Barclay Petroleum, Inc. v. Bailey
Barclay Petroleum, Inc. v. Bailey
Opinion of the Court
{¶ 1} The trial court granted summary judgment to plaintiff-appellee Barclay Petroleum, Inc. ("Barclay"), in a dispute concerning the validity of a 1985 oil and gas lease (the "lease"). In competing motions for summary judgment, Barclay argued that the lease remained valid and in effect, whereas the defendants-appellants, Matthew and Lora Bailey, Trustees of the Bailey Family Trust Dated 1/12/2007 (the "Baileys"), argued that the lease had been cancelled under its terms and by operation of law because of lack of production. Because we agree with the Baileys that the lease terminated under its own terms and by operation of law, we reverse the judgment of the trial court.
I. Facts
{¶ 2} In October 1984, Darrell and Janet Lucas granted an oil and gas lease to Marjac Energy Company. Marjac assigned its lease rights to Barclay in 1987.
{¶ 3} In July 1985, the Lucas # 1 Well was drilled and completed on the leasehold property. It is undisputed that the Lucas #1 Well continuously produced oil and/or natural gas for commercial sale for a period of twenty years until 2005. However, according to records from the Ohio Department of Natural Resources, after 2005 the Lucas # 1 Well produced no oil or gas for commercial sale during at least six years: 2006, 2008, 2009, 2010, 2011, and 2012.
{¶ 4} In October 1988, the Lucas # 2 Well was drilled and completed on the leasehold property. The Lucas # 2 Well continuously produced oil and/or natural gas for commercial sale for 12 years until 2000. However, again according to records from the Ohio Department of Natural Resources, the well produced no oil or gas for commercial sale after 2000 during at least ten years: 2001, 2002, 2003, 2004, 2005, 2006, 2008, 2010, 2011, and 2012.
{¶ 5} In November 1988, the Lucas # 3 Well was drilled and completed on the leasehold property. The Lucas # 3 Well continuously produced oil and/or natural gas for commercial sale for 12 years until 2000. However, according to records from the Ohio Department of Natural Resources, the well produced no oil or gas for commercial sale after 2000 during at least ten years: 2001, 2002, 2003, 2004, 2005, 2006, 2008, 2010, 2011, and 2012.
{¶ 6} Despite the above-described limited commercial production during the mid and late 2000's, it is undisputed that Barclay continued to operate and maintain the well that produced the household gas during that time period. The Lucases never experienced any prolonged interruption of household gas service, and Barclay promptly remedied any temporary interruption of service. The Lucases were content with the free gas used to heat their house and did nothing to cancel the lease.
{¶ 7} The Lucas # 1, # 2, and # 3 Wells are the only wells on the leasehold property. In 2012, the Lucases split their 70 acres into four separate tracts and sold each tract to Wilcox Land Finance Company, LLC. Wilcox Land Finance Company, LLC then re-sold each tract to four families. Steven and Paula Kaiser bought a tract containing approximately 36 acres; Daniel and Rita Caldwell purchased a tract comprised of 12 acres; Melodye Davis purchased the 5-acre tract containing the Lucases' house; and the Baileys purchased the remaining 17.986 acres. The Lucas # 3 Well is the only well located on the Baileys' property.
{¶ 8} Shortly after the Baileys took possession of their property in November 2012, a dispute arose between the Baileys and Barclay. The Baileys alleged that Barclay had abandoned and neglected to maintain and operate the Lucas Wells. Barclay, meanwhile, alleged that the Baileys interfered with their right to operate and maintain the Lucas # 3 Well. Despite the dispute, the wells produced enough oil to create more than $800 worth of landowner *816royalties in 2013. The Kaisers, Caldwells, and Ms. Davis all cashed royalty checks from the oil sales. Ms. Davis also uses gas from the Lucas Wells to heat her home. The Baileys did not cash any royalty checks from the oil sales.
{¶ 9} Eventually the dispute gave rise to the Barclay complaint filed in this lawsuit on February 12, 2014, which seeks damages and injunctive relief to ensure continued access to the Lucas # 3 Well located on the Baileys' property. On March 18, 2014, the Baileys filed an answer and counterclaims seeking a declaratory judgment quieting title in their favor, and alleging that the lease had expired under its terms due to the failure to produce oil, gas, or casinghead gas and Barclay's failure to otherwise continue operations. The Baileys' counterclaims also include a claim for forfeiture due to breach of various implied duties.
