Freeman v. Magnolia Petroleum Co.
171 S.W.2d 339, 141 Tex. 274, 1943 Tex. LEXIS 316 (1943)
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Rule of Law:
Where an oil and gas lease's habendum clause provides for extension beyond the primary term via a shut-in royalty payment in lieu of actual production, the payment is a condition of the lease, and failure to make a timely payment before the primary term expires causes the lease to terminate automatically.
Facts:
- On April 7, 1930, the petitioners' predecessor entered into an oil and gas lease with Mager, the respondents' predecessor, for a primary term of ten years.
- The lease provided that it would continue after the primary term as long as oil or gas was 'produced from said land.'
- A shut-in royalty clause specified that a gas well from which gas was not sold or used off-premises would be considered a 'producing well' provided the lessee paid a $50 annual royalty.
- On December 22, 1939, respondents, the assignees of the lease, completed a well that produced gas in large quantities.
- No gas from this well was ever sold or used off the leased premises.
- Respondents did not pay the $50 shut-in royalty on or before the primary term expiration date of April 7, 1940.
- Respondents tendered the $50 payment more than four months after the primary term expired, which petitioners declined.
Procedural Posture:
- Petitioners (lessors) filed suit against respondents (lessees) in trial court seeking to cancel the oil and gas lease.
- Following a jury trial, the trial court rendered judgment for the respondents.
- Petitioners, as appellants, appealed the decision to the Court of Civil Appeals at Amarillo.
- The Court of Civil Appeals affirmed the trial court's judgment in favor of the respondents, who were the appellees.
- Petitioners then brought the case before the Texas Supreme Court for review.
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Issue:
Does a lessee's failure to pay a shut-in gas royalty on or before the expiration of the lease's primary term cause the lease to terminate automatically by its own terms?
Opinions:
Majority - Mr. Judge Brewster
Yes. Failure to pay the shut-in royalty before the expiration of the primary term causes the lease to automatically terminate. The lease explicitly defines what constitutes 'production' to extend the term. The parties agreed in paragraph 3(b) that a non-selling gas well would be 'held to be a producing well' only 'while said royalty is so paid.' This language creates a condition for constructive production. Conversely, if the royalty is not paid, the well is not considered a producing well. Because the royalty was not paid by April 7, 1940, there was no production—actual or constructive—on the date the primary term ended. Therefore, the lease terminated by its own terms, and the late tender of payment could not revive it.
Analysis:
This case firmly establishes that a shut-in royalty payment, when designated in the lease as a substitute for actual production, acts as a condition rather than a covenant. The decision solidifies the legal principle of automatic termination for leases where a condition of the habendum clause is not met by the end of the primary term. This places a strict, non-negotiable deadline on lessees to make such payments, as failure to do so results in the immediate loss of the leasehold estate without any action required from the lessor. It distinguishes the failure to satisfy a durational condition from a breach of covenant, which would not typically result in automatic forfeiture.
