502 Rippy Interests, LLC v. Nash

Monday, February 1st, 2016

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

    

Rippy Interests, LLC v. Nash held that operations commenced prior to the expiration of the primary term were sufficient to propel the lease past the expiration of the primary term and that continuing those operations after receipt of notice of lease repudiation by lessor did not waive lessee’s right to later cease operations for lease repudiation. The parties aligned as Lessor and Lessee under a lease for oil and gas (“Base Lease”) which provided:

2. Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term,” and as long thereafter as operations, as hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.

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6. Whenever used in this lease the word “operations” shall mean operations for and any of the following drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in search for or in an endeavor to obtain production of oil, gas, sulphur or other minerals, excavating a mine, production of oil, gas, sulphur or other mineral, whether or not in paying quantities.

Lessor granted a “Top Lease.” Prior to the expiration of the primary term, Lessee under the Base Lease obtained a drilling permit and a surface-damage release, hired a drilling contractor and solicited a bid for a drilling rig, hired contractors to prepare the well site, began construction of a 2.88-acre well site and a 2.92-acre road to the well with heavy moving equipment, and installed the conductor pipe. The primary term expired on January 18, 2011. On January 18, 2011, Lessor placed a lock on the access gate to the Lessee’s road and well site. Lessor stated that the lock was placed on the gate because Lessor did not know whether Lessee or Top Lessee had legal title to the mineral estate. Lessee’s contractors removed the lock and continued working. The following day Lessor called the police and complained that the contractors were trespassing. The police considered the issue a civil matter and made no arrests. On January 24, 2011, Lessee filed its Original Petition asserting that it was conducting operations on the lease, that continuing operations would hold the lease past the primary term, and that Lessor was attempting to obstruct Lessee’s operations. On February 11, 2011, Lessor filed a general denial. On February 25, 2011, Lessee commenced drilling and continued drilling a vertical pilot hole until March 1, 2011, to a depth of 7,900 feet. Lessee evaluated the well, set cement plugs, and planned to bring in a bigger drilling rig to drill a 3,500 foot lateral. As of March 2011, Lessee had spent $849,404.00 on the well. Lessee then stopped all operations. On competing motions for summary judgment, the trial court held that the Lease terminated and that the Top Lease was in effect.

    

The court considered whether Lessee was engaged in “operations for drilling” when the Lease lapsed, whether Lessor gave an “unqualified notice” of repudiation, whether the reliance element of repudiation required Lessee to immediately cease all lease activity upon notice of repudiation, and whether Lessee ceased operations because of the repudiation.

    

Top Lessee and Lessor analogized Lessee’s operations under the Lease to the operator’s operations in Ridge Oil Co. v. Guinn Investments, Inc. In Ridge, the Court held that the lessee’s acquisition of a drilling permit, attempted payment for surface damages, and a single wooden stake driven into the ground was insufficient to perpetuate the lease. This court distinguished Lessee’s actions from the actions of the lessee in Ridge by detailing the operations the Lessee performed and held that the Lease was perpetuated by Lessee’s operations for drilling that it conducted before the primary term’s expiration.

Lessee contended that it had the right to cease operations because Lessor gave Lessee “unqualified notice” of repudiation based on the facts that Lessor locked the access gate, called the police to report the Lessee as trespassing, and stated on several occasions that the Lease was probably expired. The elements of a repudiation defense to lease termination include (1) a subsisting lease, and (2) lessor’s “unqualified notice” that the lease has been forfeited or terminated. Reliance is implicit in the doctrine and is part of the showing that a lessee must make to establish a lessor’s repudiation. Top Lessee contended that there was no reliance in this case because Lessee continued working for several months after the alleged repudiation. “[A] lessee’s continuing operations after an alleged repudiation of the lease is not a waiver of a repudiation defense; it also does not negate as a matter of law the lessee’s reliance on the alleged repudiation.” Because there were conflicting facts on unqualified repudiation, the trial court’s judgment granting Top Lessee’s motion for summary judgment to establish the Top Lease was reversed and remanded. Lessee did not move for summary judgment on its repudiation defense, so the court did not address whether the Lease was extended by repudiation. The conclusion of the court was that the Lease was continued in effect past the expiration of the primary term, Lessee’s conduct in continuing operations after notice did not waive the repudiation defense, the effect of the repudiation defense was remanded, and Top Lessee’s summary judgment that the Top Lease was in effect was reversed.

    

The significance of this case is the holding that a lessee does not lose the right to assert a repudiation defense by continuing to conduct operations after receiving notice of repudiation.