Oil and Gas Leases: Termination Royalty and Royalty Interests: Advance Royalty Clause

摘要

In 2003, Hoosier Energy's predecessor entered into an oil and gas lease with the predecessors of the present lessee that provided for a three-month "option period" to lease and then allowing the lease to be extended by the payment of "advanced royalties" within 36 months of the exercise of the option. There is also a notice-and-demand clause in the lease requiring the lessor to demand payment prior to termination of the lease, In 2008, the predecessors and Hoosier Energy entered into a lease amendment creating a new primary term of five years starting from January 3,2004 and allowing the lease to be extended by production or the payment of advance royalties. The lease further provides that advance royalties may not extend the lease beyond ten years from the commencement date. On January 27, 2012, an advance-royalty check is tendered but Hoosier Energy returns the check and argues that the lease had automatically terminated because no advance royalty payment had been tendered prior to January 3,2012. The trial court granted Hoosier Energy's motion for summary judgment. Held: affirmed. The interpretation of an oil and gas lease is governed by the same rules as the interpretation of contracts including the application of various canons of construction including the four corners and plain meaning canons. The court treats the advance royalty provision as if it was the equivalent of a delay-rental clause. It then notes that there are two kinds of delay-rental clauses, the "unless" clause and the "or" clause. The "unless" clause involves a lease that will automatically terminate while an "or" clause is merely a promise to make such payments. The court finds that the plain meaning of the advance-royalty clause is that if the payments are not made then the lease would not continue. The court rejects the lessee's assertion that the notice-and-demand clause makes the payment obligation a contractual provision and not a limitation that leads to automatic termination.