Epperson v. Helbron
225 S.W. 345
Ark.
1920
Check Treatment

Lead Opinion

Hart, J.

(alter stating the facts). Counsel for the plaintiffs contend that no well was completed on the land within one year from the date of the execution of the lease, and that by the terms thereof the $60 rental provided in the surrender clause was payable in advance, and that the lessor had a right to declare the lease void for the nonpayment thereof.

It is the contention of counsel for the defendants that the $60 annual rental was not payable until the end of the second j^ear after the date of the execution of the lease, and that tbe plaintiffs had no right to declare the lease void for the nonpayment of the $60 before the payment therefor became due.

That equity will enforce a forfeiture of a lease giving the exclusive right to explore for minerals upon a tract of land where it would be inequitable to permit the lessee longer to assert such right by reason of his continued default is settled in this State by the case of Mansfield Gas Company v. Alexander, 97 Ark. 167.

The reason for enforcing a forfeiture under such leases is well stated in Brown v. Vandergrift, 80 Penn. 142. In the opinion Chief Justice Agnew said: “The discovery of petroleum led to new forms of leasing land. Its fugitive and wandering existence within the limits of a particular tract was uncertain, and assumed certainty only by actual development founded upon experiment. The surface required was often small compared with the results, when attended with success; while these results, led to great speculation, by means of leases covering the lands of a neighborhood like a flight of locusts. Hence it was found necessary to guard the rights of the landowner as well as public interest,.by numerous covenants, some of the most stringent kind, to prevent their lands from being burdened by unexecuted and profitless leases, incompatible with the right of alienation, and the use of the land. Without these guards, lands would be thatched over with oil leases by subletting, and a farm riddled with holes and bristled with derricks, or operations would be delayed so long as the speculator would find it hopeful or convenient to himself alone. Hence covenants became necessary to regulate the boring of wells, their number and time of succession, the period of commencement and of completion, and many other matters requiring special regulation. Prominent among these was the clause of forfeiture to compel performance and put an end to the lease in case of injurious delay, or a want of success. These leases were not valuable, except by means of development, unlike the ordinary terms for the cultivation of the soil, or for the removal of fixed minerals. A forfeiture for nondevelopment or delay therefore cut off no valuable rights of property, while it was essential for the protection of private and public interest in rela-' tion to the use and alienation of property.”

It is true that, in general, equity abhors a forfeiture, but not when it works equity and protects a landowner from the laches of a lessee under a lease for exploring for oil and gas. The reason is that a small tract of land could be nearly or entirely drained by wells on adjoining lands, and it is common that leases contain covenants for diligent operation and for forfeiture in case of suspension. -

Again, it is said that an oil lease yields nothing to the landowner unless worked, and is an incumbrance on his land, tying his hands against selling or leasing to others. Munroe v. Armstrong, 96 Penn. St. 307.

This brings us to a consideration of a construction of the terms of the lease. In Lawrence v. Mahoney, ante, p. 310, the court had under consideration a lease similar to the one in the case at bar in all essential particulars. In that case the court held valid an oil and gas lease for a term of ten years in consideration of $1 under which the lessee covenanted that, in case a. well was not completed on the premises within one year from the date of the execution of the lease, the lease should become null and void unless the lessee should pay a fixed sum per annum for each additional year; that such completion was delayed; and further covenanted to pay the lessor one-eighth of all the oil produced. This principle was involved in the case of Mansfield Gas Co. v. Alexander, supra, where the court recognized that part of the consideration in such leases is the exploitation of the mineral resources of the land to which the lease relates. Other cases sustaining leases of this character may be found in a case note to Rich v. Donaghey (Okla.), 3 L. R. A. 352, at pp. 381 and 382.

Counsel for the plaintiffs also seek to reverse the decree on the ground that the $60 annual rental after the first year is payable in advance, and that the plaintiffs had a right to forfeit the lease for the nonpayment thereof. In support of their contention, reliance is placed upon the case of Sullivent v. Clear Creek Oil & Gas Co., 138 Ark. 367, in which the court construed a similar lease as giving the lessee the right at the end of the first year to continue the lease to the end of. the ten-year period upon the payment in advance of the fixed annual rental until a well was drilled. That case should not control here because-the question does not appear to have been duly considered by the court at that time. The language was pertinent to the issues involved, but it does not appear that the attention of the court, or the mind of the judge writing the opinion, was directed to a decision of the question involved in the instant case.

