Summary
In Millette v. Phillips Petroleum Co., 1950, 209 Miss. 687, 48 So.2d 344, although the court said that the express offset provision precluded equitable relief so far as an implied duty to drill offset wells was concerned, the court held that the lessee's "equitable duty, existing as well under implication, to conserve the mineral resources of lessors or to refrain from depletory acts survives unimpaired."
Summary of this case from Williams v. Humble Oil Refining CompanyOpinion
No. 37584.
November 6, 1950.
1. Minerals — unless lease — offset wells — contracts.
Under an unless lease which expressly stipulated that in the event a well producing oil or gas in paying quantities should be brought in on adjacent land within 150 feet of and draining leased premises, or acreage pooled therewith, the lessee would drill such offset wells as a prudent operator would drill under the same or similar circumstances, there is no implied obligation on the part of lessee to drill offset wells when no producing well is within 150 feet, even though the wells farther away were draining the leased lands.
2. Minerals — public policy in development of — contracts contrary to.
The public policy of this state with respect to the development of its mineral resources is expressed by statute and parties may not contract contrary to the public policy therein expressed. Sec. 1 Chap. 856 Laws 1948.
3. Minerals — loss of mineral resources, protective against.
Although the obligation to drill offset wells may be controlled by the express stipulations of a lease, yet when that is done there survives unimpaired the implied duty of a mineral lessee to conserve the mineral resources of lessors or to refrain from depletory acts.
4. Minerals — leases — implied covenant against impairments.
There is an implied covenant in a lease of oil property that the lessee will do nothing to impair the value of the lease and reasonable care must be used to protect lessor by some feasible means from damage or loss by the affirmative act of such lessee.
5. Minerals — oil and gas — right of lessor.
Oil is a fugacious product and ordinarily belongs to the producer who captures it upon his own lands, yet when such producer is under an obligation to do nothing to destroy or deplete the lands of his lessor he may not with impunity impair the value of his lessor's property.
6. Minerals — offset wells — express provisions of lease contract.
Although by the express provisions of a lease contract the lessor may be absolved from conservation and development by the method of offset wells, such a provision does not relieve the lessee of liability for substantial drainage by him.
7. Minerals — compensation to lessee for oil drained by lessor — equity — pleading.
A bill of complaint by the lessor against the lessee for compensation for oil drained by lessee from lands leased to it by lessor through the operation of three producing wells on nearby land states a cause for equitable relief.
8. Minerals — unless lease — delay rentals.
The primary purpose of an unless lease and similar leases is an early and profitable development of the mineral resources and payment and receipt of delay rentals under such a lease is not a substitute for royalties but is a consideration for delay in actual development, wherefore the right to delay actual development purchased thereby does not acquit the lessee of such obligations as are read into the lease by mutual understanding, equitable necessity or public policy.
9. Minerals — acceptance of delay rentals — estoppel.
The acceptance of annual delay rentals under an unless lease does not per se estop lessors to claim damages by way of waste caused by provable drainage through the affirmative action of their lessee.
Headnotes as approved by Alexander, J.
APPEAL from the chancery court of Adams County; R.W. CUTRER, Chancellor.
R.L. Netterville, Wm. F. Riley, L.A. Whittington and Berger Callon, for appellants.
In support of the first contention made by the defendants in the court below the defendants urged the case of Lloyd's Estate v. Mullen Tractor and Equipment Company, 192 Miss. 62, 4 So.2d 282, as controlling authority. We respectfully submit to the Court that this case does not hold that the courts will not enforce implied covenants in an oil, gas and mineral lease, and that this such contention is wholly against all the authorities and is not supported by this Court in the above case.
The simple holding of the Court on the question of implied covenants under that perpetual lease was that the provisions of the lease itself provided that no implied covenant regarding the measure of diligence in the drilling of said land during the original five (5) year term shall be read into this lease. Parties, as the Court points out, have a right to contract themselves, and certainly the fact that parties specifically contracted on this particular matter does not fix the law governing implied covenants where the same are not expressly contracted for.
