STATE OF NEW YORK
SUPREME COURT: COUNTY OF CHAUTAUQUA
ALLEN A. FREDRICKSON and
HOPE L. FREDRICKSON,
JOHN L. SELLSTROM, P.C.
(Stephen E. Sellstrom,
of Counsel) for
BRANDT, LAUGHLIN, SCHAACK
WHIPPLE and CLARK, P.C.
(Dustin D. Nelson, Esq.
of Counsel) for
Plaintiffs sue under RPA&P Article 15 to cancel an oil
and gas lease for lessee's failure to pay delay rentals, and
on the additional ground the lease is unfair, unjust and
unconscionable; they also claim defendant has breached the
agreement by failing to provide free gas.
The plaintiffs purchased the property in June, 1989,
subject to an oil and gas lease by the vendors in February,
Defendant has moved for summary judgment on grounds
plaintiffs have failed to state a cause of action and
challenges plaintiffs' standing because the lease was not
executed by plaintiffs, but by their predecessors in title
21 years ago.
Plaintiff sought forfeiture and cancellation of the
lease by invoking General Obligations Law, 15-304,
Subdivision 1, which permits the current owner of land
subject to any oil, gas or mineral land lease to pursue
cancellation where the lease becomes forfeited, terminates or
expires by its own terms.
Plaintiff's say the lease is "an unintelligible garble
of legalese"; that Turnquists had little or no experience
with leases; their business acumen and expertise was limited;
the land agent's sales tactics were high pressure; he carried
"a large bundle of cash"; there was no accurate explanation
of obligations; that the one-sidedness "shocks the
Defendant argues that even if Turnquists as title
holders had initiated this action 21 years after the
execution of the lease, this Court could not set aside the
lease on the grounds of unconscionability. Turnquists had
received payments, albeit sporadically; they knew the lease
terms; at one point considered the lease terminated, but did
not initiate any action to enforce perceived rights.
Defendant argues plaintiffs cannot claim undue influence
or unconscionability because they were not parties to the
Defendant says that if the lease was unconscionable as
to Turnquist, plaintiffs, one of whom is a practicing
attorney, ratified and accepted its terms when they purchased
the property subject to the lease over three years ago; they
ratified and consented to the lease by signing a gas division
order after making a thorough inquiry into its status and by
accepting royalty payments with full knowledge of the terms
and conditions of the lease.
Because of lessee's refusal to voluntarily cancel,
plaintiffs seeks to compel determination of their interests
under RPAPL 1501. General Obligations Law Sec. 15-304 and
RPAPL 1501 must be read together; the plaintiffs have
FACTS AND CONTENTIONS
In 1974, plaintiff's predecessors in title,
(Turnquists"), signed an oil and gas lease that permits
pooling or unitization of the lease with others.
The lease was pooled; gas in paying quantities was
produced from a well on other land in the pool as of
November, 1986, paying some $50.00 to $150 annually in
royalties (more often amounts in the lower range).
Plaintiffs purchased the Turnquist property in 1989
subject to the lease. On November 14, 1989, after receiving
the November 8, 1989 letter from defendant explaining the
status of the lease, plaintiffs, along with Turnquists,
signed a transfer order providing for division of royalties.
Plaintiffs' grantor, Robert Turnquist swears that on
February 2, 1974, a Paragon Resources, Inc. land agent
carrying a number of printed "fill-in-the blank " oil and gas
lease forms, flashed a large amount of money and pressured
him and his wife to sign the lease. He says the agent told
him his neighbors were all signing up.
Plaintiff's alleged the contents of the lease were not
explained to Turnquist, nor was he given an opportunity to
consult anyone regarding the meaning of provisions of the
document; that Mr. Turnquist sophistication or knowledge
regarding oil and gas leases.
Turnquist was offered and accepted a payment of $113 for
leasing his 111 acres.
