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Dethloff v. Zeigler Coal Co.

OPINION FILED OCTOBER 17, 1980.

PHILLIP A. DETHLOFF ET AL., APPELLANTS,

v.

ZEIGLER COAL CO., APPELLEE.



Appeal from the Appellate Court for the Fourth District; heard in that court on appeal from the Circuit Court of Douglas County, the Hon. James N. Sherrick, Judge, presiding.

MR. JUSTICE WARD DELIVERED THE OPINION OF THE COURT:

Rehearing denied November 26, 1980.

On June 29, 1976, Phillip and Dorothy Dethloff filed a complaint in the circuit court of Douglas County alleging that the defendant, the Zeigler Coal Company (Zeigler), had unlawfully entered the plaintiffs' land in January of 1976 and mined coal which it later converted. Counts I and II of the complaint asked for compensatory and punitive damages for trespass and conversion. Count III sought a declaratory judgment that the leasing agreement entered into by each party's predecessor in title and interest had expired by its terms on June 20, 1970. The trial court held in the plaintiffs' favor on count III but granted Zeigler's motion for summary judgment on count II on the issue of punitive damages. Count I was submitted to a jury, which returned a verdict of $4,019,867.08 in compensatory damages.

The appellate court affirmed. (69 Ill. App.3d 133.) It judged, however, that the trial court's holding that the defendant was not, as a matter of law, a trespasser in good faith was an issue of fact which should have been submitted to the jury. The court reduced the judgment to $1,573,455.57, saying it did so to avoid the necessity of remanding the cause for a new trial. The plaintiffs consented to the remittitur. (See 73 Ill.2d R. 366(b)(2)(ii).) The petitions for leave to appeal of the defendant and the plaintiffs were granted by us and the appeals consolidated. 73 Ill.2d R. 315.

The predecessors of the parties in title and interest, that is, the original lessors and lessee, entered into a leasing agreement on June 20, 1945, whereby the lessee was given the right to mine all of the subsurface coal contained within the lessor's 40-acre tract of land located in Douglas County. This parcel was but one of many such properties in the area whose owners, through leasing agreements, had extended similar, if not identical, mining rights to those now held by Zeigler. The habendum clause of the lease here provided in part:

"This lease shall be and continue for the term of twenty-five (25) years from and after the date hereof, and for so long thereafter as shall in the opinion of Lessee be necessary to mine and remove all of the coal in and under the above described leased lands and other lands in the vicinity thereof, or included in the block of leased coal hereinafter referred to, unless this lease is sooner terminated as hereinafter provided and unless in the opinion of the Lessee the coal which can be economically mined in accordance with good and accepted mining practices from said lands shall be sooner exhausted."

In October of 1969, the Dethloffs, the plaintiffs in this case, acquired their 40-acre tract from Mr. and Mrs. Joseph Taylor. A title search revealed the existence of the coal-leasing rights held by Zeigler. The defendant was not informed of the conveyance to the plaintiffs, and it continued to forward the annual rental fee of $80 to the Taylors. It was only when the Taylors returned the rental payment for 1971 that Zeigler became aware that the Dethloffs were the new owners of the tract.

When the defendant tendered this rental payment to the plaintiffs in October of 1971 their attorney wrote to the defendant stating that the lease had expired according to its own terms on June 20, 1970. The letter did indicate, however, that the Dethloffs were interested in renegotiating a new lease and, in particular, in renegotiating the royalty payment provision. During the 26-year period from June 20, 1945, until October of 1971 no coal had been taken or mined from the plaintiffs property by the defendant or its predecessor in interest.

Upon rejection of the rental payment by the plaintiffs Zeigler said it would exercise its right under the lease to withhold further payments of rent pending resolution of any disputed questions as to the rights of the parties. The defendant did not respond, however, to the plaintiffs' repeated overtures to renegotiate the lease. Negotiations were again attempted in 1975 by the plaintiffs after they became aware that Zeigler was planning to commence mining operations on the land either that fall or in the spring of 1976. Mining operations were commenced in January 1976, almost 31 years after the leasing agreement was executed.