On the question of the violation of expressed covenants, our answer is that the bill of complaint alleged that by reason of wells drilled on adjoining lands to complainants' lands, the oil and gas under complainants' lands was being drained by the defendant from its lands.
The demurrer admitted that, even though the answer denied it.
The fact that it was necessary to deny that required proof to be taken, hence, the demurrer could not be sustained on that ground. It would be folly to argue that one holding a lease on one tract of land immediately adjoining another tract of land on which he holds a lease would have the right to drain the oil and gas from one tract to the other without compensation to the lessor of the tract on which no well is drilled.
On the question of whether or not the payment and acceptance of rental for the period from May, 1949, to May, 1950, provided in the lease, justified sustaining the demurrer, we simply say that it was charged in the bill of complaint that the payment of the rental was induced by the defendant to be accepted by the complainants on false and fraudulent representation. To sustain the demurrer, you would have to admit this allegation of fraud. Certainly complainants are entitled to their day in court to offer and introduce the evidence in support of this allegation.
Moreover, it has been held that the receipt of delay rental does not defeat a cause of action for the specific enforcement of a covenant for protection, or in cases where the drainage is by other wells of the lessee, being the case here presented. Trimble v. Hope National Gas Company, 113 W. Va. 839, S.E. 529, discussed in 40 W. Va., L.Q. 72.
Dr. Maurice H. Merrill, Professor of Law at the University of Oklahoma, in his book on "Covenants Implied in Oil and Gas Leases", 2nd Ed., pages 247 through 252 discusses very thoroughly the result of accepting delay rentals with respect to the waiving of protection of the lessor against drainage by the lessee. We adopt in full what Dr. Merrill states in his book, Secs. 104, et seq., on that and its related subjects.
And we particularly call the Court's attention to Merrill's Covenants Implied in Oil and Gas Leases, supra, to the effect that the acceptance of rental in ignorance of existing drainage, should not deprive the lessor of the right to enforce or have enforced protection against draining the oil and gas from his lands by wells on other lands.
After all, the courts are for the protection of equitable rights, and to see that justice is administered in all cases. Moreover, in this particular case, under the allegations of the bill of complaint it is charged that at the time this rental was accepted, the defendant knew that the wells owned by it on adjoining lands were draining the oil and gas from under complainants' land, and that despite this knowledge, they represented to the complainants that such was not being done on the ground that there was no oil and gas in commercial quantities that could be produced from complainants' land.
Laub, Adams, Forman Truly, for appellees.
The oil, gas and mineral lease here in question is a typical example of what is known as an "unless lease". This is the form of lease that is in current use in the State of Mississippi today, and was in such use at the time of the taking of the lease here in question in the year, 1941, and it is the usual form of lease that obtains in the oil fields of America. This form of lease is made for a definite term and, if operations for drilling have not commenced on the leased premises before an anniversary day as stated in the lease, then the lease terminates "unless" the lessee pays or tenders a stipulated sum. Thus drilling upon the premises may be postponed or delayed by the lessee by the payment or tender of a stated amount in cash, which acts as delay rental. This is the general construction which has been given to this type of lease, and this construction and the conclusion has been followed in Mississippi in the case of Lloyd's Estate, et al. v. Mullen Tractor Equipment Co., 192 Miss. 69, 4 So.2d 282.
The rights of the parties under this contractual obligation were fixed as of the date of the execution of the lease, May 18, 1941. There was an express agreement as to the rights and obligations of the lessor and the lessee. Nothing was left to be implied. The parties themselves had spoken as to this condition, and they had explicitly agreed that by the payment rental annually, the drilling of a well on the leased premises could be delayed for that annual period.
The parties expressly stipulated between themselves and solemnly bound themselves by contract in the lease that the only exception to this delay could be brought about by a situation wherein a producing well might be drilled upon adjoining lands within 150 feet of the boundary lines of the property of appellants, and such well not only must be located within that agreed distance, but same must also be draining the leased premises; thereupon, an obligation would arise whereby the lessee, appellees here, would then have to protect the lease by drilling an offset well on the leased premises, offsetting the well which had been drilled within 150 feet of the leased premises, and draining the leased premises.
