Christopher S. Smith
Hoyer, Hoyer & Smith
Charleston, West Virginia
Counsel for Appellant
John A. Rollins
Lewis, Friedburg, Glasser, Casey
Charleston, West Virginia
Counsel for Appellee
This Opinion was delivered PER CURIAM.
1. "The discovery of oil or gas under a lease giving right of
exploration and production, unless there is something in the lease
manifesting a contrary intention, is sufficient to create vested
estate in the lessee in the exclusive right to produce oil or gas
provided for therein--a right, however, which may be lost by
abandonment, by failure to produce oil or gas, or pursue the work
of production, or development of the property." Syl. Pt. 4,
Eastern Oil Co. v. Coulehan, 65 W. Va. 531, 64 S.E. 836 (1909).
2. "An oil and gas lease (or other mineral lease) is both a
conveyance and a contract. It is designed to accomplish the main
purpose of the owner of the land and of the lessee (or its
assignee) as operator of the oil and gas interests: securing
production of oil or gas or both in paying quantities, quickly and
for as long as production in paying quantities is obtainable."
Syl. Pt. 1, McCullough Oil, Inc. v. Rezek, 176 W. Va. 638, 346
S.E.2d 788 (1986).
This is an appeal by Christian Land Corporation (hereinafter
referred to as "Christian Land" or "the appellant") from a March 7,
1992, final order of the Circuit Court of Logan County which
granted the appellant damages but denied the appellant's request
that the rights of the appellee, C. & C. Company (hereinafter
referred to as "C. & C." or "the appellee"), under a coal lease be
forfeited. Only the lower court's ruling regarding forfeiture is
the subject of this appeal. The appellant contends that the lower
court erred in denying the appellant's request that C. & C.'s
rights under the lease be forfeited. We conclude that C. & C.'s
rights under the lease were not forfeited, but rather that C. & C.
abandoned the leasehold and thereby lost its rights to the
Christian Land and C. & C. entered into a written lease
agreement, dated May 1, 1975, whereby Christian Land leased
property located in Tridelphia District, Logan County, West
Virginia to C. & C. The lease required a minimum annual royalty
and provided that C. & C. would mine coal in an effective and
workmanlike manner and comply with all applicable state and federal
laws relating to coal mining. Specifically, the lease provided as
Lessee agrees that it will mine the coal
demised in an effective and workmanlike
manner, according to approved and suitable
methods of modern mining, with adequate,
efficient and sufficient mining machinery,
equipment and personnel, and shall at all
times fully comply with and observe all
applicable laws and lawful rules and
regulations of the state of West Virginia and
of the United States of America pertaining to
the operation of coal mines and shall keep and
maintain said mines in good operating and
C. & C.'s surface mining permit was revoked by the West
Virginia Department of Energy in January 1990, and its underground
permit was revoked on April 24, 1990. The permits were to be
reinstated only if C. & C. remedied specific defaults or otherwise
complied with statutory requirements and Department of Energy
regulations. C. & C. has not complied with such statutes and
regulations to date. Christian Land filed a complaint in November
1989 requesting damages and forfeiture of the leased property. The
matter was tried before the Circuit Court of Logan County, without
a jury, on September 18, 19, and 20, 1990. The lower court entered
judgment in favor of Christian Land for damages, but denied
Christian Land's request that C. & C.'s rights under the lease be
forfeited as a result of C. & C.'s failure to comply with the
reclamation laws of this state and its loss of mining permits.
Christian Land filed post-trial motions on March 15, 1991, requesting, among other things, that C. & C. be required to timely pay the royalties due under the lease and to comply with the mine
reclamation laws of this state as a condition to avoiding
forfeiture of the lease. After hearings on this matter, the lower
court amended its original order to provide that C. & C.'s timely
payment of royalties was a condition of its continued possession of
the leased premises. The court also held a hearing on June 19,
1991, regarding the forfeiture issue. The lower court's final
ruling is memorialized in an amended order entered on July 19,
1991. In that amended order, the lower court held that
noncompliance with the mining laws is not grounds for forfeiture
under the terms of the lease agreement. Consequently, the lower
court did not declare a forfeiture of the lease and did not make
compliance with state mining laws a condition precedent to
continued possession of the leased premises.
