## Facts

- A mineral lessor executed an oil and gas lease covering roughly 10,254 acres with a 10-year primary term and delay rentals payable until production.
- The lease stated it bound assignees and contemplated that an assignee could maintain its assigned tract by paying delay rentals attributable to that tract.
- Before production, the original lessee assigned a 400-acre portion of the lease to an oil company, which separately held the rights to explore and develop that tract.
- The lessor expected drilling on the 400-acre tract by about October 1928, but no well had been started there by October 1929.
- The lessor sued the assignee, alleging breach of the implied covenant to reasonably develop and to proceed with reasonable diligence on the assigned tract.
- The assignee argued it had no separate implied obligation to develop the assigned tract and, in any event, a reasonably prudent operator would not have drilled there under then-existing conditions.
- The trial court found a default and entered an equitable decree requiring the assignee to drill at least one well by a set date or suffer cancellation of its interest in the tract.
- The assignee appealed.

## Issues

1. Whether an assignee of a segregated portion of a large oil and gas lease is independently bound, as to its tract, by the lease’s implied covenant of reasonable development.
2. Whether the assignee’s failure to drill on its tract within the complained-of time constituted a breach under the reasonably prudent operator standard.
3. Whether equity may compel drilling on a deadline on pain of cancellation absent a clear showing of breach.

## Decision

- The court of appeals recognized that implied covenants of reasonable development can apply to an assignee with respect to its assigned tract where the lease structure contemplates tract-by-tract maintenance through separate rentals.
- Applying the reasonably prudent operator standard, the court concluded the evidence did not show that a prudent operator would have drilled a well on the assignee’s tract by the time demanded.
- The trial court’s decree compelling drilling or canceling the assignee’s leasehold interest was reversed.

## Legal Principles

- Implied covenants in an oil and gas lease may bind an assignee as to the segregated tract assigned, particularly when the lease contemplates independent maintenance of assigned portions by separate delay rentals.
- The implied covenant of reasonable development is measured by the conduct of a reasonably prudent operator acting with due regard for both lessor and lessee interests, considering geology, market conditions, drilling costs, and risk.
- Mere passage of time or the lessor’s preferred drilling schedule does not establish breach; a clear evidentiary showing is required.
- Cancellation or forfeiture is an exceptional equitable remedy and generally should not be ordered without proof of an actual breach under the prudent-operator standard.

## Conclusion

The court held that an assignee may be subject to an implied duty to reasonably develop its assigned tract, but reversed relief compelling drilling or imposing cancellation because the record did not show that a reasonably prudent operator would have drilled on the tract within the time demanded.


Cosden Oil Co. v. Scarborough, 55 F.2d 634 (5th Cir. 1932)