Danne v. Texaco Exploration and Production

Herbert Danne and his family (Danne), Eloise Flint, and the William F. Lohmeyer Living Trust (Lohmeyer) (collectively, landowners) (plaintiffs) were joint owners of property in Oklahoma. Through separate contracts executed by Danne, Flint, and Loymeyer, the landowners leased their property interests to Texaco, Inc. (defendant) for oil-and-gas development. The three leases included habendum clauses that created both primary and secondary terms. During the primary term, Texaco was given a certain amount of time to locate a profitable oil-and-gas well. If a producing well was established prior to the expiration of the primary term, the lease would automatically extend into a secondary term. The secondary term would continue indefinitely so long as (1) the well produced oil or gas in paying quantities or (2) Texaco paid a set annual dollar amount for “shut-in” royalties. After executing these leases, Texaco established a single profitable oil-and-gas well within the primary term, triggering the secondary lease term. But Texaco later halted production for four years and did not make annual shut-in payments to the landowners. At the end of the four-year period, Texaco tendered shut-in payments to the landowners. Danne refused to accept the payments. Flint and Lohmeyer accepted them. The landowners then sued Texaco to cancel the leases, arguing that the leases terminated automatically when the well ceased providing oil or gas in paying quantities. The trial court held that the leases automatically terminated. Texaco appealed.