Between the 8th and 15th of February, 1974, the Paragon
agent obtained leases from five other neighbors of the
Turnquists, all of whom plaintiffs contend were pressed to
sign the same lease forms; defendant has not disputed these
allegations. (See defendant's Exhibits B & C).
All told, seven properties were included into a pool
comprising 570.77 acres.
For more than 9 years from the signing of the leases,
there was no drilling or exploration for oil or gas. Then,
within one month in the spring of 1993, drilling was
commenced and the well completed; but, there was no
production until November 1986, nearly 3 1/2 years later.
(See defendant's answers to interrogatories).
Turnquist indicated he was interested in obtaining the
free gas for heating and lighting but was denied free gas by
the lessees on the ground that the well was not on his
He says he and other lessors thought the lease was for a
fixed period of ten years and had no understanding that a
well producing on someone else's property would extend their
LEGISLATIVE POLICY GOVERNS OIL AND GAS LEASES
The Environmental Conservation Law regulates
the operation and development
of oil and gas properties to achieve
a greater ultimate recovery of oil and
gas, and to protect the correlative
rights of all owners and the rights of
all persons including landowners and the
general public. ECL 23-0301. (As
amended L.1987, c. 4101.) [emphasis
The Appellate Division, 4th Dept., in Envirogas, Inc.
v. Consolidated Gas Supply, 98 AD2d 119, 469 NYS2d 499, 501-
502, in a gas lease case with lease terms similar to those in
the case here said:
" In jurisdictions where oil and gas
wells are more numerous than in New York,
it is the general rule that the lessee
must exercise its pooling authority in
good faith and as a prudent operator
(Kuntz, Oil and Gas, 48.3[g0, pp 217-
220; Boone v. Kerr-McGee Oil Industries,
Inc., 217 F.2d 63 (10th Cir.1954). The
rule should also be applied in New York
since every contract contains an implied
covenant of good faith performance and
fair dealing (VanValkenburgh, Nooger &
Neville v. Hayden Pub. Co., 30 NY2d 34,
45 330 NYS2d 329, 281 NE2d 142, Havel v.
Kelsey-Hayes Co., 83 AD2d 380, 382, 445
And in Doran Associates, Inc. v. Envirogas, Inc., 112
AD2d 766 (4th Dept. 1985), 492 NYS2d 504, 505-506, the
Appellate Division said:
"Additionally, we have previously held
that a lessee must exercise its pooling
authority in good faith and as a prudent
operator (Envirogas, Inc. v.
Consolidated Gas Corp., 98 AD2d 119, 469
NYS2d 499. . . 'The good faith/prudent
operator standard is not rendered
inapplicable merely because the owner of
the unitized parcels ratifies the pooling
agreement. ECL 23-0301 is intended to
protect not only the rights of interested
parties but those of the general public
as well.' (Emphasis added). See, also 77
NYJur2d Mines&Minerals, Sec. 81.
The Courts will read into a lease granting the exclusive
right to drill for and gather oil or gas . . . an implied
promise that the lessee will diligently continue to prospect
for oil, citing Reeland v. Moore Oil Co., 77 NYJur2d, Mines &
Minerals, Sec. 44, (1934) 242 AD 462, 275 NYS 489.
Courts are reluctant to allow the lessee to continue to
hold the land for any considerable length of time without
making a reasonable effort to develop it according to the
express or implied purpose of the lease, even though there is
a provision in the contract for the payment of a minimum
royalty. 77 NYJur2d Mines & Minerals, supra; 54 AmJur2d,
Mines&Minerals, Sections 142, 143.
"...there is an implied obligation on the part of the
lessee to develop the premises and mine the product within a
reasonable time." 77 NYJur2d Sec. 44, pp 283, 284.
77 NYJur2d, Mines&Minerals, Sec. 53, says:
"The rule that forfeiture or abandonment
is not looked upon with favor is not
applicable to an oil lease which
obligates the lessee to commence
operations to drill oil within a certain
time or in lieu thereof to pay a monthly
rental, since time is of the essence in
such contracts." (Citations omitted)...