It will be observed that the contract in the present case, in consideration of $1, leases the 120 acres of land for ten years for the purpose of enabling the lessee to explore it for gas or oil and iron ore. The lease is conditioned, however, that, in case no well is completed on the premises within one year from the date of the execution of the lease, then the lease shall become null and void unless the lessee shall thereafter pay the lessor at the rate of $60 for each year thereafter such completion is delayed. The full force of'this clause is to give the lessee the option, by making such payment, to continue the lease in force to the end of ten years without completing the first well, or upon failure to make such payment to allow the lease to become null and void if the lessor should declare a forfeiture. Under a lease of this kind the lessee, so long as he pays the rentals in the manner provided, has an option to continue the lease in force to the end of the term. The lessee may also terminate the lease at will by a mere failure to pay the stipulated rent at the time due. The lessor has no right to terminate the lease as long as the lessee complies with its terms, but he may declare a forfeiture if the lessee fails to pay the annual rental when due.

In Dill v. Fraze, 79 N. E. 971, the Supreme Court of Indiana construed a clause in a lease, in all respects similar to the present one, to mean that, in case the lessee failed to complete a well within the time limit first provided and desired to continue the lease under the surrender clause, he must pay the annual rental in advance. The reasoning- of the court is clearly stated in the following language: “There can be no doubt that the principal purpose of the appellant in making said contract was to procure the exploration of his land for oil and gas, to be followed by the development of it, if circumstances warranted. The strong implication of the contract was that this would be done, and it must be construed in the light of this fact. (Citing cases). "While, upon the receipt of the first year’s compensation for delay, the operator would have been entitled to postpone the beginning of operations, yet it does not admit of question that it was within the power of appellant, by appropriate action, to prevent the second party from continuing to hold the right granted in the land, without exploration or development, for the whole of the contract period. The agreement contains an express provision for a forfeiture if a well is not completed within sixty days, unless the second party thereafter pays at the rate of $40 per year for each year such completion is delayed. The unit of payment was $40, and the question arises as to whether such payment was to be made in advance; While the ordinary rule governing rentals is that payment in advance is not required unless so stipulated in the contract, yet, as the endeavor of courts in the enforcement of agreements is to effectuate the intent of the makers, we are of opinion that, in the circumstances of this case, it should be held that it was the purpose of the parties that payment should be made in advance. The situation of appellant must be considered. There was no express agreement on the part of the operator that he would even explore for gas or oil; on the contrary, he had reserved the right, at any time, upon the payment of the nominal consideration of $1, to cancel and annul the contract. He had not agreed that he would pay any sum in the nature of rent. * * * The contract before us distinctly contemplated that a forfeiture should result at the end of sixty days (a well not then being completed), unless the operator paid the consideration for delay. This evidently required him to become an actor if he would save his rights. In such a case the owner has the privilege of declaring the lease forfeited at the end of the time; except as the other party pays the sum stipulated for the delay. The forfeiture must occur, if at all, when the time has elapsed, provided that the owner sees fit to take advantage of it. In these circumstances it would throw the provisions of said contract into hopeless confusion, and would work a great injustice to the owner, to.hold that he must wait a year, without even the assurance that the contract would then be complied with.”

The contrary view is maintained by the Supreme Court of Kansas in Rhodes v. Mound City Gas, Coal and Oil Co., 104 Pac. 851. The opinion in that case cites the cases of Mower v. Sanford, 76 Conn. 504, and Blodgett v. Lanyon Zinc Co., 120 Fed. 893, to support it. All those cases proceed upon the theory that the ordinary rule governing the payment of rentals should apply, and that is that a contract for the payment of money in fixed installments containing no other provision for the time of payment of such installments than that they are to be paid annually is lawfully performed by the payment of a single installment at the end of each year.