None of the wells alleged by the appellants to be draining the leased property were within 150 feet distance of the leased premises. The nearest well was four times the distance which had been agreed upon by lessor, appellants here, and lessee, appellees here, as being the requisite distance for an offending well before any obligation would be imposed upon the appellees to drill an offset well on the leased lands.
This identical point has already been passed upon in the State of Texas, in Hutchins v. Humble Oil Refining Co., 161 S.W.2d 571, decided in March, 1942.
It is without dispute that Mississippi in formulating the rule of property as to the nature of the estate created by oil, gas and mineral leases in Mississippi, based such rule of property squarely on Texas decisions, — namely: Stephens County v. Mid-Kansas Oil Gas Co., 113 Tex. 160, 254 S.W. 290. The Stephens County case was cited with approval by the Mississippi Court in both the Stokeley v. State and the Lloyd's Estate cases, which cases established the rule of property in Mississippi.
The following are illustrative decisions of oil and gas cases in Mississippi, which decisions are based on Texas decisions: Stokeley v. State, 149 Miss. 435, 115 So. 563, based on Stephens County v. Mid-Kansas Oil Gas Co., 113 Tex. 160, 254 S.W. 290; Koenig v. Calcote, et ux., 199 Miss. 435, 25 So.2d 763, citing with approval Hager, et al. v. Stakes, et al., 116 Tex. 453, 294 S.W. 835, and other Texas cases; Cummings, et al. v. Midstates Oil Corporation, et al., 193 Miss. 675, 9 So.2d 648, citing with approval Grissom v. Anderson, 79 S.W.2d 619; and other Texas cases.
Following the reasoning of the Texas Court in the case of Hutchins v. Humble Oil Refining Company, supra, and following the decision of our Supreme Court in the case of Lloyd's Estate v. Mullen Tractor Equipment Co. it can be plainly seen that the complainants in their bill of complaint failed to allege an actionable breach of the express covenants contained in the lease. Ostensibly they so failed because under the terms of the written lease they could not so allege a breach.
The only question that remains is whether or not there was a breach of any implied covenants in the present case.
Lloyd's Estate v. Mullen Tractor Equipment Co., supra, as decided by our Mississippi Supreme Court, covers in principle the case here at bar. The Court there held that where a lease was for a lawful purpose between persons capable of making a valid contract, for a sufficient legal consideration, without fraud or mistake, and is constructed in language clearly expressing the understanding and agreement of the parties, the courts have no other alternative than to uphold and protect the rights and privileges therein granted, and to recognize and enforce the obligations thereby assumed.
The oil and gas lease made an exhibit to the bill of complaint meets all of the requirements as laid down by this Court in the above rule in the Lloyd's Estate v. Mullen Tractor Equipment Co., supra, and the bill of complaint nowhere charged any fraud or insufficient legal consideration in the granting of the lease.
To write into the lease in question an implied covenant, in view of the expressed covenants therein contained, would run contrary to the universal principle of law applicable to contracts generally, and to oil and gas leases in particular; and would run contrary to the specific holding of our court in the above mentioned Lloyd's Estate v. Mullen Tractor Equipment Co., when the Court said: "It is elementary that an express stipulation upon a matter excludes the possibility of an implication upon the same subject, Glassmire Oil Gas Leases and Royalties, 2nd Edition, p. 202, Sec. 55; Merrill, Covenants Implied in Oil and Gas Leases, p. 272, Sec. 115, et seq. And it is expressly stated in the case of Brimmer v. Union Oil Co., 10 Cir., 81 F.2d 437, 440, 105 A.L.R. that: `An express covenant upon a given subject, deliberately entered into without fraud or mutual mistake, excludes the possibility of an implied covenant of a different or contradictory nature,' citing Brewster v. Lanyon Zinc Co., 8 Cir., 140 F. 801; Shell Petroleum Corporation v. Shore, 10 Cir., 72 F.2d 193; Freeport Sulphur Co. v. American Sulphur Royalty Co., 117 Tex. 439, 6 S.W.2d 1039, 60 A.L.R. 890."
