective interests, will be referred to hereafter as the "Bedinger lease." Defendants, trustees of the Spool Trusts (Spool), are successor lessees to portions of the lands covered by the Bedinger lease.


O'Hara's first claim is based upon the habendum clause of the lease, which provides that the lease shall extend for a primary term of 10 years from January 4, 1965, and so long thereafter as oil, gas, or other mineral is produced from the leased lands. The lease further provides that it will expire as of the fourth day of January of each year of the primary term, unless drilling has commenced or unless the lessee mails or delivers a yearly delay rental of $6,617.18.

It is undisputed that the delay rental payment for the second year of the lease, 1967, was not timely paid, but was at least two days late. The payment was accepted by the lessors, O'Hara's predecessors, and distributed among themselves. Delay rental payments for all other years were timely paid under the lease through 1971, and in July of that year, O'Hara purchased the mineral fee. The trial court found that O'Hara thereafter accepted delay rental payments through 1974, and applied them to his own benefit. In 1975, he learned of the untimely 1967 payment and brought this action to terminate lessee's interest in the Bedinger lease.

The trial court ruled that the lease had not terminated as a matter of law, basing its decision upon the theories of estoppel, offer and acceptance, and ratification.

We affirm the result reached by the trial court. However, it was unnecessary to go beyond the doctrine of estoppel in reaching this conclusion. O'Hara relies on dictum in Kugel v. Young, 132 Colo. 529, 291 P.2d 695 (1955), which appears to reject the application of any equitable defenses to an "unless" oil and gas lease. However, under the facts and circumstances peculiar to that case, it was unnecessary to resort to equitable considerations and reasoning. In Kugel, the lessees mistakenly computed the actual acreage involved under their lease and tendered timely payments for acreage less than that covered by the lease. In tendering payment, the lessees specifically described the acreage intended and included the correct sum to cover only that acreage. The lessors took the money and distributed it among themselves; by doing so, the court ruled, they accepted the lessees' offer to continue the lease on an area less than the whole covered by the original lease. The lease was held to have terminated as to that portion of the land for which no payment of rentals was tendered. The facts of Kugel are therefore distinguishable from the circumstances surrounding the late delay rental payments under the Bedinger lease.

The improper 1967 payment under the Bedinger lease was not rejected shortly after its acceptance, but was accepted by O'Hara's predecessors with the intent that the lease continue. Subsequent delay rentals were tendered to and accepted by O'Hara and his predecessors in title for seven years. The lessees and their predecessors in interest continued to make timely payments and developed the leased lands in reliance upon the continuation of the lease.

As a general rule, an "unless" lease creates an estate upon limitation, which is subject to termination upon non-compliance with its requirements for extension. Hill v. Stanolind Oil & Gas Co., 119 Colo. 477, 205 P.2d 643 (1949). However, O'Hara is estopped to claim that the lease is terminated. In Kugel v. Young, supra, the Supreme Court stated:

"We are aware of no instance where the lessor kept the money and later by offering to return it succeeded in having the lease declared judicially cancelled."

By accepting delay rental payments through 1974, and applying them to his own benefit, O'Hara induced the lessees to rely upon the continuation of the lease. See Fitzwater v. Norcross, 95 Colo. 527, 37 P.2d 522 (1934). He is also bound by the actions of his predecessor lessors in accepting the late 1967 delay rental payment, and can be in no better position than his predecessors in title. Indian Creek Coal Mining Co. v. Home Savings & Merchants Bank, 80 Colo. 96, 249 P. 499 (1926).


O'Hara's second claim for relief asserts that the lease expired for lack of production. Paragraph 2 of the Bedinger lease states as follows:

"Subject to the other provisions herein contained, this lease shall be for a term of 10 years from this date (`primary term') and as long thereafter as oil, gas or other mineral is produced from this land hereinabove described."

O'Hara contends that no production sufficient to extend the primary term had been carried out and that the lease expired 10 years after it was executed on January 4, 1965. The trial court found that the Bedinger lease conveyed oil, gas and mineral leasehold interests in the following described properties, among others: The NE1/4, SE1/4, § 33, T. 3 N., R. 62 W.; and the W1/2 and SW1/4, SE1/4, § 8, T. 2 N., R. 62 W.