We decline to follow the holding of these cases, and adopt that of the Supreme Court of the State of Indiana, believing it to be the better reasoning. What has been said above on the question of equity following the law and enforcing forfeitures in cases of this kind applies with equal force to this question. Leases of this kind are prepared by the lessee, and holding to a lease after ceasing to search for oil or gas is often for the purpose of speculation. When the lessee is not exploring the land for oil or gas, he is out nothing, and it is valuable to him to hold the lease for the purpose of speculation or to await developments of other persons in that vicinity. Hence we think that time is of the essence of the contract. It was contemplated that the lessee should do the affirmative act of paying the annual rental in advance in order to prevent the lease from being declared forfeited by the lessor.

It is claimed, however, that the word “thereafter” indicates that the annual rental was not to be paid in advance. We do not think that word was inserted for any such purpose. It is used twice and seems to have been used only to show that the annual rental was not to be paid during the first year of the lease. It is a matter of common knowledge that such contention has been made in many instances in similar leases. The lessor was within his rights in declaring the forfeiture of the lease for the nonpayment of the annual' rental and the chancery court erred in not so holding. Therefore, the decree will be reversed; and, inasmuch as the case seems to have been fully developed, the chancery court will be directed to enter a decree canceling the lease as prayed for in the plaintiff’s complaint.

Wood, J., dissents.



Rehearing

Hart, J.

(on rehearing). Counsel for appellees insist in their motion on rehearing that the court’s statement of facts with regard to the forfeiture and the rule laid down with regard to it is wrong. The case was tried on an agreed statement of facts, and a re-examination shows that we correctly stated them in onr opinion. It is true that, as insisted by counsel, we stated that on April 19, 1920, B. C. Epperson wrote Helbron a letter in which he declared that the lease was void and informed Helbron that he had leased the land to other parties, when in fact this letter was written and signed by the attorneys of Epperson. Their act, however, was his act.

Again, it is insisted by counsel for appellees that this letter was not received by Helbron until April 22, 1920, and that on April 20, 1920, Helbron wrote Epperson a letter tendering him the rent for the current year. This did not avoid the forfeiture. The forfeiture occurred when the attorneys for Epperson mailed the letter of April 19, 1920, in which the forfeiture was declared. It was not necessary that Helbron should receive the declaration of forfeiture before it became effective. Epperson had the power to declare the forfeiture, and his act in so doing was completed when he mailed the letter. Therefore it did not make any difference that Helbron wrote Epperson a letter tendering the rent before he received Epperson’s letter declaring the forfeiture. Again, it is contended that the force of the opinion in Dill v. Fraze, 79 N. E. 971, is weakened because the Supreme Court of Indiana in that ease impliedly overruled the earlier case of Watson v. Penn, 108 Ind. 21, without mentioning the case. The Supreme Court of Indiana did not overrule the case of Watson v. Penn. That was an ordinary case of tenancy in which no time was stipulated for the payment of the rent, and the court held that the payment could be made at the end of the year. The reason for the holding was that rent is in its nature a return for the enjoyment of the annual profits of the land. As pointed out in the case of Dill v. Fraze, a different rule applies in cases of a lease for the contemplated exploration of the land for gas or oil. The conditions' existing in such cases require a different rule and form an exception to ordinary cases of tenancy where the object of the lease is for the lessee to obtain possession of the land and use it in return for rent paid.

Again counsel contend tliat there should be a difference in developed and undeveloped oil territory in this respect. We can see no reason for this distinction. As pointed out in the opinion, the object of the rule is that the lessee should act in the premises by paying the rent in advance, so that the lessor would know whether or not the lessee intended to extend the term of the lease. If he did not, the lessor would then have an opportunity to lease it to some one else for the purpose of having it explored for oil.

Finally, it is insisted that the use of the word “thereafter” gave the lessee until the end of the year within which to pay the rent. We think the use of this word rather indicates to the contrary. It applies to the first thing which the lessee was required to do, towit: the payment of the rent if he desired to continue the lease for another year.

Therefore, the motion for a rehearing will be denied.