095 Hitzelberger v. Samedan Oil Corp.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
In Hitzelberger v. Samedan Oil Corp. 948 S.W.2d 497 (Tex. App. – Waco 1997, writ denied, motion for rehearing pending), the court finds that an oil and gas lease terminated for failure to timely pay royalty under an habendum clause with unusual language. The habendum clause provided:
 
Subject to the other provisions hereof, this lease shall be for a term of Three years from this date (called “Primary Term”) and as long thereafter as oil and gas, or either of them, is produced in paying quantities from said land or lands with which said land is pooled hereunder and the royalties are paid as provided. [emphasis added].
 
The lease was a paid up lease, production was obtained within the primary term, and Samedan failed to timely pay royalties due to a clerical error.
 
It is the general rule in oil and gas law that failure to make proper and timely royalty payments will not by itself allow the lessor to terminate the lease. This is based on the general concept that the royalty clause is a covenant. In Hitzelberger, the obligation to timely pay royalty was included as a part of the habendum clause.
 
Breach of a condition results in automatic termination of the leasehold estate upon the happening of the stipulated event. Breach of a covenant does not automatically terminate the estate, but instead subjects the breaching party to liability for monetary damages, or in extraordinary circumstances, the remedy of a conditional decree of cancellation.
 
To save its lease, Samedan argued that the requirement to timely pay royalty was a covenant. The court concluded that the lease was unambiguous and that the clear and precise language imposed a condition. Its conclusion was not based on the alleged primacy of the habendum clause as a canon of construction, but upon determining the intention of the parties from the entire lease. Although the court was reluctant to impose a forfeiture, it applied the unambiguous language of the lease to declare the lease terminated.
 
The significance of the case is that it highlights the difference between the habendum or granting clause and the contractual provisions inserted elsewhere in the lease. Because failure of that condition may result in lease termination, contractual provisions should never be included in the habendum clause.