## Facts

- Lessors Herman and Loretta Schippers executed an oil and gas lease with a primary term ending February 5, 1994.
- In May 1993, Reynolds-Rexwinkle Oil, Inc. assigned its operating interest in the lease to Petex, Inc., reserving a 1.5% overriding royalty interest (ORI) on production under the lease “or any extension or renewal thereof.”
- In August 1993, while the original lease was still in force, Petex obtained a “top lease” from the same lessors covering the same acreage and containing substantially the same terms, to commence February 6, 1994.
- After the top lease became effective, Petex drilled a producing well in November 1994.
- Reynolds demanded ORI payments on production; Petex refused, asserting the ORI terminated when the original lease expired.
- The district court granted summary judgment for Reynolds, holding the ORI attached to the top lease; the Kansas Court of Appeals reversed; the Kansas Supreme Court granted review.

## Issues

1. Whether an ORI reserved in an assignment that expressly applies to the original lease “or any extension or renewal thereof” burdens a substantially identical top lease acquired by the assignee from the same lessors during the original lease term.
2. Whether Kansas law imposes a duty of fair dealing between the assignee-operator and the ORI holder that prevents the assignee from avoiding the ORI by acquiring a replacement lease.

## Decision

- The Kansas Supreme Court reversed the Court of Appeals and affirmed the district court’s summary judgment for Reynolds.
- The court held Kansas recognizes a duty of fair dealing between the assignee of the lessee’s interest and the holder of an ORI created by the assignment.
- The court held the ORI attached to and burdened Petex’s interest under the top lease obtained from the same lessors during the life of the original lease, where the assignment included “extension or renewal” language and the later lease was substantially identical.
- The case was remanded for further proceedings consistent with the opinion.

## Legal Principles

- As a general rule, an overriding royalty has no duration beyond the life of the lease it burdens.
- Exceptions apply where (1) the creating instrument expressly requires the ORI to apply to “extensions or renewals,” or (2) evidence supports a fiduciary or contractual duty between operating and nonoperating interest holders.
- Kansas recognizes a duty of fair dealing between holders of operating and nonoperating interests in an oil and gas lease; fraud, collusion, or bad faith is not required for the duty to exist.
- When an assignee acquires a substantially identical lease from the same lessors during the term of the original lease and the ORI reservation applies to “extensions or renewals,” the ORI burdens the later lease.

## Conclusion

The court required the assignee-operator to honor an overriding royalty reserved for a lease and its “extensions or renewals” by treating a substantially identical top lease obtained during the original lease term as burdened by the ORI, supported by both the reservation’s language and Kansas’s duty of fair dealing between operating and nonoperating interest holders.


Reynolds-Rexwinkle Oil, Inc. v. Petex, Inc., 270 Kan. 471, 1 P.3d 909 (Kan. 2000)