vs HO7443





(Stephen E. Sellstrom,

of Counsel) for




(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

original lease.

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



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

leases indefinitely.


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

NYS2d 333)."


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."

(Citations omitted).


The court perceives that the same considerations apply

in drilling for gas.

Unconscionable Contracts

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.


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





Dated: October ,1995

Mayville, New York