"The oil is apt to be drained by the
sinking of wells on adjacent premises, so
it is important to the owner of the land,
who is to receive from the lessee as
royalty a part of the oil produced, that
the work should commence at the time
stipulated, in order that whatever oil
belongs to his premises may be obtained."
The court perceives that the same considerations apply
in drilling for gas.
Unconscionability has been incorporated into several of
the model statutes of the Uniform Commercial Code; see Sec.
2A-108, unconscionability under the Code or Leases, which in
Sec. 2A-103(1)(h) defines "Goods", excludes oil and gas
before extraction, but implicitly includes them after
extraction; in Section 1-112, unconscionable agreement or
term of contract in the Common Interest Ownership Act;
in Section 1-112 (Unconscionable Agreement on Term of
Contract) in the Planned Community Act; in Section 1-112
(unconscionable Agreement on Term of Contract) in the Model
Real Estate Cooperative Act; and in Section 1-105
(unconscionable Agreement on Term of Contract) in the Real
Estate Time-Share Act ( see Uniform Commercial Code, Uniform
Laws Annotated, Business and Financial Laws).
The trend of jurisprudence is to examine contracts in
terms of whether the parties had equal bargaining power;
".. use of deceptive or high-pressure sales techniques, and
confusing or hidden language in written agreement; see
AvildsenvPrystay (1991), 1st Dept) 171 AD2d 13, 574 NYS2d
535, app dismd 79 NY2d 841, 580 NYS2d 193, 588 NE2d 91.
"unconscionability may be found under
judicial power to annul contractual
obligation because of its
unconscionability was known at common law
and has been codified in CLS UCC 2-302;
pivotal finding which could trigger such
exercise of judicial nullification,
whether under Uniform Commercial Code or
common law, was where egregiously
oppressive contractual provision was
perceived to emanate from gross
inequality in bargaining power between
contracting parties, resulting in
contract "such as no man in his senses
and not under delusion would make on the
one hand, and as no honest and fair man
would accept on the other."
Also see Weissman v. Blue Cross of W.N.Y., 457 NYS2d 392
(Sup.Ct. 1982) pp. 395-396 where the Court said:
"When such an unequal bargaining
situation develops between the parties,
the courts will more carefully scrutinize
such agreements for the purpose of
avoiding unconscionable clauses. (6A
Corbin on Contracts Section 1376)
Unconscionability has been defined as
contractual overreaching, imposition,
oppressiveness or patent unfairness.
(Hume v. U.S., 132 U.S. 406, 10 S.Ct.
134, 33 L.Ed. 393 (1889)."
An unconscionable agreement will not be disturbed where
there has been ratification of it with knowledge of all its
terms after there is time for adequate consideration. See
cases cited in 21 NY Jur 2d, Contracts, Sec.141, page 547.
The lease provided:
"6. If gas is found in paying quantities and conveyed
from the Premises and marketed, the Lessor may have
gas from the wells on the Premises not exceeding
200,000 cubic feet per year free of cost, for light
and heat on the Premises only, by laying the necessary
line and making connection at the Lessor's expense at
such point as may be designated by the Lessee, provided
said gas is measured by meter as in the case of other
consumers. . . ."
Plaintiffs claim they are entitled to free gas.
Defendant contends that free gas usage is reserved only to
the Lease in which the gas well is located; that a pooled
lease limits the free gas rights solely to the owner on whose
land the well or wells are located and not to any other
lessor in the pool.
There are no New York cases on this point, but, this
Court adopts the rationale in other gas and oil producing
jurisdictions that have held that a free gas clause in a
pooled lease entitles the Lessor to free gas usage.
The Kansas Supreme Court, in JacksonV.Farmer, 594 P.2d
177, 183, (1979), held that a free gas clause entitled the
Lessor of a lease within a unit to free gas for Lessor's
As in this Fredrickson case, the lease before the Kansas
court contained language that "any well drilled on such unit
shall for all purposes be a well under this Lease". The
Court held that language applicable to all provisions of the
lease, including the free gas clause.
