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Lessors acceptance of royalty payments does not waive a claim for forfeiture of an oil and gas lease with a minimum royalty provision

07.07.15 written by

In Sims v. Anderson, the Fourth District Court of Appeals reversed a decision from the Washington County Court of Common Pleas and held an oil and gas lease was forfeited as a result of the lessee’s failure to make the minimum royalty payment. The Fourth District found that neither the lessor’s acceptance of royalty payments after termination of the lease nor the lessor’s delay in seeking forfeiture provided the lessee an affirmative defense to the forfeiture.

The lessors in Sims brought suit alleging the lessee’s failure to comply with a lease provision that required production in paying quantities. The lease at issue specifically defined production in paying quantities as “production sufficient to net the Lessors a minimum of $400 royalty per year.” While the parties disagreed on the measurement of ‘per year,’ with the lessors arguing for calendar year (in which case $280.03 was paid) and the lessee arguing that it was each subsequent anniversary of the expiration of the primary term (in which case $391.45 was paid), under either theory it was undisputed the minimum royalty was not paid in 2012. 

The lessee argued that it was inequitable to grant forfeiture for the failure to pay $8.55 in royalties. The Fourth District disagreed, finding that the lease contained an express forfeiture clause (“the lease shall terminate unless the Lessee is then producing oil or gas or their constituents in paying quantities”), and found undisputed that the lessee breached an express contractual duty, therefore forfeiting the lease as a matter of law. The Court also found the lessee’s argument of substantial compliance unconvincing, finding that the parties’ decision to define paying quantities in the lease indicated the same was essential to the purpose of the contract, and therefore substantial compliance was insufficient to avoid termination of the lease. 

The Court noted, however, that in the absence of a forfeiture clause, the failure to pay royalties generally only gives rise to an action for damages.

Additionally, the lessee argued the lessors should be prevented from seeking forfeiture due to their continued acceptance of royalty payments through March of 2013 after the lessors asserted the lease had terminated. The Court found the appropriate analysis was whether the lessors’ behavior was inconsistent with their legal position and found it was not because the lessors would have been entitled to payment for production of oil or gas in absence of the lease. 

Sims v. Anderson, 4th Dist. Washington No. 14CA31, 2015-Ohio-2727 (Jun. 30, 2015) 

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

If you have any questions concerning this client alert, please contact Attorney Gregory W. Watts at 330-497-0700