On February 14, 1992, the United States Bankruptcy Court for
the Southern District ("bankruptcy court") of West Virginia entered
an order granting an involuntary bankruptcy petition against C. &
C. The bankruptcy court also entered an order granting Christian
Land relief from the automatic bankruptcy stay provisions in order
that Christian Land could prosecute this appeal. Because C. &. C.
listed its lease with Christian Land as an asset of the bankruptcy
estate on its Schedule of Assets, our ruling in this appeal will
assist the bankruptcy court in determining the issues before it.See footnote 1
On May 6, 1992, the bankruptcy court authorized C. & C. to abandon its interest in the leasehold estate of the property leased from Christian Land Corporation, effective April 1, 1992, and ordered that C. & C. would have no continuing obligation to make lease payments or maintain any interest in the property thereafter. That order specifically noted that the finding of abandonment would not moot the matters on appeal before this Court.
C. & C. contends that although Christian Land's stated reason
for its request of forfeiture is the alleged leasehold default, the
compelling factor behind Christian Land's suit is its desire to
have the lease considered terminated in order to place Christian
Land in a position to claim a greater share of a settlement
received in a separate litigation. C. & C. and Christian Land were
both plaintiffs in a civil action filed by them against Island
Creek Corporation regarding a trespass on the property owned by
Christian Land and leased by C. & C.See footnote 2 The distribution of the
proceeds from the settlement of that matter will depend, in part,
upon the resolution of this appeal and, specifically, a ruling on
whether the lease was forfeited.
The bankruptcy court, as explained above, has already
determined that the lease is to be deemed abandoned. That
determination does not moot this appeal, however, because the issue
of a possible previous forfeiture still remains unsettled.
Christian Land contends that the lease was forfeited when C. & C.,
as lessee, breached a covenant in the lease agreement.
Specifically, Christian Land alleges that C. & C. breached its duty
to maintain the mine in good operating and working order and to
comply with the laws relating to coal mining. The loss of
underground and surface mining permits, Christian Land argues,
constitutes evidence of failure to maintain the mines in good
operating and working order and failure to comply with mining laws.
Christian Land further contends that when C. & C.'s mining permits
were revoked, C. &. C. lost its ability to mine coal. Since the
mining of coal and the operation of the mine in an effective manner
were the purposes of the lease, Christian Land contends that C. &
C.'s inability to mine coal constituted a breach of the covenants
of the lease and should have resulted in forfeiture.
C. & C. emphasizes, however, that the lease does not require it to develop any mines on the property, to mine any particular amount of coal, or to otherwise maintain any production. The lease simply requires a minimum annual royalty that is payable regardless of whether any coal is mined. Furthermore, C. & C. contends that
forfeiture may only result through the three mechanisms specified
in the lease agreement: 1) nonpayment of rent or royalties or
other sums due under the lease; 2) breach or violation of any terms
or provisions of the lease; or 3) reassignment or subletting of the
lease without Christian Land's consent.
In its July 19, 1991, amended order, the lower court found
that noncompliance with reclamation laws was not specifically
delineated as a ground for forfeiture under the lease.
Furthermore, the lower court found that Christian Land was not
entitled to the requested forfeiture under the general clause
allowing forfeiture for breach or violation of any lease terms or
provisions. The court opined that such clause constituted a catch-all clause of the type condemned by this Court in Easley Coal Co.
v. Brush Creek Coal Co., 91 W. Va. 291, 112 S.E. 512 (1922), and
Bethlehem Steel Corp. v. Shonk Land Co., 169 W. Va. 310, 288 S.E.2d
139 (1982). In Easley, we dealt with a dispute involving a
condition against assignment and determined that the assignment by
the lessee did not constitute a forfeiture. In so doing, we
explained the following:
Forfeitures of estates are not favored in law. The right to forfeit must be clearly stipulated for in terms, else it does not exist. Every breach of a covenant or condition does not confer it upon the injured party. It never does, unless it is so provided in the instrument. Such breaches are usually compensable in damages, and, if a forfeiture has not been stipulated for, it is presumed that the injured party intended to be content with such right as is conferred by the ordinary remedies. The broken covenant or
condition relied upon for forfeiture must be
found not only in the instrument, by clear and
definite expression, but also within the
forfeiture clause, by such expression. A
covenant or condition merely implied, or an
express one not clearly within the forfeiture
clause, will not sustain a claim of forfeiture
by reason of its breach.
91 W. Va. at 296-97, 112 S.E. at 514.
In discussing the issue of forfeiture in Bethlehem Steel, we
[a]nother principle to be observed is
that, in so far as a covenant is relied upon
to sustain a claim of forfeiture, it is always
strictly construed in respect of that claim.
The instrument must give the right of
forfeiture in terms so clear and explicit as
to leave no room for any other construction,
or it does not exist. . . .
