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Lessor entitled to judgment that oil and gas lease expired

April 30, 2014

Partial summary judgment for the lessor was affirmed Wednesday by the Indiana Court of Appeals in a contract dispute involving an oil and gas lease of land in Sullivan County.

Owners of the land entered into the agreement with Maverick Energy Inc.’s predecessors as lessee. The original lease contained a Demand Clause and Advance Royalties Clause. Under the lease, Maverick had the option to either renew the lease each year by timely paying advance royalties or allow the lease to expire – considered an “unless” clause.

Maverick did not pay advance royalties for 2012 by the Jan. 3, 2012, deadline. Hoosier Energy informed Maverick in February that the lease had terminated because those royalties were not timely paid. Both sides sought judicial review of Maverick’s plans to begin drilling on the property. The trial court granted Hoosier Energy’s motion for partial summary judgment.

“Unless” clauses provide a lease will terminate automatically after the expiration of a specified term unless the lessee either drills or pays advance royalties by a prescribed date. But Maverick argued the Advance Royalties Clause in its contract is not a standard “unless” clause because it does not contain the words “terminate” or “unless.”

“Here, it is clear that the parties intended for the lease to continue year-to-year upon timely payment of advance royalties. The only reasonable interpretation of the Advance Royalties Clause is that if advance royalties were not timely paid, the lease would not continue, i.e., it would terminate,” Judge Ezra Friedlander wrote.

Maverick also argued that the Demand Clause required the lessor to issue a demand prior to terminating the lease for failure to timely pay advance royalties. But the language in the Demand Clause contemplates the existence of separate termination provisions set forth in the lease and unambiguously states that it does not supersede them, Friedlander pointed out.

“We conclude that the lease clearly and unambiguously provided that if Maverick had not begun paying production or shut-in gas royalties by the end of the initial term, the lease would continue year-to-year upon the timely payment of advance royalties. Because Maverick failed to timely pay advance royalties, the lease expired by its own terms and without the need for Hoosier Energy to issue a demand,” the court held in L.C. Neely Drilling, Inc. and Maverick Energy, Inc. v. Hoosier Energy Rural Electrical Cooperative, Inc., 49A02-1305-MI-457.  

 

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