{¶ 10} On April 1, 2015, the Baileys filed a motion for summary judgment, again contending that the lease had expired on its terms by operation of law due to non-production of the wells. On April 17, 2015, Barclay filed a cross-motion for summary judgment claiming that the lease remained valid and in effect. Barclay alleged that the Baileys' interpretation of the lease was incorrect, and that the Lucases, the landowners at the time of the alleged non-production, had expressly approved of Barclay's performance under the lease. Specifically, Barclay alleged that the Lucases had expressly agreed that production of gas for their home on the leasehold property was sufficient to hold the lease-and that the doctrines of modification, waiver, and estoppel barred the Baileys from claiming the lease had terminated.
{¶ 11} On May 10, 2016, the trial court issued its decision and judgment entry on the competing motions for summary judgment. In its decision and judgment entry the trial court determined that the lease remained valid and in effect and awarded Barclay summary judgment. Specifically, the trial court determined that under the terms of the lease Barclay's production of gas for the Lucases domestic use was sufficient to hold the lease. Alternatively, the trial court found that the Lucases' longstanding course of performance had modified the lease. Of note, the trial court stated: "The undisputed facts are that Barclay provided free gas and the Lucases were satisfied with this performance." Thus, the trial court found that: "[T]he agreement was modified so that the provision of the free gas was sufficient performance to have the lease continue in effect." Finally, the trial court found-again in the alternative-that the Lucases had waived their right to challenge the validity of lease by not challenging its validity when non-production first occurred in the early to mid-2000's, and that the Baileys, as the Lucases successors-in-interest, were estopped by the doctrine of waiver from challenging the validity of the lease.
{¶ 12} The Baileys filed a timely notice of appeal from the trial court's May 10, 2016 decision and judgment entry.
II. Assignments of Error
{¶ 13} The Baileys raise four assignments of error for our review.
First Assignment of Error:
The trial court erred as a matter of law when it concluded that the subject oil and gas Lease did not automatically expire on its own terms and by operation of law in the early 2000s when the Lessee failed to continually satisfy the express production requirement contained in the Lease's unambiguous habendum clause which required commercial, non-domestic production of oil and/or natural gas in order for the Lease to remain valid and in effect beyond its primary term.
*817Second Assignment of Error:
The trial court erred as a matter of law when it concluded that the Lease had been modified by the parties' course of performance.
Third Assignment of Error:
The trial court erred as a matter of law when it failed to find that the Lease converted into a tenancy at will upon its automatic expiration by operation of law.
Fourth Assignment of Error:
The trial court erred as a matter of law when it concluded that the Baileys were estopped from having the Lease declared cancelled.
III. Law and Analysis
{¶ 14} Because the Baileys' assigned errors are interrelated, we address them jointly. Essentially, the Baileys argue that the trial court erred by granting Barclay's cross-motion for summary judgment and by denying their competing motion for summary judgment. The Baileys contend that the lease expired under its terms and by operation of law when the wells failed to produce oil or gas for commercial sale in the mid to late 2000's; that upon the automatic termination of the lease a tenancy relationship was formed between Barclay and the landowners; that because the lease had been automatically terminated it was incapable of being modified and that any alleged modification before the termination of the lease was not supported by new consideration or a different course of conduct; and that the doctrines of waiver and estoppel do not apply.
A. Standard of Review
{¶ 15} We review the trial court's decision on a motion for summary judgment de novo. Smith v. McBride ,
{¶ 16} Summary judgment is appropriate only when the following have been established: (1) that there is no genuine issue as to any material fact; (2) that the moving party is entitled to judgment as a matter of law; and (3) that reasonable minds can come to only one conclusion, and that conclusion is adverse to the nonmoving party. Civ.R. 56(C) ; DIRECTV, Inc. v. Levin ,
*818Discover Bank v. Combs , 4th Dist. Pickaway No. 11CA25,
{¶ 17} "In addition, this case involves the interpretation of a written contract, which is a matter of law that we review de novo." Bohlen v. Anadarko E & P Onshore, LLC ,
{¶ 18} More specifically, "[t]he rights and remedies of the parties to an oil or gas lease must be determined by the terms of the written instrument" and "[s]uch leases are contracts, and the terms of the contract with the law applicable to such terms must govern the rights and remedies of the parties." Harris v. Ohio Oil Co.,
B. Expiration of Lease on its Own Terms
{¶ 19} The Baileys first contend that the trial court erred in granting summary judgment in favor of Barclay because the lease terminated by its own terms, i.e. by operation of law. In particular, the Baileys cite the lack of oil and gas production in the mid to late 2000's and early part of this decade, in which the wells only produced gas for domestic use, and assert that the trial court erred in denying their claim that the lease expired by its own terms.
