In a recent decision, the Washington County Court of Common Pleas granted a landowner's request to terminate a ninety-one year old oil/gas lease due to non-production. In Wilson v. Equitable Gas Company, (No. 2009-6503 Washington County, August 31, 2011), the trial court held that a five-year gap in production was sufficient to automatically terminate the lease. As explained below, this decision could impact hundreds of non-producing leases across the Commonwealth.
The facts of the Wilson case are very common to many landowners in Pennsylvania. The Wilson family purchased a 197 acre farm in Amwell Township, Washington County in the late 1980's. The farm was subject to an old gas lease originally signed back in 1920 ("1920 Lease"). At the time the Wilsons bought the farm, there was a single, shallow well on the property that produced modest royalties. No gas, however, was produced between 2001 and 2006. Production was restored in 2006. In 2009, the Wilsons brought suit seeking cancellation of the 1920 Lease due to the complete cessation of production between 2001 and 2006. Interestingly, the well was producing gas at the time the suit was filed.
The 1920 Lease contained a typical habendum clause with a ten (10) year primary term. Following expiration of the ten (10) year primary term, the 1920 Lease would remain in effect "as long thereafter as oil or gas, or either of them, is produced from said land by the said party of the second part..." The Wilsons contended that the moment production ceased in 2001, the 1920 Lease automatically converted to a "tenancy at will" which they could terminate at any time. The trial court agreed and opined that:
Very good case, I looked at it in some detail at the Washington County Court house.
A decision of this variety occurs in virtually every jurisdiction in the U.S. It is commonly understood that you cannot breathe life into a dead lease. Once production in paying quantities ceases (except in limited circumstances where a lease provision or existing case law will give a lessee a reasonable amount of time to fix a mechanical problem that is considered as temporary in nature) you are toast. A five year cessation certainly wouldn't be construed as being a reasonable period of time.
I agree with you but Equitable gas certainly did not, but it sure is nice when the fight goes to court and becomes public and the land owner wins.
I think that this was a fair ruling provided that the landowner was not cashing royalty checks from 2006 through 2009 (between the restart of production and the suit being filed), if the landowners were accepting royalties then by accepting payment they were in fact agreeing to the terms of the lease.
I don't think it is a good idea to cash royalty checks if your well is not producing, but I don't beleive it is a deal breaker either. It all comes down to production, if it stops producing gas, the lease ends. And just cause they say it is producing and send you a little check every month does not mean it is producing. BTW I am in no means an expert in any of these fields.
Here is an exerpt from the following link challenging your claim in Ohio
Arguments will likely be made that if a landowner is currently accepting
royalty payments under a lease, the lease is ratified and still a valid lease. In
Litton v. Geisler
, the Fourth Appellate District Court noted that, “[i]t is rather
universally held that acceptance of rents or royalties under an oil and gas lease
such as the one here under consideration is a waiver of forfeiture for breach of
any covenant or condition for which such rents or royalties are paid.”
Bonner Farms Ltd. v. Fritz, the United States Court of Appeals for
the Sixth Circuit rejected this argument in its analysis of Ohio law.
17 In that
case, it was argued that the landowners’ acceptance of royalty payments ratified
a lease that had not been producing. The court disagreed and held that the
landowner was already entitled to payment from mineral interest that he owned
and therefore his actions did not constitute ratification. The court stated that
“before a party is estopped by the receipt of benefits from a transaction to deny
the validity of the transaction it must initially appear that he is not otherwise
entitled to those benefits.”
18 If the landowner accepted free gas or rental
payments under the lease, the estoppel claim would have been valid.
Possibly not if the land owner does not have the royalties (he made have sold the royalty to a specific well or wells) in that case it would be possible to be getting a royalty check which would be directed by division orders, but not as the land owner legally owning the royalty.