## Facts

- Landowners leased their Chautauqua County property under an oil-and-gas lease granting exclusive rights to drill for, produce, and market oil and gas.
- Desert Gas Exploration Co. received an assignment (June 21, 1990) covering two portions of the leasehold known as Oag units #3A and #6.
- The original leased premises contained multiple producing wells; at least eight wells were producing.
- The landowners received royalties from production on the original leased premises.
- No wells were producing on the two units assigned to Desert Gas.
- The landowners sued for compensatory damages, rescission, and a declaration that the lease was null and void, asserting entitlement to additional shut-in royalties or termination as to the nonproducing assigned units.
- The trial court granted summary judgment for Desert Gas and declared the lease remained in full force and effect; the landowners appealed.

## Issues

1. Whether, absent an express lease provision to the contrary, an oil-and-gas lease’s habendum clause and related clauses (including shut-in royalty provisions) are indivisible after assignment.
2. Whether production on any portion of the original leasehold satisfies the habendum clause for the entire lease, including assigned nonproducing units, thereby barring termination and additional shut-in royalty claims against the assignee.

## Decision

- The Appellate Division unanimously affirmed summary judgment for Desert Gas, without costs.
- The court held the lease’s habendum clause and modifying clauses were indivisible absent a contrary lease provision.
- Because undisputed production existed on the original leased premises and the landowners had received royalties, the habendum clause was satisfied for the entire lease, including the assigned units.
- Desert Gas had no contractual obligation to tender additional shut-in royalties for Oag units #3A and #6.
- The court rejected the landowners’ remaining appellate arguments as meritless.

## Legal Principles

- Absent an express divisibility provision, an oil-and-gas lease’s habendum clause and related modifying clauses (including well completion, continuous drilling, shut-in royalty, and dry hole provisions) are treated as indivisible.
- Production obtained on any part of the original leased premises maintains the lease as to all parts, including portions later assigned to another operator.
- An assignee of nonproducing portions is not required to make separate shut-in payments when actual production elsewhere on the leasehold keeps the lease in effect, unless the lease expressly imposes tract-by-tract obligations.

## Conclusion

The court held that, without a lease term dividing habendum and shut-in obligations by assigned tract, production on any portion of the original leased premises preserves the entire lease, defeating the landowners’ claims for termination, rescission, damages, or additional shut-in royalties for nonproducing assigned units.


Oag v. Desert Gas Expl. Co., 239 A.D.2d 899, 659 N.Y.S.2d 654 (App. Div. 4th Dep’t 1997)