When the right has been clearly and unequivocally secured by the terms of the contract, it does not accrue unless nor until there has been an equally clear and unequivocal breach of the condition.
Bethlehem Steel, 169 W. Va. at 315, 288 S.E.2d at 142.
In Bethlehem Steel, the clause upon which the lessor attempted
to rely to support a forfeiture provided as follows: "If . . .
default shall be made by Lessee in the performance of any other
covenant or condition herein contained . . . the Lessor, at its
option may . . . (a) declare a forfeiture. . . ." Id. at 315-16,
288 S.E.2d at 143. We concluded the following in Bethlehem Steel,
This nonspecific reference to breached covenants does not meet the strict standards for valid forfeiture clauses in Easley Coal, supra. Its language, which we emphasized, requires that a covenant relied upon for
raising forfeiture be clearly and definitively
expressed in a forfeiture clause. A catchall,
dragnet forfeiture clause for breach of any
contractual covenant is inadequate.
We do not believe that forfeiture is the appropriate remedy in
the present case. As explained above, the lease specified the
three scenarios from which forfeiture could result: (1) non-payment of rent or royalties or other sums due under the lease; (2)
breach or violation of any lease terms or provisions; or (3)
reassignment or subletting of the lease without Christian Land's
consent. Noncompliance with reclamation laws and subsequent loss
of mining permits was not specifically made a ground for forfeiture
under the lease. Consistent with our previous evaluation of
forfeiture issues, we maintain that the right to forfeit must be
clearly and succinctly expressed in the lease agreement. A "catch-all" clause such as (2) above, similar to the one in Bethlehem
Steel, will not be sufficient to justify a forfeiture. Based upon
that analysis, we do not believe that a forfeiture occurred in the
present case.See footnote 3
We do, however, view this situation in light of abandonment principles and hold that C. &. C. did indeed abandon its interest
in Christian Land's property. This principle is particularly
relevant since one of our primary concerns as we address this
situation is to prevent an innocent landowner from becoming an
unwilling participant in a struggle between a lessee and an entity
enforcing mining requirements and regulations. We have previously
explained, in considering general mineral leases, that a lessee's
action or inaction may trigger termination of a lease for failure
to diligently pursue operations. In syllabus point 4 of Eastern
Oil Co. v. Coulehan, 65 W. Va. 531, 64 S.E. 836 (1909), for
example, we explained:
The discovery of oil or gas under a lease
giving right of exploration and production,
unless there is something in the lease
manifesting a contrary intention, is
sufficient to create vested estate in the
lessee in the exclusive right to produce oil
or gas provided for therein--a right, however,
which may be lost by abandonment, by failure
to produce oil or gas, or pursue the work of
production, or development of the property.
We further stated in South Penn Oil Co. v. Snodgrass, 71 W. Va. 438, 76 S.E. 961 (1912), that abandonment sufficient to destroy the vested interest created by the discovery of oil or gas under a lease will not be found so long as the lessee diligently and efficiently operates the leased premised to produce the oil and gas located thereon. Id. at 452, 76 S.E.at 967. In syllabus point 1 of McCullough Oil, Inc. v. Rezek, 176 W. Va. 638, 346 S.E.2d 788 (1986), we explained:
An oil and gas lease (or other mineral lease) is both a conveyance and a contract. It is designed to accomplish the main purpose of the owner of the
land and of the lessee (or its assignee) as
operator of the oil and gas interests: securing
production of oil or gas or both in paying
quantities, quickly and for as long as production
in paying quantities is obtainable.
While short term cessations of development may not be
sufficient to terminate a lease, we discussed the temporary
cessation doctrine in McCullough Oil and indicated that in the
absence of a cessation of production clause, factors to be
considered in assessing the feasibility of termination of the lease
included the following: the length of time without production, the
cause of the delay, and whether the lessee exercised reasonable
diligence to resume production. Id. at 644, 346 S.E.2d at 794.
In the present case, these factors--length of time, cause, and reasonable diligence questions--are applicable to development or inability to continue exploration due to lack of mining permits. Upon loss of its mining permits, C. & C. became ineligible to continue development. If the reclamation situation had been remedied within a reasonable period after the loss of permits, we would be in a position to conclude that C. & C.'s loss of mining permits constituted a temporary cessation and that C. & C. had not abandoned its lease. C. & C., however, allowed this situation to linger and thereby occasioned unreasonable delay to Christian Land. Such extended delay cannot be tolerated, and relief in the form of abandonment must be extended to the landowner.