{¶ 20} The lease at issue contains a habendum clause with a primary and secondary term. Under the secondary term of the habendum clause, after the initial one-year term, the lease continues "as long thereafter as oil, gas, or casinghead gas is produced from the leased premises or operations are continued * * *." Meanwhile, Ohio law dictates, "the term 'produced' [when used] in a habendum clause means 'produced in paying quantities [.]' " Morrison v. Petro Evaluation Servs., Inc. , 5th Dist. Morrow No. 2004CA0004,
{¶ 21} "We have consistently recognized that an oil and gas lease containing a habendum clause stating the lease shall remain in force as long as paying quantities are produced expires when there is no oil or gas produced for two years or more[.]" Schultheiss v. Heinrich Ents., Inc. ,
{¶ 22} Here, under the express terms of the lease's habendum clause, the lease only remained valid and in effect after the expiration of the primary term so long as at least one of the Lucas Wells was producing oil or gas in paying quantities or the lessee was conducting operations under the lease; this did not occur. A review of the record demonstrates that Barclay failed to produce and market or sell any oil or natural gas from the entire leasehold property for the following five years: 2006, 2008, 2010, 2011, and 2012. Furthermore, Barclay's contention that its maintenance of the wells-conducted to ensure production of gas for the Lucases domestic use-constitutes "operations" sufficient to hold the lease is also without merit. In construing a similar habendum clause, this Court has concluded that the incidental use of domestic gas by the property owner is insufficient to constitute operations. Pottmeyer at ¶ 44, citing Gardner at ¶ 42.
{¶ 23} Therefore, when Barclay failed to meet the conditions of the secondary term of the habendum clause of the lease because *820there was not production from the wells from 2010-2012, a period greater than two successive years, the lease terminated automatically by its own terms and by operation of law. Furthermore, the continued production of gas during that period to heat the Lucases' home was not sufficient to ensure continuation of the lease. Finally, neither the Baileys nor their predecessors-in-interest were required to take further action to formally terminate the lease.
C. The Lease Was Not Modified Through the Parties' Course of Performance or by Oral Agreement
{¶ 24} Barclay argues, and the trial court found, that the parties' course of performance created a new implied contract that modified the terms of the original lease, pursuant to which the Lucases, the Baileys' predecessors-in-interest, agreed that the production of gas for use in their household was sufficient to hold the lease. In addition, Barclay alleges that the Lucases orally agreed to modify the lease, expressly stating that production of gas for domestic use only was sufficient to hold the lease. We disagree that the lease was modified by the parties' course of performance or by oral agreement.
{¶ 25} "A contract can be modified when there is clear and convincing evidence of the parties' mutual intent to modify the contract through their course of dealing." Third Fed. S. & L. Assn. of Cleveland v. Formanik, 8th Dist. Cuyahoga Nos. 100562 & 100810,
{¶ 26} "[S]ubsequent acts and agreements may modify the terms of a contract, and unless otherwise specified, neither consideration nor a writing is necessary. Oral agreements to modify a prior written agreement are binding if based upon new and separate legal consideration or, even if gratuitous, are so acted upon by the parties that a refusal to enforce the oral modifications would result in fraud to the promisee." Corsaro v. ARC Westlake Village, Inc., 8th Dist. Cuyahoga No. 84858,
{¶ 27} In the case sub judice, there has not been a change in the parties' course of performance, or an oral agreement supported by new or separate legal consideration, to support Barclay's claim that the lease was modified. This is so because under the plain and unambiguous language of the lease, as executed in 1984, the lessee always had the express obligation to provide free domestic gas to the lessor at a single dwelling house. Specifically, the lease provides as follows: "Lessor may lay a line to any gas well on said lands and use gas for light and heat in one dwelling house on said lands, at Lessor's own risk and expense, subject to the reasonable rules and regulations of Lessee and the use and right of abandonment of the well by Lessee." Accordingly, the parties' course of performance in providing and accepting free domestic gas at a single dwelling house does not evidence an intent to modify the lease-these actions are what is required under the express terms of the lease. Likewise, no new consideration existed for the alleged oral modification of the lease. Therefore, Barclay's claim that the lease was modified by the parties' course of performance or by a subsequent oral agreement is without merit.
