Pennsylvania Superior Court Interprets Nonstandard Habendum Clause of Oil and Gas Leases
In Hite v. Falcon Partners Trust, 2011 WL 9632 (Pa. Super. Ct. 2011), the Pennsylvania Superior Court interpreted the nonstandard habendum clause of certain oil and gas leases, which read:
Term. Lessee has the right to enter upon the Property to drill for oil and gas at any time within one [sic.] (1) year from the date hereof and so long thereafter as oil or gas or either of them is produced from the Property, or as operations continue for the production of oil or gas, or as Lessee shall continue to pay Lessors two ($2.00) dollars per acre as delayed rentals, or until all oil and gas has been removed from the Property, whichever shall last occur.
The leases were dated 2002 and 2003, and assigned to Falcon in 2007. No effort was made to drill upon any of the leases, but "delayed" rentals were paid when and as due. In 2008, the landowners were approached by a competing operator and offered terms for new leases. The landowners, pursuant to a "Right of Renewal" clause, offered Falcon the right to match the offer of the competing company. After Falcon did not accept, the landowners brought an action to determine the status of the leases.
Upon cross motions for summary judgment, the Cambria County trial court determined that the leases had terminated. The Superior Court affirmed, and, relying heavily upon Jacobs v. CNG Transmission Corp., 332 F. Supp. 2d 759 (W.D. Pa. 2004), held that the interest of a lessee under a Pennsylvania oil and gas lease begins as an inchoate right, and upon achieving production, becomes a fee simple determinable ownership of the oil and gas in place. Specifically, the court pointed to the following language in Jacobs:
The initial title conveyed by an oil and gas lease is inchoate, and for the purposes of exploration only. Calhoon, [201 Pa. at 101], 50 A. at 968. The lessee may perfect its inchoate title to a vested interest by bringing the property into production. At that juncture the lessee gains a fee simple determinable in the oil and gas, and may continue to reap the benefit of his efforts in accordance with the terms and conditions of the lease. [Brown v. Haight, 435 Pa. 12, 17, 255 A.2d 508, 511 (1969)] (interpreting traditional habendum clause of oil and gas lease to convey fee simple determinable once production in paying quantities has occurred). Defendant has failed to advance any case where the mere payment of a delay rental beyond the term of the lease has been held to create a vested corporeal hereditament (such as in a coal lease that amounts to the sale of the coal in place). Hummel v. McFadden, 395 Pa. 543, 544, 150 A.2d 856. 861 (1959) [emphasis in original].
The synthesis of earlier Pennsylvania authority and the evolution of the legal nature of oil and gas leases can be clearly seen in the Superior Court?s adoption of the federal court?s position. The decision in Jacobs will be useful in interpreting oil and gas leases in the future.
Should you have questions about this or any matter involving energy law, please contact the Energy Group at Steptoe & Johnson PLLC.