Mildred Mitchell JONES et vir, Petitioners, v. S. H. KILLINGSWORTH et al., Respondents, 403 S.W.2d 325

SMITH, Justice. ON MOTION FOR REHEARING Our opinion delivered on June 23, 1965, is withdrawn and the following opinion is substituted therefor. The question presented for our determination is whether or not the lands owned by the petitioner, Mildred Mitchell Jones, and described in an oil, gas and mineral lease executed by Mildred Mitchell Jones and her husband, Harry C. Jones, as lessors, to S. S. Long, as lessee (later assigned to S. H. Killingsworth), on August 16, 1951, were effectively pooled into what is known as the Hunt Oil Company et al. — West Poynor Unit.

The trial court, without a jury, held that Killingsworth effectively pooled the acreage covered by the lease in accordance with authority granted in the lease, and for that reason the lease did not terminate on August 16, 1961, the date of the expiration of the primary term. A take-nothing judgment rendered against the petitioners has been affirmed by the Court of Civil Appeals. 379 S.W.2d 362. The judgments of both the trial court and the Court of Civil Appeals are reversed and judgment is rendered for the petitioners. Mildred Mitchell Jones and her husband filed this suit against S. H.

Killingsworth and owners of leases in the immediate vicinity of the Mitchell-Long lease. These owners will be referred to as “Hunt Petroleum Corporation.” On July 12, 1961, at a time when the Mitchell-Long lease was in effect and was owned by and the title thereto was vested in S. H.

Killingsworth, subject to certain overriding royalty interests, Kill-ingsworth, joined by the above-mentioned owners of other leases, entered into a pooling agreement establishing a unit hereinafter referred to as the “West Poynor Unit.” The two tracts of land described in the Mitchell-Long lease were included within this unit designation. These tracts contained, in the aggregate, 20.55 acres. It was stipulated that the created unit contained 170.86 acres. However, the parties deal with this unit as though it contains only 160 acres.

It was stipulated that the unit owners commenced drilling operations on the West Poynor Unit and completed a producing oil well on or about August 16, 1961, which “unit well” has continued to produce oil in paying quantities. It was agreed that “no well in search of oil, gas or other minerals has been drilled by S. H.

Killingsworth and the other defendants on the lands actually described by metes and bounds in the Long lease, and that no oil, gas or other minerals in paying quantities has been produced from any well actually located on the lands actually described in the Long lease.” Although lessors contend that they are not bound by the terms of the Unit Declaration and the Amended Unit Declaration, it is agreed that Killingsworth and the other unit owners in the unit acted in good faith in forming the unit, in securing a permit to drill and in drilling the well on the unit.

The habendum clause of the Mitchell-Long lease provides that: “Subject to the other provisions herein contained, this lease shall be for a term of ten (10) years from this date * * and as long thereafter as oil * * * is produced from * * * land with which said land is pooled hereunder.” The pertinent pooling provisions of the lease are to be found in the first two sentences of paragraph 4 of the Mitchell-Long lease.

These sentences read as follows: “Lessee, at its option, is hereby given the right and power to pool or combine the acreage covered by this lease, or any portion thereof as to oil and gas, or either of them, with other land, lease or leases in the immediate vicinity thereof to the extent, hereinafter stipulated, when in Lessee’s judgment it is necessary or advisable to do so in order properly to develop and operate said leased premises in compliance with the spacing rules of the Railroad Commission of Texas, or other lawful authority, or when to do so would, in the judgment of Lessee, promote the conservation of oil and gas from said premises.

Units pooled for oil hereunder shall not substantially exceed 40 acres each in area, and units pooled for gas hereunder shall not substantially exceed in area 640 acres each plus a tolerance of 10% thereof, provided that should governmental authority having jurisdiction prescribe or permit the creation of units larger than those specified, units thereafter created may conform substantially in size with those prescribed by governmental regulations.” The issue in this case is not whether the pooling clause granted authority to pool the Jones’ land into an oil unit consisting of more than 40 acres.

The issue, properly defined, is whether the pooling clause granted authority to pool the Jones’ land into an oil unit containing 170.-86 acres. The lessors take the position that authority to pool their land into an oil unit consisting of 170.86 acres was not granted by the lease, and that the attempt to pool did not effectively extend the term of the lease beyond the terminal date provided therein.

We agree with the lessee that the pooling provision confers authority on the lessee to pool the lessors’ land, but, we do not agree that the extent to which the power to pool may be exercised is entrusted solely to the lessee’s judgment. The lessors’ land may be pooled only to the extent stipulated in the lease.