D. The Doctrines of Estoppel and Waiver Do Not Bar the Baileys' Request that the Court Declare the Lease Expired By Operation of Law and Under the Express Terms of the Lease
{¶ 28} Barclay argues, and the trial court agreed, that the doctrines of estoppel and waiver barred the Baileys from seeking cancellation of the lease. Specifically, Barclay contends that because the Lucases continually accepted the free domestic gas for use in their dwelling, and did not seek to formally terminate the lease for lack of production, the Baileys, as the Lucases' successors-in-interest, are now barred from seeking cancellation. This proposition is without merit.
{¶ 29} First, the Baileys are not seeking cancellation of the lease, but rather *822a declaration that the lease has already automatically terminated under its express terms and by operation of law. This is an important distinction because under Ohio law once an oil and gas lease expires on its terms, the lessor has no duty to cancel the lease by undertaking some affirmative act. See Tisdale , supra , at *4 ("The terminology utilized in the habendum clause ( [e.g.,] 'and as long thereafter as') is generally construed to create a determinable fee interest, such that the lessee's interest automatically terminates upon lessee's failure to satisfy any of the listed provisions would serve to extend the terms of the lease. In such a case, no affirmative action on the part of the lessor is required to formally terminate the lease; it expires on its own terms .") (Emphasis added.); Lekan , supra , at 212,
{¶ 30} Furthermore, this Court recently discussed whether the acceptance of benefits estopped a landowner from asserting a breach of an oil and gas lease and noted that the question "turned on the facts of each case and whether the acceptance of the benefit is inconsistent with the landowner's legal position concerning the lease." Sims v. Anderson ,
E. The Baileys' Neighbors Are Not Necessary Parties
{¶ 31} Finally, Barclay claims that the Baileys have failed to join all the necessary parties to the lawsuit as required under R.C. 2721.12(A) -in particular, the three other families who receive royalties and domestic gas from the original leasehold property.
{¶ 32} R.C. 2721.12(A) states, in relevant part: "[W]hen declaratory relief is sought * * * all persons who have or claim any interest that would be affected by the declaration shall be made parties to the action or proceeding." The absence of an interested party under this section "is a jurisdictional defect which precludes a declaratory judgment." Gareau v. Holiday Lakes Property Owners' Assn., Inc. , 6th Dist. Huron No. H-90-52,
{¶ 33} Barclay contends that should the Baileys obtain the declaratory judgment they seek, their neighbors' royalty rights *823and right to free gas under the lease would extinguish. Thus, Barclay argues that the Baileys' failure to join their neighbors violates R.C. 2721.12(A) and is fatal to their claim. We disagree.
{¶ 34} A decision in the Baileys' favor will not affect their neighbors' current rights or interests. As discussed above, the lease had already expired under its terms and by operation of law by the time the Baileys and their neighbors took possession of the leasehold property in late 2012. Thus, there was never any relationship between Barclay and the neighbors under the lease, and any such relationship that currently exists between Barclay and the neighbors will remain unchanged regardless of the Baileys' declaratory judgment action. See Potts v. Unglaciated Industries, Inc. ,
IV. Conclusion
{¶ 35} Based on the foregoing, we sustain the Baileys' assignments of error, considered jointly, and conclude that the trial court erred in granting summary judgment to Barclay and in denying the Baileys' motion for summary judgment. Accordingly, we reverse the judgment of the trial court and remand the cause to that court to enter judgment in favor of the Baileys.
JUDGMENT REVERSED AND CAUSE REMANDED.
Abele, J: Concurs in Judgment and Opinion.
McFarland, J.: Concurs in Judgment Only.
Barclay in turn assigned away part of those rights in 1989, only to gain them back on March 27, 2013. Despite this partial assignment, Barclay has operated all wells on the leasehold property since its first assignment in 1987.
Reference
- Full Case Name
- BARCLAY PETROLEUM, INC. v. Matthew BAILEY, Trustee of the Bailey Family Trust Dated 1/12/2007
- Cited By
- 11 cases
- Status
- Published