## Facts

- Mississippi landowners (Berry and others) granted an “unless” oil, gas, and mineral lease to Richardson with a five-year primary term, subject to termination unless drilling/development occurred or lease-specified alternatives were satisfied.
- During the primary term, Richardson assigned a segregated portion of the leased acreage to Tide Water and co-defendants, retaining the remainder.
- Richardson drilled a discovery well on his retained tract within the primary term.
- The lease allowed payment of a shut-in gas royalty when gas was discovered but no market existed; Richardson paid $200 per year per well under this clause.
- Tide Water did not drill or otherwise develop its assigned tract during the primary term.
- The lessors sued in equity to cancel the lease and remove cloud of title as to Tide Water’s assigned portion, asserting termination and, alternatively, abandonment or failure to develop.
- The lessors did not make a prior demand that Tide Water drill or release the acreage and did not seek a conditional decree requiring drilling within a set time.

## Issues

1. Whether partial assignment of a segregated portion of an “unless” oil and gas lease makes the lease effectively separate by tract, requiring drilling on each assigned portion within the primary term to avoid termination as to that portion.
2. Whether shut-in gas royalty payments authorized by the lease operate as “production” to continue the lease as to all leased lands, including lands assigned to an assignee who did not drill.
3. Whether an assignee’s nondevelopment of its tract, without a prior demand to drill and without proof of abandonment, justifies equitable cancellation or forfeiture of the lease as to that tract.

## Decision

- The Fifth Circuit affirmed judgment for the defendants and denied cancellation.
- The court held the lease was not divided into separate leases by partial assignment for purposes of continuation under the “unless” clause; the discovery well on the retained tract continued the lease as to all acreage.
- The court held the shut-in royalty payments made pursuant to the lease were the equivalent of production and continued the lease for all interests, including assignees.
- The court held nondevelopment alone did not establish abandonment or justify forfeiture; absent demand for development or proof of abandonment/repudiation, equity would not cancel the lease.

## Legal Principles

- Partial assignment of an “unless” oil and gas lease does not, without controlling contrary law or lease language, divide the habendum/continuation provisions into separate tract-specific leases; one producing (or treated-as-producing) well may hold the entire lease.
- When a lease provides that shut-in gas royalty payments are accepted in lieu of production during lack of market, timely payment functions as production for purposes of maintaining the lease.
- Equitable cancellation and forfeiture of oil and gas leases are disfavored; failure to develop an assigned tract, without a prior demand to drill (or comparable notice) and without clear evidence of abandonment or repudiation, is insufficient to cancel.

## Conclusion

The court concluded that production on the original lessee’s retained tract—supplemented by lease-authorized shut-in royalty payments—kept the lease in force as to all lands despite a partial assignment, and that equity would not cancel the assignee’s interest based solely on nondevelopment absent a demand or proof of abandonment.


Berry v. Tide Water Associated Oil Co., 188 F.2d 820 (5th Cir. 1951)