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Case Bulletin — Pennsylvania Supreme Court Rules on Tolling of Oil and Gas Leases

On February 17, 2015 in the case Wayne Harrison et al. v. Cabot Oil & Gas Corporation,2015 WL 668073 (Pa. 2015), the Pennsylvania Supreme Court ruled that a landowner’s legal dispute against Cabot Oil & Gas Corporation (“Cabot”) would not allow Cabot to extend that lease.  In 2007, the Harrisons entered into an oil and gas lease with Cabot. The habendum clause for the Harrisons’ lease provided for a primary term of five years and an extended  term for as long as oil or gas was produced in paying quantities on the property. The lease also provided Cabot with an option to extend the primary term another five years.  Cabot agreed to pay the Harrisons an initial bonus plus a one-eighth royalty on oil and gas successfully produced from the land.

 

Approximately half-way through the primary term of the lease, the Harrisons filed a complaint in the U.S. District Court for the Middle District of Pennsylvania  seeking a declaration that the lease was invalid because Cabot allegedly fraudulently induced Mr. Harrison to enter into the lease. The Harrisons’ complaint alleged that a representative from Cabot told Mr. Harrison that he would never receive over $100 per acre as an initial bonus payment from a gas producing company.  Cabot responded by denying the lease was invalid and filing a counterclaim seeking a declaratory judgment to toll the primary term of the lease because Cabot asserted it could not develop or commence operations on the Harrisons’ property while the lawsuit was pending.

 

Cabot filed motions for summary judgment arguing that the Harrisons’ lease was valid and that the primary term of the lease should be tolled. The U.S. District Court for the Middle District of Pennsylvania granted Cabot summary judgment as to the validity of the lease but determined that Pennsylvania law did not permit tolling the primary term of the Harrisons’ lease because of the pending lawsuit. The district court cited to Derrickheim Co. v. Brown, 451 A.2d 477 (Pa. Super. 1982) in support of its decision on Cabot’s counterclaim, citing that the Derrickheim decision established that in Pennsylvania, the express terms of a lease cannot be changed by “equitable considerations in a circumstance in which an oil and gas company forewent operation of a well until a defect in the lessor’s title was resolved.” Id. at 480. Cabot then appealed the district court’s decision on its counterclaim to the Third Circuit and filed a motion requesting certification to the Pennsylvania Supreme Court.

 

The Third Circuit granted Cabot’s request, which the Pennsylvania Supreme Court accepted, noting this was an issue of first impression and great significance to Pennsylvania’s oil and gas industry. The Pennsylvania Supreme Court  then upheld the district court’s decision denying Cabot’s request to toll the lease, which departed from the legal precedents established in Arkansas, Illinois, Louisiana, Michigan, Montana, Ohio, Oklahoma, and Texas.

 

In making its decision, the Pennsylvania Supreme Court relied heavily on the oil and gas companies’ apparent superior bargaining power in lease negotiations. Despite refusing to provide for equitable extension of an oil and gas lease, the Pennsylvania Supreme Court opinion explicitly advised that oil and gas companies could draft contracts to include tolling provisions in the event of legal challenges to the oil and gas lease. The Harrison opinion supports that  a tolling provision in leases or in lease amendments would be upheld in court.

 

Though the Harrison opinion declines to adopt the traditional standard for equitable extensions, Harrison has provided  a modicum of certainty on this issue, and oil and gas companies would be prudent to incorporate equitable tolling provisions in leases and lease amendments.