During the primary term of the Bedinger lease, Spool transferred its leasehold interests in the following lands to Beaver Mesa Exploration Company (Beaver Mesa): The NE1/4, SE1/4, § 33, T. 3 N., R. 62 W.; and the W1/2, § 8, T. 2 N., R. 62 W.

Thereafter, Beaver Mesa pooled lands located outside the leased premises with the section 33 and section 8 lands covered by the lease in order to form production units. Production was commenced by Beaver Mesa upon the following pooled property during the primary term of the lease:

1) The Vernon-Preston Well No. 14-8, located in the SW1/4, SW1/4, § 8, T. 2 N., R. 62 W., producing oil but shut-in as a producing gas well. The well was completed October 27, 1974, and is producing oil, but is shut-in as a producing gas well. 2) The Premier Corporation Well No. 44-33, located in the SE1/4, SE1/4, § 33, T. 3 N., R. 62 W. This well was completed June 22, 1974.

Shut-in gas royalties of $6,617.28 were tendered to but refused by O'Hara on January 3, 1975. The trial court granted defendants' motion for summary judgment on O'Hara's second claim, and ruled that production by Beaver Mesa on pooled property is sufficient to extend the Bedinger lease.

O'Hara first argues that the lease terminated at the end of its primary term for lack of production on lands covered by the lease. We disagree.

He asserts that the wells drilled by Beaver Mesa failed to extend the lease term because they are located on land not covered by the lease and are located on property improperly pooled in disregard of the express provisions of the lease. Paragraphs 6 and 7 of the Bedinger lease grant to lessee the right to pool land covered by the lease with other lands to create production units. Under paragraph 7 of the lease, a well located on lands pooled with the leased land but not located on the leased lands operates to extend the lease. See also Clovis v. Pacific Northwest Pipeline Corp., 140 Colo. 552, 345 P.2d 729 (1959).

Both the Vernon-Preston well and the Premier Corporation well are located on lands pooled with lands covered by the Bedinger lease. O'Hara argues that the lands on which these two wells are located were improperly pooled. Again, we disagree. He asserts that the agreements between Spool and Beaver Mesa are subleases rather than assignments and that, as a sublessee, Beaver-Mesa was not authorized to exercise the option to pool independent of action by the lessee, Spool.

Under the terms of the Bedinger lease, Spool itself was authorized to obtain the pooling agreement and commence production in the manner undertaken by Beaver Mesa. Although the lease is silent as to a lessee's authority to sublease, it provides that either party may assign its interests "in whole or in part". Paragraph 12 of the lease also states:

"Whether or not this lease be owned by one party or by two or more different parties, production under the terms of this lease, or drilling or re-working operations on any portion of the land above-described, shall keep this lease in effect upon all the land herein leased."

Spool, therefore, was authorized to transfer its interests under the Bedinger lease, including its right to pool. The characterization of Beaver Mesa as sublessee or assignee is irrelevant to our determination of the effect of wells drilled by Beaver Mesa on lands pooled by Beaver Mesa with lands covered by the Bedinger lease.

The distinction between a sublease and an assignment in the context of an oil and gas lease has never been adopted in Colorado, and has been criticized as inappropriate to the law of oil and gas. See Page v. Fees-Krey, Inc., Colo., 617 P.2d 1188 at 1195 fn. 13 (1980). See H. Williams & C. Meyers, Oil & Gas Law § 414 (1972).

O'Hara also argues that Beaver Mesa was not authorized by Spool to execute the declarations of pooling which were recorded as to section 33 and section 8. The Spool-Beaver Mesa agreement permitted limited pooling by Beaver Mesa and the record confirms the findings of the trial court that Beaver Mesa complied with those limitations. Beaver Mesa acted within the authority granted to it by Spool, and it was not necessary for Spool to ratify the acts undertaken by Beaver Mesa.

Finally, O'Hara contends that the Bedinger lease makes no provision for the payment of shut-in royalties, and therefore the lease cannot be extended by shut-in gas royalty payments. We disagree. The shut-in clause of the Bedinger lease, paragraph 11, although speaking in terms of the "leased premises," when combined with paragraph 7 of the lease, which describes the manner in which pooling is to be carried out, provides for the payment of shut-in gas royalties on pooled wells, regardless of their location. Therefore, the terms of the Bedinger lease were satisfied by the tender of full shut-in royalty payments on January 3, 1975.

O'Hara's other contentions of error are without merit.

The judgment is affirmed.

KELLY and TURSI, JJ., concur.


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