## Facts

- In 1958, the owners of a 160-acre tract about five miles north of Burns, Oregon (the Cowings) leased to Robert Hebener and his partner, Elmer Jenkins, the right to remove gravel from a gravel pit and stockpile on the property.
- The lease term was 30 years, with an option for the lessees to renew for an additional 30 years.
- The lease required payment of a royalty of 5¢ per cubic yard of gravel mined.
- The lease also required a minimum annual payment of $100 and allowed the lessors to declare the lease “null and void” if any year elapsed without at least that minimum payment.
- The lease contained a waste provision and a forfeiture/re-entry clause providing that if the lessees violated any “terms or covenants” of the lease, the lessors could re-enter, repossess the property, and expel the lessees, without losing the right to sue for delinquent rent.
- In 1969, after dissolution proceedings, Hebener acquired Jenkins’s interest in the lease.
- The Cowings retained ownership until Mr. Cowing died in 1970; in 1978, Mrs. Cowing deeded the property to Audrey Bennett and Dorothy Starbuck.
- Over more than two decades, gravel extraction was sporadic. Defendants’ records showed that in 15 of 23 years they paid only the $100 minimum.
- For extended periods, defendants had little or no operating capacity on the site, including having no rock-crushing equipment on the premises after the mid-1960s and no truck to haul crushed rock after 1974.
- One year of production was so small that it generated only about $0.15 in royalties.
- Evidence at trial indicated there was a strong market for the gravel on the property.
- Bennett and Starbuck sued to terminate the lease, alleging defendants failed to reasonably pursue development and operation of the gravel pit.
- The trial court found defendants had not developed the mine as a reasonable operator would and entered a decree extinguishing defendants’ rights under the lease and allowing plaintiffs to repossess the property under the forfeiture clause.
- Defendants appealed.

## Issues

1. Does a royalty-based gravel (mineral) lease imply a covenant that the lessee will exercise reasonable diligence to develop and operate the resource for the benefit of both lessor and lessee?
2. Can a lessee breach that implied covenant by long-term minimal production despite an available market, even if the lessee pays the lease’s $100 minimum annual amount?
3. If the lessee breaches the implied covenant of reasonable development, does that breach constitute a violation of the lease’s “terms or covenants” allowing forfeiture and repossession under the express re-entry clause?

## Decision

- The Oregon Court of Appeals affirmed the decree terminating the lease and extinguishing defendants’ rights.
- The court treated the gravel lease as a mineral lease in which the lessors’ expected return depended largely on production royalties.
- The court held that such a lease carries an implied covenant requiring reasonable diligence in development and operation.
- The court agreed with the trial court that defendants’ history of minimal production and lack of equipment, despite evidence of market demand, supported a finding that defendants did not act as a reasonable operator would.
- The court rejected the argument that paying the $100 minimum excused nondevelopment; the minimum-payment term did not convert the arrangement into a lease that permitted holding the property indefinitely with little or no production.
- The court concluded that breach of the implied covenant counted as a breach of a lease covenant within the scope of the forfeiture/re-entry clause, permitting repossession.

## Legal Principles

- A mineral lease that compensates the lessor mainly through production royalties implies a covenant that the lessee will use reasonable diligence to develop and operate the resource in a manner consistent with a reasonable operator.
- A minimum annual payment provision functions as a floor for rent and a ground for forfeiture if unpaid; it does not, by itself, authorize a lessee to avoid reasonable development when the lease’s structure anticipates royalty-generating production.
- An implied covenant in a mineral lease is treated as a covenant of the lease; when the lease authorizes forfeiture for violation of its “terms or covenants,” breach of an implied development covenant can support termination and repossession.
- Long-term minimal production, lack of operational capacity, and failure to respond to market demand can support a finding that the lessee failed to meet the reasonable-diligence standard.

## Conclusion

The court affirmed termination of the gravel lease because the royalty-based agreement carried an implied covenant to reasonably develop and operate the pit, defendants’ decades of minimal production and limited operations breached that covenant despite payment of the $100 minimum, and the lease’s forfeiture clause allowed the lessors to repossess the property for violation of lease covenants.


Bennett v. Hebener, 643 P.2d 393 (1982)