TANNER v. OLDS (1946)

The undisputed facts are these:

On October 4, 1924, the several owners of lots 168 to 176, both inclusive, in Montebello, entered into a community oil and gas lease with the Standard Oil Company as lessee. Each of the lots contained five acres. Respondent Emma F. Olds and her husband, Frank H. Olds, now deceased, were owners of lot 173. They held this lot in joint tenancy and since the death of Frank H. Olds his widow, Emma F. olds, has been and is now the owner thereof. George Tanner and Emma Tanner, husband and wife, were the owners as joint tenants of lot 174. George Tanner has died and his widow Emma Tanner is now the owner thereof. Appellants Emery B. Hunt and Mable G. Hunt are the owners of lot 176. The community lease provided that the lessee could at any time at its pleasure quitclaim and release any lot from the community lease.

The lessee proceeding under the community lease drilled two wells and placed the same on production. One of these wells is located on the Tanner lot (lot 174) and the other is located on the Hunt lot (lot 176). On June 1, 1933, the lessee having elected to quitclaim and release all lots except lots 174 and 176 joined with all the owners of the lots comprised in the community lease and executed a certain agreement under which all the lots were quitclaimed and released from the community lease to their respective owners except lots 174 and 176. It was also expressly provided by the terms of the agreement that Emma F. Olds should thereafter continue to receive her proportionate share of the royalty accruing from the operation under the community lease. In October, 1936, Mrs. Olds and the rest of the owners of the lots quitclaimed and released to them commenced an action to quiet their respective titles against appellants Tanner and Hunt and in that action procured a decree quieting their titles to the lots. This decree became final.

In 1937, deeper oil sands were discovered in the Montebello oil filed and Mrs. Olds leased her lot to the Bush Oil Company, which company, as lessee, drilled for and produced oil from such lot. Mrs. Olds as a result began to receive a landowner's share of the royalty from the production on lot 173. She also continue to receive her proportionate share of the royalty from the community lease wells until September 18, 1938. Shortly prior to such date appellants Tanner and Hunt asserted that they alone were entitled to all the community royalty for the reason that Mrs. Olds was receiving royalty from the production on the lot quitclaimed to her, to wit, lot 173. When she disregarded this claim and refused to surrender her share of the community royalty, appellants Tanner and Hunt commenced an action against her and others to quiet their titles to all the royalty from the community lease. This action was entitled Tanner et al. v. Title Insurance & Trust Company et al. The trial court rendered a judgment in favor of the plaintiffs quieting their titles to the entire royalty from the community lease. This judgment was reversed by the Supreme Court which held that Mrs. Olds was entitled to continue to receive her share of the community royalty notwithstanding that she was also receiving royalty from the production on lot 173. (Tanner v. Title Insurance & Trust Co., 20 Cal.2d 814, 816 et seq., 129 P.2d 383.)

Subsequently appellants Tanner and Hunt amended their complaint by alleging that the oil operation on Mrs. Olds' lot (lot 173) was causing oil to be drained from the common pool from which the community wells were producing. The trial court found that by reason of the production on lot 173 which produced from the common pool the production from the community wells was 15% less than it would have otherwise been. The court entered a judgment decreeing that respondent Olds was entitled to her share of royalty under the community lease and also to her landowner's royalty on oil produced on lot 173. From this judgment appellants Tanner and Hunt have appealed.^*

This is the question presented for our determination:

Was respondent Olds barred from receiving her royalty accruing under the community lease because she also received a landowner's royalty from the oil produced on lot 173 since the oil operation on lot 173 reduced the amount of oil recovered by the wells being operated under the community lease?

This question must be answered in the negative. The express provisions of the community lease impel the answer to the foregoing question. Before the execution of the community lease the parties did not know on whose lot oil might be found nor did they know that any oil would be found on any of the lots. Situated alike and with aspirations common to all they placed their respective lots together pursuant to the agreement that should oil be discovered on the community tract, irrespective of the lot or lots on which it might be discovered, the royalty from that oil would be apportioned one ninth to each lot owner. They further expressly provided that in the event the lessee should quitclaim and release any lots from the lease the owners of such lots would continue to participate in the royalty to the same designated extent. It is clear that they contemplated the future and made provision for a contingency that might subsequently occur. Further it was expressly provided in the community lease that when and if a lot was quitclaimed and released the owner thereof would not thereafter hold it completely free of obligations arising from the community lease. For example, they expressly provided that the community lessee while concluding the community operation would have the right of ingress and egress to, from, and over the quitclaimed lot and to lay pipes thereon or therein to the extent that the same might be necessary or convenient to the lessee's operation, and that the lessee, notwithstanding the quitclaim was authorized to retain eight acres surrounding each community well even though such acreage might include a portion of a quitclaimed lot. Thus the parties did impose restrictions upon the quitclaimed lots which would continue and would encumber such lots and impede some operation thereon as long as the community lessee continue his operation on the community lease. Accordingly, the owner of a quitclaimed lot could not conduct any oil operations upon, or make any use of his lot that would preclude or impede the community lessee from ingress and egress and from laying pipes and, if any portion of the quitclaimed lot was included within the eight-acre rectangular area surrounding a community well, the owner of the quitclaimed lot would be prohibited from using such portion for any purpose which might interfere with any activity which the community lessee might find necessary or convenient to conduct thereon. There were no other restrictions placed upon the quitclaimed lots by the agreement of the parties.

