## Facts

- Hartman Ranch Company owned oil-bearing land subject to a 1913 oil and gas lease reserving a 1/8 royalty to the lessor.
- Associated Oil Company acquired and operated the leasehold interest (as assignee or sublessee) and produced oil from the Hartman tract.
- Associated also operated a lease on adjoining land to the south (the Lloyd lease) and conducted intensive drilling there.
- In its agreement acquiring the Hartman leasehold, Associated expressly agreed to assume and perform the obligations and covenants of the parent lease.
- Hartman alleged Associated’s drilling on the Lloyd lease drained oil from the Hartman tract and that Associated failed to drill protective (offset) wells on Hartman’s land.
- Hartman sought (1) damages for lost royalty attributable to drainage and (2) forfeiture of the lease for breach of an implied covenant to protect against drainage.
- A jury awarded Hartman $593,700 in damages for lost royalty during the four-year period preceding the filing of suit (March 7, 1933), and the trial court entered a conditional decree of forfeiture.

## Issues

1. Whether a lease that specifies a number of wells to be drilled can still carry an implied covenant requiring additional drilling to protect the premises from drainage.
2. Whether a party in possession as assignee/sublessee that expressly assumes lease obligations can be held directly liable to the original lessor for breach of implied lease covenants.
3. Whether the evidence was sufficient to prove substantial drainage and to support the amount of lost-royalty damages.
4. Whether forfeiture (even conditional) is an appropriate remedy in addition to damages for breach of the implied covenant to protect against drainage.

## Decision

- The court upheld recognition of an implied covenant requiring the operator of the leased premises to act to protect against substantial drainage caused by its operations on adjacent land.
- The court rejected the argument that an express clause specifying the number of wells eliminated the implied duty to protect the lessor’s royalty from drainage.
- The court held Associated could be liable directly to Hartman because Associated held and operated the leasehold and had expressly assumed the parent lease’s obligations and covenants.
- The court found the evidence adequate to support findings of drainage and the jury’s damages award for lost royalty for the limitations period applied.
- The court treated forfeiture as an exceptional equitable remedy, to be limited and conditioned rather than imposed automatically where damages can provide relief.

## Legal Principles

- An oil and gas lease may include an implied covenant to protect the leased premises from substantial drainage, measured by the conduct of a reasonably prudent operator.
- A provision setting a required or minimum number of wells does not, by itself, negate an implied covenant to drill additional protective wells when needed to prevent substantial drainage.
- A transferee in possession who expressly assumes the obligations and covenants of the original lease may be held directly accountable to the lessor for breach of covenants, including implied covenants tied to the leasehold’s operation.
- Lost-royalty damages are a standard remedy for breach of the implied covenant to protect against drainage when supported by competent evidence of drainage and resulting loss.
- Forfeiture of an oil and gas lease is disfavored; if ordered, it should be narrowly tailored and conditioned based on equitable considerations, particularly where monetary relief is adequate.

## Conclusion

The court held that the operator of the Hartman leasehold owed an implied duty to protect the lessor’s royalty from drainage caused by the operator’s adjacent drilling, that Associated could be sued directly due to its possession and express assumption of lease obligations, that the evidence supported a substantial lost-royalty award, and that forfeiture, if available, must be applied cautiously and on limited equitable terms rather than as an automatic consequence of breach.


Hartman Ranch Co. v. Associated Oil Co., 10 Cal. 2d 232, 73 P.2d 1163 (Cal. 1937)