In Berry Energy Consultants and Managers, Inc. v. Bennett, 175 W. Va. 92, 331 S.E.2d 823 (1985), we addressed the issue of alleged abandonment of an oil and gas lease and confronted West Virginia Code § 36-4-9a (1985). That statute imposes upon the lessee a "rebuttable legal presumption" of intention to abandon when the property has not been developed for a period of twenty-four months.See footnote 4 If, however, a delay rental has been tendered, the presumption of abandonment is not created. Berry Energy, Id. at 96, 331 S.E.2d at 827. We recognized in Berry Energy, however, that "in spite of the making of the delay rental payments, the
lessees in this action had an obligation to be reasonably diligent
in marketing the gas." Id. at 97, 331 S.E.2d at 828.
In the present case, our review of the record reveals C. &.
C.'s failure to exercise reasonable diligence concerning the
development of the coal reserves in the property owned by Christian
Land. In its treatment of the abandonment issue with regard to oil
and gas leases, the legislature has determined that twenty-four
months of inactivity is an appropriate time period after which
abandonment will be presumed. W. Va. Code § 36-4-9a. While we do
not find it necessary in the present case to enunciate a precise
time limitation regarding inactivity subsequent to loss of mining
permits, we do recognize and adopt the determination of the
bankruptcy court with regard to abandonment by the lessee. C. &.
C.'s surface mining permit was revoked in January 1990, and its
underground mining permit was revoked on April 24, 1990. According
to the information available to this Court, C. &. C. would have
been permitted to regain eligibility to mine coal upon compliance
with Department of Energy regulations and the payment of civil
penalties. The bankruptcy court authorized formal abandonment
effective April 1, 1992.
Recognizing C. &. C.'s potential for correction of the problems surrounding the loss of mining permits, it would be inequitable to hold that C. &. C. abandoned its lease on the very day it became ineligible to mine coal. However, as that period of
ineligibility progressed, the equities shifted toward the
landowner. We believe that C. &. C.'s failure to diligently pursue
its options to regain eligibility to mine coal from the date of its
final loss of permits on April 24, 1990, to the ruling of the
bankruptcy court regarding abandonment effective April 1, 1992,
clearly constituted an abandonment of the lease and the leased
premises. The passage of almost two years prior to the bankruptcy
court's ruling certainly gave C. &. C. the benefit of any doubt
regarding the abandonment issue and also provided a reasonable time
period for the lessee to make attempts to correct any impediments
to production or the development of the property in question.
Based upon this analysis, we conclude that C. & C.'s failure
to exercise reasonable diligence in taking the steps necessary to
correct the conditions which led to the cessation of mining rights
constituted an abandonment of C. & C.'s rights under the leasehold
Footnote: 1The Department of Energy apparently estimated that the cost of reclamation of the property would be $222,295. Reclamation by an independent contractor hired by the state has been completed at a cost of $281,000, after the deduction of the $57,000 reclamation
bond posted by C. & C. Including the civil penalties of $111,000,
the total claim asserted by the State in C. &. C.'s bankruptcy case
is approximately $392,000.
Footnote: 2C. & C. emphasizes, however, that the facts relating to the Island Creek settlement and the bankruptcy proceedings are not part of the record on this appeal, and that C. & C. does not rely on those facts as exclusive support for its position in this appeal.
Footnote: 3We hasten to add, however, that we view strict compliance with environmental laws as a justifiable concern and potential topic for leases such as the one in the present case. Noncompliance with such laws could certainly be made the basis for forfeiture if that issue were clearly addressed in the forfeiture provisions of the lease agreement.
Footnote: 4West Virginia Code § 36-4-9a, in pertinent part, provides as follows:
There shall be a rebuttable legal
presumption that the failure of a person,
firm, corporation, partnership or association
to produce and sell or produce and use for its
own purpose for a period of greater than
twenty-four months, . . . oil and/or gas
produced from such leased premises constitutes
an intention to abandon. . . .
This rebuttable presumption shall not be created in instances (i) of leases for gas storage purposes, or (ii) where any shut-in royalty, flat rate well rental, delay rental, or other similar payment designed to keep an oil or gas lease in effect or to extend its term has been paid or tendered, or (iii) where the failure to produce and sell is the direct result of the interference or action of the owner of such oil and/or gas or his subsequent lessee or assignee. Additional, no such presumption shall be created when a delay in excess of twenty-four months occurs because of any inability to sell any oil and/or gas produced or because of any inability to deliver or otherwise tender such oil and/or gas produced to any person, firm, corporation, partnership or association.