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The notice and demand required for cancellation of an oil and gas lease because of a breach of an implied covenant must be made before the initiation of the forfeiture action.
The lessees filed an action alleging that the lessors breached their contract by executing top leases to the working interests and that the working interests were trespassers and converters. The lessors alleged that the lessees had abandoned the lease and sought cancellation for the lessees' breach of the implied covenant of further development. The district court found in favor of the lessors and cancelled the lease for breach of an implied covenant to further develop the lease. The lessees appealed.
Under the circumstances, did the district court err in ordering the cancellation of the oil and gas lease?
On appeal, the court found that the doctrine of implied covenant to further develop was applicable to the leasehold, but the district court erred in ordering cancellation where no notice or demand was served on the lessees prior to execution of the working interests' leases. The district court's equity reasons for cancellation were without merit. Because the lessees failed to file an affidavit of production, the working interests needed actual or constructive notice of the prior leasehold for them to be liable to the lessees. Without knowledge, they would be bona fide purchasers, and the lessees' recourse would be against the lessors only. The court reversed the orders, vacated the judgment, and remanded for further findings.