Not So Fast My Friend: Implied Covenant to Develop and Non-Apportionment Subdivision Tracts
I can acquire a 2,000-acre lease in Ritchie County, West Virginia, held by production from one well, drilled in 1905.
I can acquire a 100-acre lease with an affidavit of nonproduction from an individual who has owned the property for in excess of 50 years.
What's the problem? It may be the same property!
In West Virginia, is there any guidance or limitation as to the extent of the West Virginia State Supreme Court’s judicial “implied covenant to develop” as it might affect non-apportionment subdivision tracts within a leasehold?
When a single tract of land subject to an oil and gas lease is subdivided into two or more tracts, the royalties paid for wells drilled thereon is paid either:
- Proportionately to all of the owners of the oil and gas within the leasehold, regardless of well location, in a ratio of the acreage ownership to the total leasehold acreage. E.g.: A 100-acre lease subsequently subdivided where A owns 40 acres, B owns 35 acres, and C owns 25 acres, A is entitled to 40 percent of the gross royalties; B is entitled to 35 percent of the gross royalties; and C is entitled to 25 percent of the gross royalties. States using this allocation of royalties are referred to as Apportionment States. (California, Mississippi and Pennsylvania)
- 100 percent to the owner of the subdivision upon which the well is physically located. In the above example, a 100-acre lease subsequently subdivided as follows: A owns 40 acres; B owns 35 acres; and C owns 25 acres, if the well is located on subdivision C, the owner of subdivision C is entitled to 100 percent of the royalties. Where land subject to a prior lease for oil and gas has been partitioned … the owner of each of the subdivisions from which oil or gas is produced is entitled to recover the rents and royalties arising from the subdivisions owned. Pittsburg & West Virginia Gas Co. v. Ankrom, 83 W. Va. 81, 97 S. E. 593, 5 A. L. R. 1157, and Musgrave v. Musgrave, 86 W. Va. 119, 103 S. E. 302, Fisher v. Teter, 89 W.Va. 693, 109 S.E. 896. (Non-apportionment States: Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Louisiana, Nebraska, New Mexico, Ohio, Oklahoma, Texas and West Virginia)
West Virginia Supreme Court Justice Poffenbarger observed that the non-apportionment rule “… makes the owners of the several parcels into which the leased tract has been divided separate lessors of their respective,
parcels. They are as separate, distinct, and strange to one another as if the parcel of each was, the sole and only subject-matter of a separate lease executed by him. Each owns exclusively the oil and gas in his own parcel, and has no interest direct, indirect, or collateral in the oil or gas of any other tract.” Fisher v. Teter 89 W. Va 693.
Operators must be aware that West Virginia courts consistently have stated that an operator who may have drilled a producing well within the primary term of the lease may not subsequently refuse to further develop the lease. There exists on the operator's part an obligation “… to drill the number of wells reasonably necessary to develop the property and prevent drainage by operation on adjoining lands
[i]n the absence of an express provision requiring the lessee to protect the leased premises from drainage by oil or gas wells on adjacent property, an implied obligation will be read into the lease to give such protection.” Adkins v. Huntington Development & Gas Co., 113 W.Va. 490, 168 S.E. 366 (1933),“Id. at 490, 168 S.E. at 366.
The conundrum presented is as follows:
Where a 500-acre lease has been subdivided into five separate and distinct 100-acre tracts, is the operator required to protect every subdivision within the leasehold from drainage by well located on an adjoining leasehold? Must the operator protect the interior division lines as well as the exterior lines, where production from one subdivision will cause drainage from an adjacent subdivision?
There does not appear to be any judicial resolution of this dilemma. However, such a situation has not been presented for question.
Large leases with habendum clauses may be held by production from a well a considerable distance from another subdivision within the original lease.
Particularly in areas with historic oil and gas production, extreme caution is urged for operators acquiring large historic leaseholds held by production from only a few wells. A thorough record examination should identify all subdivisions of the original lease and each subdivision should be examined for adverse leases.
Operators acquiring new leases in areas with historic oil and gas production should diligently examine ancient leases to make certain that the proposed new lease tract is not a subdivision of an old larger lease held by production.
A thorough record room examination is key to ascertaining either situation. Once either situation is discovered, the work begins.
If you have any questions, please contact us