Under the chapter on Implied Covenants and Forfeiture, which is Chapter XIII, appearing at page 243, in the second edition of Glassmire's Oil and Gas Leases and Royalties, the author in the pocket part, 1950, at pages 62 and 63 thereof cites Lloyd's Estate v. Mullen Tractor Equipment Co., 192 Miss. 62, 4 So.2d 282, as supporting the principle that an express stipulation in a lease precludes an implication on the same subject; and, likewise, the authority supports the above principle by citing Smith v. Tullos, 195 La. 400, 196 So. 912, as enunciating the rule that an implied covenant can not exist as against contrary agreement, supporting the Smith v. Tullos case by a citation also of Louisiana Gas Lands v. Barrow, 197 La. 275, 1 So.2d 518.
Appellants in reply:
The sole basis for appellees' contention is founded upon the naked principle of law that an express stipulation upon a matter excludes the possibility of an implication upon the same subject. And in so doing counsel for appellees ignored the general principle covering the interpretation of contracts and terms and provisions thereof that is universally recognized by all authorities, that in any contract wherever it becomes necessary to the operation of the contract and the performance thereof, an implied covenant can be read into the contract whether inferable from any particular words or not. As stated in 13 C.J. p. 558, 15 C.J. p. 1214 covenants may be implied from the language of express covenant in order to effectuate their clear intention and give them their full and beneficial operation.
Under the interpretation of the rule against implications contended for by appellees and under the facts and the circumstances in this case, we have the right to conclude that if appellees' contention is upheld by this Court, the appellees, notwithstanding the relation between appellants and appellees of lessor and lessee, and wholly contrary to the intent and purpose and substance of the lease and the obligations arising by reason of the relation of lessor and lessee, could proceed by the wells drilled on the adjacent tracts of land to drain the oil and gas from under appellants' lands and appropriate it to its own use and benefit without compensation or royalty to appellants for the oil and gas so drained from appellants' lands, simply because the wells draining appellants' lands were more than 150 feet from the property line of appellants, and simply because appellants had, by paying delay rentals, the right to defer developing appellants' lands even though the appellee was producing and draining the oil and gas from under the appellants' lands. It is obvious to state this contention is to refute the same as being unsound, immoral and as perpetrating a fraud on appellants and as violating the contract entered into between appellants and appellees by which the appellees were bound to produce the oil and gas under appellants' lands by wells drilled thereon, and to pay to appellants one-eighth of the value of production therefrom.
The payment of delay rentals was not intended by the parties to the contract to give to the appellant the right to produce and drain the oil and gas from under appellants' lands and appropriate it to itself and others, and destroy the property rights of the appellants in the oil and gas under the lands.
To say that the provision that a well would have to be drilled within 150 feet of appellants' property lines, authorized appellee to obtain oil and gas from under appellants' lands by drainage, is to stultify the understanding and knowledge of the physical characteristics of oil and gas, their fugacious character particularly; and would, if enforced, in effect nullify the contract and agreement of lease, as well as destroy the oil and gas of appellants — something that no court of equity, or even court of law, would countenance.
On the contrary, as is universally held where an implication is necessary to carry out the intention of the parties and to accomplish that which the parties agreed between themselves to accomplish and do, the courts will imply any covenant that is necessary whether the courts imply such covenants as covenants in fact, or in law.
A great many authorities hold that such covenants are covenants de facto.
In the leading case of Brewster v. Lanyon Zinc Co., 140 Fed. 801, 72 C.C.A. 213, it is said: "Whatever is necessary to the accomplishment of that which is expressly contracted to be done, is part and parcel of the contract, though not specified. . . . the question is essentially one of intention. . . . a covenant arising by necessary implication is as much a part of the contract — is as effectually one of its terms — as if it had been plainly expressed therein."