The Arkansas Supreme Court in a similar case held
Lessors were entitled to free gas from the unit well not
located on their property. See Postv.TennecoOilCo, 648
W.W.2d 42 (1983).
That Court construed the language of the lease against
the defendant as an assignee of the drafter. It properly
reasoned that, because of the nature of gas deposits, gas was
actually being taken from Lessor's property, a fact that is
true in this case.
There is no language in the Fredrickson lease that would
limit free gas to the owner of property on which the well is
drilled. On the contrary, paragraph 4 of the lease
"Drilling, mining, or reworking operations upon,
or production of oil or gas from any part of any
such unit shall be treated, for all purposes
hereunder, as such operations upon or such
production from this lease".
Cases too numerous to mention recite that any ambiguity
in a written agreement should be construed most strongly
against the author. Although the rule does not have
application where a dispute occurs between parties claiming
under the same conveyance because each are entitled to the
benefit of the same rule of construction (NYJur2d, DEEDS,
Section 237 citing ColemanvBeach 97 NY 545), this Court
holds it applies to assignees of oil and gas leases who make
a business of, regularly deal with, and utilize form oil and
gas leases such as the one in this case.
If the lease is not subject to cancellation, this Court
holds that plaintiffs are entitled to free gas.
PAYMENTS IN DEFAULT UNDER PARA. 9 OF THE LEASE
Plaintiffs also call for cancellation of the lease
because of defendant's alleged failure to pay delay rentals
pursuant to the language of Paragraph 9.
That provisions states:
"This lease shall be in force for the
term of ten years from the date hereof,
and so long thereafter as the premises is
operated by lessee in search for a
production of oil or gas, and as
operations thereon continue for the
storage of gas or the removal of stored
gas, with the extension of term by
payment of rentals as hereinbefore set
forth; . . ."
This provision requires the lessee to operate on the
premises of the plaintiffs in search for a production of oil
or gas, "with extension of the term by payments of rentals
as hereinafter set forth" so that extension beyond the fixed
ten year term requires payment of delay rental unless a gas
well is paying quantities is found on plaintiff's premises.
In short, under the terms of paragraph 3, payment of
$28.25 for a period of three months is required, or $113 per
year. It is evident defendant has not made such payments,
presumably since November 1992 when gas was produced on other
Defendant relies on the language of Sec. 4 which reads:
"Drilling, mining or reworking of
operations upon or production of oil or
gas from any part of any such unit shall
be treated for all purposes hereunder, as
such operation upon or such production
from the lease."
This general language does not address the specific
obligation and undertaking of Sec. 9 quoted above. Moreover,
Section 4 deals with allocating royalties according to the
ratio of the acreage of each lease to the total acreage, and
"treated for all purposes hereunder", may equally be read as
applying solely to Para. 4.
4 Williston on Contracts, Third Ed., Sec. 619, p. 743
"Where there is a repugnancy between general clauses and
specific ones, the latter will govern;"
Clearly, in the court's view, paragraph 9 is a specific
clause whereas paragraph 4 is a general clause which
defendant reads as over-riding any and all specific clauses.
The Court holds that paragraph 9 governs and defendant
has been in default of payment of delay rental for an
extended time and remains in default despite plaintiffs
having made due and timely demand for payment.
Moreover, if it may be said that the premises
particularly paragraph 4 and 9 are ambiguous, the ambiguity
must be resolved against the maker of the document.
This Court holds that it could not and should not
entertain cancellation of an interest in real property
without a hearing.
Accordingly, the Court adjourns the motion for summary
judgment pending a hearing on the issues, including
unconscionability, and, payments under paragraph 9, and free
THIS IS THE DECISION OF THE COURT. PLAINTIFF IS DIRECTED TO
PREPARE AND SUBMIT A PROPOSED ORDER TO THE COURT AND OPPOSING
Dated: October ,1995
Mayville, New York
JOSEPH GERACE, J.S.C.