## Facts

- Lessors executed a Texas oil and gas lease (April 7, 1930) covering approximately 7,499 acres in Sherman and Hansford Counties.
- The lease had a 10-year primary term and continued thereafter only so long as oil or gas was produced.
- The lease included a shut-in gas royalty clause providing that a gas well capable of producing in paying quantities but not connected to a market would be treated as a producing well only while a specified shut-in royalty (about $50 per year per well) was paid.
- By the end of the primary term (April 7, 1940), a gas well existed that was capable of producing in paying quantities, but gas was not being sold because there was no market connection.
- The lessee’s assignees did not pay the shut-in royalty on or before the expiration of the primary term and attempted to tender payment roughly four months later.
- The lessors refused the late tender and sought a declaration that the lease terminated at the end of the primary term.

## Issues

1. Whether a shut-in royalty clause providing that a well is deemed producing only “while” the shut-in royalty is paid creates a condition that must be timely satisfied to extend the lease beyond the primary term.
2. Whether a late tender of the shut-in royalty after expiration of the primary term can revive or continue the lease.

## Decision

- The Texas Supreme Court reversed the judgments for the lessee’s assignees and rendered judgment for the lessors.
- The court held the shut-in royalty language created a condition to continuation of the lease, not merely an independent covenant to pay.
- Because the shut-in royalty was not timely paid by the end of the primary term, the lease terminated as a matter of law; the later tender could not prevent termination.
- The lease was cancelled.

## Legal Principles

- When a lease provides that a shut-in gas well will be treated as “producing” only while shut-in royalties are paid, timely payment is a condition precedent to maintaining the lease beyond the primary term.
- Failure to satisfy a condition tied to continuation of the lease results in automatic termination by the lease’s own terms, rather than only a damages remedy.
- A nonproducing but capable gas well does not extend a “production” lease past the primary term unless the lease’s contractual substitute for production (such as a shut-in royalty payment) is properly and timely performed.

## Conclusion

The court treated the shut-in royalty clause as a strict condition for extending the lease beyond the primary term, so the lessee’s failure to make the required payment by the end of the primary term caused the lease to terminate automatically, and a later tender could not reinstate it.


Freeman v. Magnolia Petroleum Co., 171 S.W.2d 339 (Tex. 1943)