Summers, in his work on oil and gas, Vol. II, Secs. 397, 398, 399, refers to covenants as being implied "to accomplish the manifest intention of the parties", and, "to carry out what the parties must have intended". In 40 C.J., at page 1053, it is said that such implied covenants are those only which the courts may read into the lease for the purpose of effectuating the intention of the parties. In Acme Oil and Mining Co. v. Williams, 140 CL Calif. 681, 74 P. 396, it is said that the implied covenant for diligent operation "stands on the same footing as if it was expressly contained therein". It is said by other courts that "implication, when used in that sense, is synonymous with intention". 81 F.2d 437.
That such covenants are part of the lease, embodied therein in order to carry out the evident intention of the contracting parties, seems reasonably well settled. Freeport Sulphur Co. v. American Sulphur Co., 117 Tex. 439; Flewellen v. Sims Oil Co., 134 S.W.2d 687; Texas Pacific Co. v. Stuard Co. (Tex. Civ. App.) 7 S.W.2d 878. And in the case of Indian Territory Illuminating Co. v. Rosamond, 138 A.L.R. 246, it is said: "We conclude that the implied covenant to protect against drainage is a part of the written lease as fully as if it had been contained therein, is implied in fact, and not in law . . . we accordingly hold that plaintiff was entitled to maintain his action."
In Merrill's Covenants Implied in Oil and Gas Leases, 2nd Ed., par. 94, p. 234, and under Note 11, the author says in part: "An absolute duty to offset wells at a certain distance, regardless of the fact of drainage, seems not to exclude the general duty to protect against drainage in fact, from whatever distance. It is merely the establishment of a convenient rule of thumb to measure the minimum protection. The modern authorities tell us that the extent of drainage depends upon factors which vary widely from field to field. See Cloud, Petroleum Production, 37ff., 57ff. (1937)."
We desire, in connection with this case, to call the Court's attention to the statute in Mississippi declaring the public policy of this state touching the production of oil and gas in this state. Sec. 1, Chap. 256, Laws 1948, declares as follows: "It is hereby declared to be in the public interests . . . to safeguard, protect and enforce the co-equal and correlative rights of owners in a common source or pool of oil and gas to the end that each such owner in a common pool or source of supply of oil and gas may obtain his just and equitable share of production therefrom; and to obtain, as soon as practicable, consistent with the prohibition of waste, the full development by progressive drilling of other wells in all producing pools of oil and gas or of all pools which may hereafter be brought into production of such, within the state, until such pool is fully defined."
We submit that in considering any differences of opinions of other courts or of the many courts touching many questions arising under oil, gas and mineral leases, that there is no declaration of public policy by the Legislature whereby certain constructions on the terms and provisions of certain leases might be made against the public interest and to the destruction of property rights of individuals. The law with reference to this is generally stated, that: "Liberty of contract is subject to the limitation that the agreement must not be against public policy." "It is a general rule that agreements against public policy are illegal and void." Am. Jur., Vol. 12, p. 662. "An agreement in contravention of the express public policy of the State is invalid." 30 A.L.R. 1085; 21 A.L.R. 1340. "No statute is necessary to prohibit contracts in businesses which the Courts have declared void as against public policy." 88 Miss. 209, 40 So. 552. "An agreement to be against public policy must have a mischievous tendency and in some way militate against the public welfare and the rights of the public." 22 S.W. 1070; 12 A.L.R. 469. "A contract cannot be said to be contrary to the public policy unless the Legislature has declared it to be so." 68 A.L.R. 1166.
In the instant case to deny that a covenant by implication can be read into or made a part of the lease contract involved herein so as to prevent the appellees from draining the oil and gas under appellants' lands by wells drilled on adjoining tract under lease to the appellees, would deny to appellants an opportunity to recover a fair share of oil and gas in a common pool.
Under the statute it is declared to be the public policy of this state that the coequal and correlative rights of owners in a common pool of oil and gas shall be safeguarded, protected and enforced to the end that each owner in a common pool or source or supply of oil and gas may obtain his just and equitable share of production therefrom.
Therefore, to allow appellees to drain the oil and gas in a common pool under appellants' lands by wells on adjoining lands is declared to be against the public policy of this state and it would be the duty of the courts to enforce that public policy.