The second sentence of the pooling provision provides that “units pooled for oil * * * shall not substantially exceed 40 acres each in area, and units pooled for gas * * * shall not substantially exceed in area 640 acres each plus a tolerance of 10% thereof. * * * ” However, this provision must be construed in the light of the further provisions which is to the effect that in the event a governmental authority having jurisdiction should “prescribe or permit the creation of units larger than those specified units thereafter created may conform substantially in size with those prescribed by governmental regulations.” [Emphasis added.] Absent this proviso, perhaps it could well be said that the lessee was given authority to pool the lessor’s land for oil only in units not substantially exceeding 40 acres in area for either the purpose of complying with spacing rules or to promote the conservation of oil, the two situations mentioned in the first sentence wherein the power to pool is left exclusively to lessee’s judgment.

In order to ascertain the true intention of the parties to this lease, the Court should take into consideration all of the pooling provisions contained therein, as well as the rules and regulations governing the Fairway (James Lime) Field in which lessors’ land is located. [The rules adopted by the Railroad Commission governing that field have the express purpose of “permitting only one well to each eighty (80) acre proration unit.” The field rules only encourage larger units by permitting an operator “to assign tolerance of not more than eighty (80) acres of additional unassigned lease acreage to a well on an eighty (80) acre unit and shall in such event receive allowable credit for not more than one hundred sixty (160) acres.”] It is argued that these Railroad Commission rules provide for proration units of not less than 80 acres more than 160 acres, and that by reading the rules into the lease contract, paragraph 4 of the lease would read: “the size of the units thereafter created may not be substantially less than 80 acres nor substantially more than 160 acres.” We disagree with this construction of the lease contract.

The lessors did not consent to enlarge an oil proration unit to any size permitted by governmental regulations. They gave their consent to enlarge a unit of substantially 40 acres, but only to the extent of the size of units prescribed by the regulatory authority. The fact that the Railroad Commission may permit a much larger unit cannot be read into the lease contract when, as here, the authority to create larger oil units is expressly limited to units of the size prescribed by the Railroad Commission.

The Commission prescribed a unit of 80 acres. [The field rules clearly say that there must be a proration unit of at least 80 acres, and there may be larger units of not more than 160 acres.] It is true that the pooling provision contains the word “permit” as well as the word “prescribe.” It is not unreasonable to assume that the parties to the lease contract intended, by the use of both words, to give each a distinctly different meaning.

The parties obviously knew when the lease contract was executed that a permitted oil pro-ration unit could conceivably be much larger in area than one prescribed by governmental authority. To say that a lessee can pool lessors’ land with units of any size permitted by the Railroad Commission would defeat the intention of the parties to restrict the size of the units to the size prescribed by governmental authority. Absent express authority, a lessee has no power to pool interests in the estate retained by the lessor with those of other lessors. See Brown v.

Smith, 141 Tex. 425, 174 S.W.2d 43 (1943); Gulf Oil Corporation v. Marathon Oil Co., 137 Tex. 59, 152 S.W.2d 711 (1941); Knight v. Chicago Corporation, 144 Tex. 98, 188 S.W.2d 564 (1945). Since the lands were pooled without authority, the habendum clause in the Mitchell-Long lease cannot be used to extend the term of the lease beyond August 16, 1961, the terminal date of the primary term of the lease.

Killingsworth and the Hunt Petroleum Corporation contend that the pooling clause in the Mitchell-Long lease created a relationship of principal and agent, or at least created a relationship similar to that of principal and agent, and that performance by the lessee is to be measured by the standard of good faith. It is true that the lessee acted in good faith. It is true that the lessee was given authority to pool. It is equally true that the permit granted by the Railroad Commission is unquestionably valid.

Even so, the acts of the Railroad Commission cannot be said to operate effectively to extend the restrictive terms of the lease. The orders of the Railroad Commission cannot compel pooling agreements that the parties themselves do not agree upon. The Railroad Commission has no power to determine property rights. See Ryan Consolidated Petroleum Corp. v. Pickens, 155 Tex. 221, 285 S.W.2d 201 (1955); Magnolia Petroleum Co. v. Railroad Commission, 141 Tex. 96, 170 S.W.2d 189 (1943); Nale v.

Carroll, 155 Tex. 555, 289 S.W.2d 743 (1956). [The judgments of the trial court and the Court of Civil Appeals are both reversed and judgment is rendered declaring the Mitchell-Long lease terminated as of August 16, 1961, and the title and possession of the lands described in said lease is awarded to Mildred Mitchell Jones. Respondents’ motion for rehearing is overruled. A second motion for rehearing may be filed within fifteen days.] GRIFFIN, HAMILTON and POPE, JJ., dissenting.