From Casetext: Smarter Legal Research

Blausey v. Stein

Supreme Court of Ohio
Feb 20, 1980
61 Ohio St. 2d 264 (Ohio 1980)


holding that requiring lessor to execute division order prior to receipt of royalties did not impose such a burden that it could be considered attempted modification of lease

Summary of this case from Wilhelm v. Jay-Bee Prod. Co.


No. 79-471

Decided February 20, 1980.

Leases — Oil and gas — Construction of habendum clause — Refusal to execute division order — Effect on agreement.

1. In determining whether an oil or gas well is producing in paying quantities for purposes of carrying out the provisions of an oil or gas lease, it is not necessary to include the value of an individual lessee's own labor as an operating expense.

2. Requiring an oil or gas lessor to execute a division order prior to receiving royalties is not such a burden that it can be considered an attempted modification of the lease, in the absence of express provisions in the lease to the contrary.

APPEAL from the Court of Appeals for Ottawa County.

Plaintiff-appellant, Leona Blausey, is the record owner of 80 acres of land in Ottawa County. Since 1934, the land has been subject to an oil and gas lease which is now held by defendant-appellee, Richard H. Stein, as lessee. The lease, executed by the predecessors in interest of the parties herein, provided that it would continue for a term of "five years, or as long thereafter as oil or gas is found in paying quantities * * *."

There has been no production of gas from the premises; however, there is one well located on this parcel, which intermittently produces oil. Evidence presented at trial tended to establish the following: In 1971, 4,050 gallons of oil were sold for $241; in 1972 and 1973, oil was periodically pumped from the well, but none was sold; in 1974, no oil was produced, ostensibly due to a damaged pipeline; in 1975, appellee resumed operations, and sold 3,707 gallons for $889.68; and, in 1976, 4,148 gallons were sold for $1,089.60.

Appellant received royalty payments for oil sales occurring in 1971; thereafter, however, she refused to sign the division orders upon which her royalty payments were contingent. In March 1976, appellant notified appellee of her intention to declare the lease forfeited. Another notice was delivered on June 2, 1976. Appellee did not reply to the county recorder, and on July 7, 1976, appellant filed an affidavit of forfeiture with the recorder. Finally, on December 28, 1976, appellant brought this action to quiet title, basically seeking a return of possession of her land, extinguishment of all claims of appellee, and damages. Appellee counterclaimed for damages for slander of title.

The trial court rendered judgment for appellant, finding that the lease had expired of its own terms because the well no longer produced oil in "paying quantities." That court also dismissed appellee's counterclaim. On appeal, the Court of Appeals reversed, holding that the lower court had improperly calculated the operating expenses of the well. However, the appellate court affirmed the dismissal of appellee's counterclaim.

The cause is now before this court pursuant to allowance of a motion to certify the record.

Messrs. Kline and Corogin, and Mr. Dale A. Kline, for appellant.

Mr. Jonathan B. Cherry, for appellee.

The primary term of the lease under consideration expired in 1939. The resolution of this appeal turns upon the meaning of the phrase "found in paying quantities" contained in the habendum clause.

In Murdock-West Co. v. Logan (1904), 69 Ohio St. 514, 520, this court held that the mere existence of oil which is capable of being produced is insufficient to support an extension of the leasehold under this type of lease, unless that oil has, in fact, been produced. The record indicates that appellee extracted oil in the period from 1971 through 1976. We must determine whether this oil was produced in "paying quantities."

The term "paying quantities," when used in the habendum clause of an oil and gas lease, has been construed by the weight of authority to mean "quantities of oil or gas sufficient to yield a profit, even small, to the lessee over operating expenses, even though the drilling costs, or equipping costs, are not recovered, and even though the undertaking as a whole may thus result in a loss." Annotation, 43 A.L.R. 3d 8, 25. In this cause, the well operated by appellee has been only marginally productive, and the determination of whether it produces in paying quantities hinges upon whether the value of appellee's own labor must be treated as an operating expense.