Appellants executed on May 18, 1941, a mineral lease containing the following provision: "In the event a well or wells producing oil or gas in paying quantities should be brought in on adjacent land and within one hundred fifty (150) feet of and draining the leased premises, or acreage pooled therewith, lessee agrees to drill such offset wells as a prudent operator would drill under the same or similar circumstances." The lease is what is known as an "unless lease", and provides for a primary term of ten years, and by mesne conveyances was assigned to appellee on August 27, 1945.
In September 1948, appellee, as lessee, drilled a producing oil well on an adjoining tract known as the Artmann tract, which well is about 570 feet from appellant's land. Likewise, producing wells were brought in by appellee on other lands leased by it from others, to wit: on the Oliver Hence tract and the Carter tract, which wells are respectively 1,300 feet and 580 feet from the lands leased to appellee by appellants.
On January 8, 1949, appellants notified appellee that their lands were being drained of oil by production on the adjoining tracts and demanded protection against such depletion. The lessee disclaimed responsibility and refused, in reply to a letter from lessors dated February 25, 1949, to surrender the lease. Delay rentals were accepted by lessors in May 1949.
The foregoing facts were alleged in a bill filed by the lessors September 8, 1949, praying for cancellation of the lease and for damages from the drainage of oil beneath their lands. An amendment added a charge of fraud in the payment of the delay rental in May 1949, at which time, it is alleged, the lessee knew of the fact of such drainage. A duty in the lessee to drill an offset well on the lands in suit was asserted. A demurrer to the bill was filed and sustained, and the complainants having refused to plead further, the bill was dismissed, whence this appeal.
The facts, as for our present purposes admitted by the demurrer, raise the question whether drainage of a lessor's lands by a lessee of an adjoining tract is such a deviation from the requirements of good husbandry as to require of the lessee, common to both tracts, a development of the drained acreage at the risk of liability for a failure so to act.
We first encounter the application of the quoted obligation which requires the drilling of an offset well or wells. The provision is specific and limits such obligation to cases where a producing well or wells have been completed in paying quantities within 150 feet of and are draining appellant's lands.
We need not piece out the extent of lessee's duty in this respect by sheer reasoning. (Hn 1) The subject of offset wells is expressly provided for in the lease, and there are evidences in the lease itself that its contents were examined and substantial corrections made in the printed form. The parties were competent to contract with regard thereto, and there is no room for an interpretation of its unambiguous provisions, much less of its nullification by supposed contrary implications. The producing well closest to appellants' lands is 570 feet. The limitation of such duty on the part of the lessee to such wells as are within 150 feet precludes resort to an implied covenant in respect of a development by the drilling of an offset well on the lands of appellant. Lloyd's Estate v. Mullen Tractor Equipment Co., 192 Miss. 62, 69, 4 So.2d 282; Hutchins v. Humble Oil Refining Co., Tex. Civ. App., 161 S.W.2d 571; Brimmer v. Union Oil Co., 10 Cir., 81 F.2d 437, 105 A.L.R. 454, certiorari denied 298 U.S. 668, 56 S.Ct. 833, 80 L.Ed. 1391: 24 Am. Jur., Gas Oil, Sec. 42; Summers, Oil Gas, Vol. 2, pp. 300, 319; Merrill, The Law Relating to Covenants Implied on Oil Gas Leases, Sec. 27, p. 81; Glassmire, Oil Gas Leases Royalties, (2nd Ed.), Chap. XIII, p. 243; Texas Law Rev., Vol. 11, pp. 399, 435. As to this obligation, the payment of the rentals by the lessee and their acceptance by the lessor preserves the option of the lessee to develop the lands in suit by actual drilling.
We conclude therefore that the bill stated no ground for equitable relief insofar as a duty to drill offset wells is concerned.
We proceed next to a consideration whether there exists a duty in a lessee to protect the interests of his lessor against a depletion of the lessor's lands by the affirmative act of the lessee upon adjacent property.
