## Facts

- An oil and gas lease covered a tract in Weld County, Colorado, and a predecessor of North American Resources Company (NARCO) drilled one gas well on the tract.
- Whitham Farms, LLC and the City of Longmont later acquired surface and mineral interests in portions of the tract, subject to NARCO’s existing lease.
- Whitham Farms asked NARCO to release undeveloped acreage not needed for the existing well; NARCO refused.
- Whitham Farms and Longmont asserted NARCO breached the implied covenant of reasonable (further) development by leaving substantial acreage undeveloped and sought partial termination of the lease.
- The parties did not dispute that additional wells on the tract would not be economically viable.

## Issues

1. Whether the implied covenant of reasonable development is breached when further drilling would not be economically viable.
2. Whether the prudent-operator standard requires additional drilling only when a reasonably prudent operator would drill with a reasonable expectation of profit.
3. Whether equitable termination (partial cancellation) is available absent proof of a profitable drilling opportunity and a clear breach.

## Decision

- The Colorado Court of Appeals affirmed judgment for NARCO and the other defendants.
- The court held Whitham Farms and Longmont failed to prove a breach of the implied covenant of reasonable development.
- Because additional drilling was not economically viable, a reasonably prudent operator would not be required to drill further wells.
- Equitable termination of the lease was denied.

## Legal Principles

- Oil and gas leases include an implied covenant that the lessee will reasonably develop the leasehold after discovery, measured by the conduct of a reasonably prudent operator under similar circumstances.
- The covenant is limited by economic prudence; it does not require drilling wells that lack a reasonable expectation of profit.
- The party alleging breach bears the burden to show that additional development would probably be profitable and that a prudent operator would undertake it.
- Equitable cancellation or termination is an extraordinary remedy, generally disfavored, and requires a clear breach and inadequacy of damages.
- Implied covenants supplement, and may not contradict, express lease terms.

## Conclusion

The court refused to terminate the lease because the lessors failed to prove that profitable additional development was available; under the prudent-operator standard, a lessee is not obligated to drill uneconomic wells, and forfeiture-type relief is inappropriate without a clear breach.


Whitham Farms, LLC v. City of Longmont, 97 P.3d 135 (Colo. App. 2003)