The trial court determined that appellee sustained a net operating loss during the six-year period for which evidence was introduced. In reaching this conclusion, the court found that appellee's gross receipts of $2,220.28 were exceeded by his operating costs, which the court calculated as $3,741.04, including the sum of $2,887.50 as the value attributed to appellee's labor. On appeal to the Court of Appeals, neither party contested the base period utilized by the trial court; rather, the dispute centered upon whether the value of appellee's labor should be included as a component of operating costs. The Court of Appeals held that it should not. We agree.

Appellee performs all the labor necessary to produce oil from the leasehold. He has made no direct expenditures from gross receipts for labor. The fact that a lessee can keep operating costs at a minimum should inure to his benefit in a determination of whether a well produces in paying quantities. See Weisant v. Follett (1922), 17 Ohio App. 371.

Because an oil and gas lessee bears the risk of nonproduction in a lease of this kind, we believe that appellee should be allowed to attempt to recoup his initial investment for as long as he continues to derive any financial benefit from production. It is clear that appellee derives a small income from the sale of the oil he produces. We hold that this well is producing in paying quantities. The trial court erred in including the value of appellee's labor in its computation of operating expenses.

Appellant argues, however, that the trial court's termination of the lease is sustainable on a separate ground. She claims that the lease contains an implied covenant to operate the well as would an ordinarily prudent businessman, and that by failing to sell oil for a period of nearly four years, appellee has breached the covenant and forfeited the lease. Without passing upon the validity of this contention, we note that it was not raised in the courts below. The issue is not, therefore, properly before us. Republic Steel Corp. v. Bd. of Revision (1963), 175 Ohio St. 179.

Appellant argues further that she has an unqualified right under the lease to receive royalty payments, and that she is not required to sign division orders as a condition of payment. She contends that the imposition of such a condition is an attempted modification of the lease agreement. This claim is without merit.

A division order is a direction and authorization to the purchaser of oil to distribute the purchase price in a specified manner. Its purpose is to assure that the purchaser pays only those parties who are entitled to payment. See 4 Williams, Oil and Gas Law, Section 701. By signing the division order, the lessor is simply verifying that he has a right to royalty payments.

The record indicates that appellant has refused to sign a division order for the oil sold by appellee in 1975. Because of her refusal, the purchaser has not tendered payment for accrued royalties. The trial court found the requirement that appellant execute a division order to be an attempted modification of the lease, and ordered appellee to account for accrued royalties. The Court of Appeals reversed. We hold that the requirement that appellant execute a division order prior to receiving her royalty payments does not contravene any specific provision of the lease, and is not such a burden that it can be considered an attempted modification of the agreement.

Because we have determined that the lease remains in full effect, we need not address appellant's arguments regarding removal of the well casing and other equipment from her land. She has no right to removal of this equipment at the present time.

For the foregoing reasons, we affirm the judgment of the Court of Appeals.

Judgment affirmed.


Summaries of

Blausey v. Stein

Supreme Court of Ohio
Feb 20, 1980
61 Ohio St. 2d 264 (Ohio 1980)

holding that requiring lessor to execute division order prior to receipt of royalties did not impose such a burden that it could be considered attempted modification of lease

Summary of this case from Wilhelm v. Jay-Bee Prod. Co.

finding that issues not raised before the trial court cannot be raised for the first time on appeal

Summary of this case from State v. Wade

In Blausey, the owner of land subject to an oil and gas lease refused to sign a division order on the grounds that the lease did not require her to do so.

Summary of this case from Profit Energy Co. v. Gulfport Energy Corp.

In Blausey the court held in the syllabus that (1) labor of a lessee is not to be valued in determining whether production is in paying quantities, and (2) requiring a lessor to execute a division order is not a modification of the lease.

Summary of this case from Wagner v. Smith
Case details for

Blausey v. Stein

Case Details


Court:Supreme Court of Ohio

Date published: Feb 20, 1980


61 Ohio St. 2d 264 (Ohio 1980)
400 N.E.2d 409

Citing Cases

Paulus v. Beck Energy Corp.

The Ohio Supreme Court has adopted the standard definition of paying quantities: "quantities of oil or gas…

Talbott v. Condevco, Inc.

{¶38} The Ohio Supreme Court uses a mathematical formula to define paying quantities as those "quantities of…