(Hn 2) The public policy of our State with regard to the development of its mineral resources is expressed in Sec. 1, Chap. 256 of the Laws of 1948: "It is hereby declared to be in the public interests . . . to safeguard, protect and enforce the co-equal and correlative rights of owners in a common source or pool of oil and gas to the end that each such owner in a common pool or source of supply of oil and gas may obtain his just and equitable share of production therefrom; and to obtain, as soon as practicable, consistent with the prohibition of waste, the full development by progressive drilling of other wells in all producing pools of oil and gas or of all pools which may hereafter be brought into production of such, within the state, until such pool is fully defined."
It is elemental that parties may not contract contrary to expressed public policy so that while the express provision regarding the drilling of offset wells may be upheld, there remains a fundamental principle founded as well in equity as in policy that an owner or lessor is entitled to reasonable protection against the loss of mineral resources in his lands. (Hn 3) The express provision here involved absolved the lessee from meeting his duty to the lessor by capturing lessor's oil in situ through wells drilled on lessor's lands. The equitable duty, existing as well under implication, to conserve the mineral resources of lessors or to refrain from depletory act survives unimpaired. Hughes v. Busseyville Oil Gas Co., 180 Ky. 545, 203 S.W. 515, 518.
For the purposes of this appeal, we accept as a fact that the appellee, by the drilling of these producing wells, has been and is now draining the oil from the adjoining lands of appellee. So that there is presented for decision the question whether the implied duty of a mineral lessee to conserve the interests of its lessor extends to protection against, or a duty to compensate for, its own act of drainage.
(Hn 4) There is an implied covenant in a lease of oil property that the lessee will do nothing to impair the value of the lease, and must use reasonable care to protect lessor from damages or loss by the affirmative act of such lessee. This implied obligation has been extended to include, in the absence of express stipulation, a duty to drill offset wells if practicable and profitable. Indian Territory Illuminating Oil Co. v. Haynes Drilling Co., 180 Okla. 419, 69 P.2d 624; Humphreys Oil Company v. Tatum, 5 Cir., 26 F.2d 882; Indian Territory Illuminating Co. v. Rosamond, 190 Okla. 46, 120 P.2d 349, 138 A.L.R. 246; Steele v. American Oil Development Co., 80 W. Va. 206, 92 S.E. 410; Texas Pac. Coal Oil Co. v. Barker, 117 Tex. 418, 6 S.W.2d 1031; Carper v. United Fuel Gas Company, 78 W. Va. 433, 89 S.E. 12, L.R.A. 1917 A, 171; Trimble v. Hope Natural Gas Co., 113 W. Va. 839, 169 S.E. 529; Orr v. Comar Oil Co., 10 Cir., 46 F.2d 59.
We cite these typical cases merely as stepping stones to the conclusion that protection by some feasible means is requisite. Such relief in the instant case may not be had by cancellation of the lease, Summers Oil Gas, Vol. 2, Sec. 397; Glassmire, op. cit., supra, Sec. 65; Freeman v. Magnolia Pet. Company, Tex. Civ. App., 165 S.W.2d 111; 24 Am. Jur., Oil Gas, Sec. 60, p. 565, or by compelling the drilling of offset wells.
(Hn 5) Although oil is a fugacious product and ordinarily belongs to the producer who captures it upon his own lands, yet when such producer is under an obligation to do nothing to destroy or deplete the lands of his lessor, he may not with impunity impair the value of his lessor's property. Such an obligation gains equitable recognition when substantial drainage is caused by the lessee himself. This responsibility is separable from a duty to drill offset wells, and (Hn 6) an express covenant which absolves the lessee from this method of development does not relieve the lessee of liability for substantial drainage by him. R.R. Bush Oil Co. v. Beverly-Lincoln Land Co., 69 Cal.App.2d 246, 158 P.2d 754; Humphreys Oil Co. v. Tatum, supra; Indian Territory Illuminating Oil Co. v. Haynes Drilling Co., supra; Carper v. United Fuel Gas Co., supra; Blair v. Clear Creek Oil Gas Co., 148 Ark. 301, 230 S.W. 286, with extensive annotation in 19 A.L.R. at pages 437, 450; Glassmire, op. cit., supra, Sec. 65, p. 247. The reasoning of these authorities is not here reproduced, but we are content to quote from Geary v. Adams Oil Gas Co., D.C., 31 F. Supp. 830, cited with approval in the R.R. Bush Oil Co. case, supra [ 69 Cal.App.2d 246, 158 P.2d 757] as follows: "Looked at solely from the defendant's point of view, the location of a well in the southeastern part of the lease perhaps would not have been a prudent operation in view of defendant's belief that, though it might pay out, the chances of making a profit were very questionable. If the defendant had no interest in the adjoining leases on the north and south, it would seem that its defense, based on the foregoing facts, might be sound. But here the mind is haunted by the fact that the defendant is the beneficiary of the oil drained from plaintiff's land by the wells on the north and south which belong to the defendant. It has not only been saved the cost of drilling, equipping and operating a protecting well but it gets the oil anyway without plaintiffs being paid for it."