There is no merit in the proposition that the court should imply a further restrictive provision to this effect: ‘While the owner of a quitclaimed lot may produce oil therefrom he shall be prohibited from producing the same when to do so will cause any drainage from the common pool from which the community wells were producing or forfeit his right to his share of the community lease royalty.’

Such a provision would be contrary to the express terms of the contract which named only three restrictions upon a quitclaimed lot. The law is settled that an implied condition cannot be inserted in a contract as against the express terms of the contract or to supply a condition upon which the contract is intentionally silent. (Tanner v. Title Insurance & Trust Co., 20 Cal.2d 814, 824, 129 P.2d 383; Foley v. Euless, 214 Cal. 506, 511, 6 P.2d 956.) Had the parties desired to put a further restriction upon a quitclaimed lot, such as appellants seek to have the court imply, they could have done so by inserting such a provision in the lease. (See Clark v. Elsinore Oil Co., 138 Cal.App. 6, 31 P.2d 476.)

It is not our duty to alter a contract by construction or to make a new contract for the parties. We are confined to the interpretation of the agreement, which the parties have made for themselves, without regard to its wisdom or folly as shown by events subsequent to the execution of the contract. Such a rule is fair and just to all parties. When the community lease was executed the lessors were all equally affected; none knew on whose lot oil might be discovered; none knew whose lot would be quitclaimed or released. The lessee could have drilled the wells on the Olds' lot and quitclaimed the appellants' lots, in which event the appellants would have had the right to drill on their lots. Where the parties agree on all the provisions of their contract and provide that all shall be treated alike, and when thereafter in the course of the performance of the contract it develops that some of the parties may gain an advantage over the others, an advantage that might equally as well have fallen to the others, it cannot reasonably be said that the contract was incomplete or that some implied covenant should be read into the contract to equalize the advantages of the parties.

Drainage of leased premises is now a generally known fact and the parties contemplating this fact, inserted a provision relative to drainage in the community lease. Section 23 of the lease reads as follows: ‘In the event that wells are drilled and oil procured in paying quantities upon property adjoining the land hereby leased, and within two hundred and fifty (250) feet of the exterior limits of the area covered by this lease, the lessee agrees to protect the lessors' boundary line by offsetting such wells by the commencement of actual drilling within ninety (90) days after discovery of oil in paying quantities in such wells.’

The foregoing provision is conclusive of the rights of the parties. It provides that should a well be drilled on adjacent lots within 250 feet of the community wells, the community lessee shall drill offsetting wells. Undoubtedly this provision was inserted in the lease in contemplation, among other things, of the provisions of the community lease which expressly permitted the lessee to quitclaim and release lots from such lease. The parties by such a provision expressly provided what was to be done in the event of drainage irrespective of the lot or lots on which the draining well might be located.

The provision in the community lease pursuant to which the lessee was authorized to quitclaim and release lots from the community lease, the provision that the lessee would drill an offset well if there should be substantial drainage to the community wells, and the absence of a provision prohibiting production on a quitclaimed lot, must all be considered together, and when the contract of the parties is thus considered only one logical and reasonable determination may be made, vis.: that the parties intended that the owner of a quitclaimed lot could produce therefrom and that the community wells would be protected from drainage by operation of the provision imposing upon the community lessee the duty to offset that drainage. Any other construction would lead to an impractical situation relative to community leases.

The community lease has become a commonly used instrument. It has proved to be a desirable device both to the lessee and to the lessors. The substantial cost of drilling a well would dissuade a lessee from drilling in an area limited only to one or two wells and the lessors, without the device of a community lease, would in most instances be forced to let their lands lie undeveloped. As common as is the community lease is also the provision whereby the lessee may quitclaim lots therefrom and thus relative himself from further drilling. If such quitclaiming of lots were not a common occurrence the provision allowing the same would not generally be inserted. It cannot be gainsaid that in numerous areas, in and without our jurisdiction, there are now numerous lots and larger areas which were once included in a community lease but have been excluded therefrom. None of these excluded areas could be safely used for the production of oil in the event that production therefrom would cause some drainage to the remaining community wells, if a construction contrary to that which we have placed upon the lease in question were adopted. Such a construction would manifestly stop much present day development, and because it is unreasonable it would cause many an absurd situation. If the right to drill and produce oil on a quitclaimed lot might be circumscribed by the implied proviso that no drainage should thereby be caused to the common pool, the owner of a quitclaimed area a mile away from the community wells might be denied the right to drill and produce upon his lot. The same oil pool can naturally lie under hundreds of acres. A lot quitclaimed from a community lease may adjoin a lot, never included in the community lease, upon which there is a torrent of production causing substantial drainage to the quitclaimed lot. Is the owner of such quitclaimed lot powerless to offset that drainage merely because production on this lot will cause some drainage to the common pool from which the community wells are producing? That quitclaimed lot might be located at any distance away from the community wells, but nevertheless a well drilled upon it might cause some drainage to the community wells. The position of appellants is therefore obviously untenable.