A check for the royalty payment for coal mined in January and February was delivered to the plaintiffs in March of that year. The Dethloffs reacted with a demand that Zeigler discontinue operations on their land. Though the Dethloffs filed suit that June, defendant continued its mining operation until December of 1976, when all of the coal that could be subterraneanly mined from the plaintiffs' land had been removed. The record shows that royalty checks delivered every month to the plaintiffs through December 1976 were not cashed but were retained by them in a safety deposit box as evidence of the amount of coal mined each month.

As the parties generally agree, the central question is the interpretation to be given to the mining lease. More specifically, the issue is whether the lease automatically expired by its provisions on June 20, 1970, after the 25-year term had expired, or whether it remained in effect until December of 1976, when defendant completed the removal of all of the subsurface coal from the plaintiffs' property.

Though the legal and economic interests as well as exploratory and extraction techniques involved in hardmineral and coal production differ from those pertaining to fugacious substances such as oil and gas (see, e.g., Norvell, The Coal and Lignite Lease Compared to the Oil and Gas Lease, 31 Ark. L. Rev. 420 (1977)), coal-mining leases closely resemble oil and gas leasing agreements. As a result, the body of the law and rules of construction used to interpret the latter instruments have been applied to coal-mining leases like the one here. See Fremont Lumber Co. v. Starrell Petroleum Co. (1961), 228 Or. 180, 364 P.2d 773; Fletcher, Mining Leases and Gas Leases — Different Breeds, 24 Rocky Mtn. Min. L. Inst. 309 (1978).

The habendum clause in the lease executed on June 20, 1945, is of the standard form found in oil and gas leases. It provides that the agreement to mine coal shall be in effect for "the term of twenty-five (25) years from and after the date hereof [June 20, 1945], and for so long thereafter as shall in the opinion of Lessee be necessary to mine and remove all the coal in and under the above described leased lands * * *." (Emphasis added.)

The purpose of the habendum clause in a lease is to define and measure the duration of the lessee's interest in the property to be developed. (See H. Williams, Oil and Gas sec. 604 (1977); 2 W. Summers, Oil and Gas secs. 281 through 307 (1959).) Typically, the clause is in two parts. The first part, or primary term, defines the time period within which production or removal must begin. The second part, or "thereafter" clause, extends the lessee's right to mine for an indefinite duration beyond the term of years, usually for as long as it is profitable to continue production or, in the terms of this lease, as long as "the coal * * * can be economically mined in accordance with good and accepted mining practices * * *." (See Freeland v. Edwards (1957), 11 Ill.2d 395.) The "indefinite duration" clause does not come into effect, however, until production operations have begun within the primary term or period of the lease. Habendum clauses of this type generally have been interpreted as vesting the lessee with an interest subject to this special limitation that mining operations must commence within the primary period of the lease. Thus, if no production or significant mining operations have been initiated within the primary period the lease automatically terminates at the end of that period or term. (See Fremont Lumber Co. v. Starrell Petroleum Co. (1961), 228 Or. 180, 364 P.2d 773; Brown v. Haight (1969), 435 Pa. 12, 255 A.2d 508.) See also Guffey v. Smith (1915), 237 U.S. 101, 59 L.Ed. 856, 35 S.Ct. 526; H. Williams, Oil and Gas sec. 604 (1977).

Both the trial and appellate courts> held that Zeigler's failure to mine coal from the Dethloffs' property within the lease's primary term of 25 years resulted in the automatic forfeiture or termination of all of the defendant's mining rights and that it was liable for trespass and conversion.

The defendant presents several contentions basically to the effect that the interpretation given the lease by the trial and appellate courts> was erroneous. The company first submits that the leasing agreement did not convey a leasehold estate subject to a special limitation but instead granted "a freehold estate or interest" subject to a condition subsequent. Under this theory the lessee's interest in mining the coal would not terminate automatically upon a breach by it but only when the lessor had taken affirmative action by either demanding performance by the defendant or by extinguishing its interest through a forfeiture proceeding. Since no such action was ...


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