Primary Oil and Gas Lease Term Will Be Permitted to Expire Even with Litigation Pending
On Tuesday, February 17, 2015, the Pennsylvania Supreme Court unanimously held that in certain cases a primary oil and gas lease term will be permitted to expire even with litigation pending. This decision in Harrison v. Cabot was a departure by Pennsylvania from all other oil and gas producing jurisdictions that have applied equitable tolling principles.
In August 2007, the Harrisons signed an oil and gas lease with Cabot allowing for production on their property. The lease contained a primary term of five years and for “as long thereafter as oil or gas is produced… in paying quantities.” The lease also contained an option for Cabot to extend the lease for five years. Halfway through the primary term, the Harrisons filed a civil action in federal court seeking a declaratory judgment that the lease was invalid, claiming they had been fraudulently induced into signing the lease through the claim by Cabot’s representative that they would never get more for their oil and gas rights than was being offered at that time. Other area lessors eventually ended up being offered more, according to Harrison. Cabot filed a counterclaim asking for a declaratory judgment that the lease term would be equitably tolled if Cabot prevailed. The District Court ruled against the Harrisons on the lease, but also ruled that primary term of the lease would continue to run during the litigation, leading to its expiration.
The case was appealed to the Third Circuit. The Pennsylvania Supreme Court was asked to answer a certified question regarding the equitable tolling, which it did through this opinion. The Supreme Court solely looked at the issue of whether in this circumstance a lease would be equitably tolled. They found that equitable tolling only occurs when a lessee somehow refuses or prohibits a lessor from benefiting under the terms of the lease. In the eyes of the Court, a request for a declaratory judgment is not enough to actually prohibit development. The rationale for this is that a request for a declaratory judgment is not a breach of contract and oil and gas companies are capable of addressing tolling in the event of litigation in their leases. The Court focused on the need for at least anticipatory repudiation, meaning “absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so.”
The major take away from this decision is that all oil and gas producing companies in Pennsylvania should incorporate a tolling provision into all future oil and gas leases. This is a simple paragraph that states that in the event of a dispute or litigation over the lease, the primary term will be tolled until the issue is resolved.
This decision is narrow and does not permit for lessees to otherwise interfere with producers in their efforts to perform under a valid lease. The Supreme Court also only discussed declaratory judgments without comment on whether or not other forms of litigation may be seen as sufficient repudiation to warrant equitable tolling. This puts oil and gas companies in a precarious position when litigation is brought against them and it is not clear whether or not they will win, thus making it even more unclear whether or not the investment of drilling on that particular property is worth the risk.
If you or your clients have any questions regarding the implications of the PA Supreme Court’s decision, please contact Leech Tishman’s Energy Practice Group at 412.261.1600.
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