The right of a community lessor to share in the community royalty is a right in gross, that is to say, the right is personal to him and is not attached to the land. (Tanner v. Title Insurance & Trust Co., 20 Cal.2d 814, 820, 129 P.2d 383.) If such lessor should sell his lot, which had been excluded from the community lease, the new owner of the lot would not be prohibited from drilling oil therefrom even if by so doing he should drain the community pool. At the same time the lessor who sold the lot could continue to hold and enjoy his community lease royalty as an interest in gross.

Appellants contend for conclusions contrary to that which we have reached predicated upon the following statements in Tanner v. Title Insurance & Trust Co., 20 Cal.2d 814, 824 et seq., 129 P.2d 383, 389:

‘True, courts have frequently considered implied covenants as being within a contract but such covenants are justified only when they are not inconsistent with some express term of the contract and, in the absence of such implied terms, the contract could not be effectively performed. Williston on Contracts, vol. 5, § 1293; Jones v. Interstate Oil Corp., 115 Cal.App. 302, 1 P.2d 1051. But the facts of the present case do not show any basis for implying a covenant in the lease which would have the effect of dividing the royalty provided for in it differently than the parties have agreed upon by the plain terms of their contract.

‘The respondents would be in an entirely different position if their suit was based upon pleadings and proof that the appellants Olds, by the production of oil on their land, are draining oil from the pool tapped by the wells on lots 174 and 176, and are thus impeding the full performance of the community lease.

‘Every contract contains an implied covenant on the part of each party not to prevent or hinder performance by the other party. Williston on Contracts, Vol. 5, § 1293A. Upon fundamental principles, the law will not allow one to claim royalties under a community lease and at the same time diminish the amount of oil which might otherwise be recovered for the common benefit of all the lessors.

‘For example, in Hartman Ranch Co. v. Associated Oil Co., 10 Cal.2d 232, 73 P.2d 1163, the defendant leased plaintiff's oil property and also acquired a lease on adjacent land upon which it drilled wells, thereby draining oil from the plaintiff's land. The lease with the plaintiff contained no offset clause. Nevertheless, the court held that a covenant would be implied obligating the lessee to drill wells to offset those on the adjacent property.

‘In the present case, however, no evidence was offered to show that the well on the land of the Olds is draining oil from the source of supply under the community lease, and contrary to the contention of the respondents, this court may not take judicial notice of any such alleged fact.’ (Italics added.)

The quoted provisions of the opinion in Tanner v. Title Insurance & Trust Co., supra, are inapplicable to the present case for two reasons.

First: In the Tanner case, the Supreme Court expressly recognized the rule that a court may not imply a condition in a contract which is contrary to an express term of the contract. In the instant case the covenant which appellants seek to have implied is as shown above contrary to the express terms of the contract.

Second: The provision of the opinion relied upon by appellants is dicta and was not pertinent to any issue then before the court. This is evidence in the opinion itself wherein it is said the ‘respondents would be in an entirely different position if their suit was based upon pleadings and proof that the appellants Olds, by the production of oil on their land, are draining oil from the pool tapped by the wells on lots 174 and 176, and are thus impeding the full performance of the community lease.’ (Italics added.) Obviously if there were no pleadings and proof that respondent Olds had produced oil on her land which was draining from the common pool there was no issue relative to such matter before the court and the discussion relative to a hypothetical situation was dicta and is not controlling in view of the facts in the instant case.

For the foregoing reasons the judgments are and each is affirmed.

FOOTNOTES

FOOTNOTE.  The community lease provided that the community royalty be paid to an agent for distribution among the persons entitled thereto. At one time the Escrow Depositary Corporation was such agent and thereafter the Security-First National Bank of Los Angeles accepted this agency. Due to the controversy between respondent Olds and appellants Tanner and Hunt with respect to the royalty designated for respondent Olds, the Escrow Depositary Corporation and the Security-First National Bank in Los Angeles instituted separate interpleader actions joining as defendants the contending claimants to the royalty designated for respondent Olds. These interpleader actions were consolidated for trial and tried with the principal action, that is, the quiet title action. In the interpleader actions judgment was also entered in favor of respondent Olds. From the adverse judgment entered against them in the interpleader actions the appellants Tanner and Hunt have also appealed, and by stipulation these appeals have been consolidated with the appeal in the quiet title action. By stipulation the parties have agreed that all three appeals may be considered on one set of briefs and that the three cases may be consolidated for decision since the same question is involved in each appeal.

McCOMB, Justice.

MOORE, P. J., and WILSON, J., concur.