(Hn 7) We hold therefore that the bill states a cause for equitable relief by way of compensation for oil drained by lessee from lands leased to it by appellants. We now examine the extent of such liability.
(Hn 8) The payment and receipt of delay rentals is not a substitute for royalties. It is the consideration for delay in actual development. Steele v. American Oil Development Co., 80 W. Va. 206, 92 S.E. 410; Trimble v. Hope Natural Gas Co., supra.
The primary purpose of this and similar leases is an early and profitable development of the mineral resources. 24 Am. Jur. Oil Gas, Sec. 42; Merrill, op. cit., supra, Secs. 27, 34; Glassmire, op. cit., supra, Sec. 65. Conventionally, this is by drilling, so that such leases constitute both a privilege and a duty to drill. In this form of lease, the lessee retains an option to drill or surrender the lease but is protected against compulsory forfeiture, for failure to develop, by the privilege of extending the period of option by prompt and successive payments of annual rentals. By these he purchases the right to delay actual development, but not an acquittal of such obligations as are read into the lease by mutual understanding, equitable necessity or public policy. The specific provision above quoted exhausts its efficacy and relevancy in releasing the lessee from a duty to explore by drilling. But for this express agreement the right to demand protection may well have had plausible support. See 24 Am. Jur., Gas Oil, Sec. 43.
The purported tender back by the lessor of the rentals paid and accepted in May 1949 brings into view the extent of the obligation of the lessee to protect the lessor against loss by drainage caused by the latter. We need not consider the effect of the receipt of rentals as a waiver of the right to drill offset wells. The close question is whether a receipt of delay rentals constitutes a waiver of all right to demand compensation for damage theretofore caused.
(Hn 9) We are of the opinion that the acceptance of annual delay rentals, being knit to the duty to drill, and the right to delay operations, is apart from, and not relevant to, the duty to protect against drainage as such. Authorities which debate the existence of an estoppel against a demand for actual exploration are not found pertinent even as analogies.
The bill, as amended, alleges a misrepresentation by the lessee as to necessity for, or practical advantage of, drilling an offset well; that the lessee knew, but the lessor did not, of the fact of drainage. Such allegations if proved may import into the case some defenses based upon estoppel. We do not, however, so adjudicate but state only that we do not hold that a lessor may not be estopped by conduct or held, under proper circumstances, bound by some waiver.
What we do hold, however, is that the acceptance of the delay rentals in May 1949 does not per se estop the appellants to claim damage by way of waste caused by provable drainage through the affirmative action of their lessee. By repetition, we emphasize that the option to defer actual drilling by the payment of annual delay rentals affects only the specific right which such rentals are designed to purchase. Acceptance of such rentals is relevant solely to the duty to drill; they are not compensation for waste or depletion. Under this form of lease, the lessor may drill wells or pay rentals, but on the other had he must prevent drainage or pay damages.
We are not of course concerned with the difficulty of satisfactory proof of resultant damage. We go no further than to preserve to the appellants their right to show a clear and substantial damage caused by the direct acts of their present lessee.
The demurrer ought to have been overruled.
Reversed and remanded.