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Heasley v. KSM Energy, Inc.

The Heasley case involved construction of two 1942 oil and gas leases subsequently assigned to defendant KSM. Each lease provided for a primary term of 20 years and could be extended for "as long thereafter as oil or gas ... is produced." Each lease further provided for payment of a flat quarterly royalty payment, the amount of which was tied to measured gas pressure, if a well produced gas that was used off the leased premises. Although KSM had made the required quarterly payments to plaintiff Heasley who accepted them through 2008, there was no production on the leasehold, and Heasley brought an action in Jefferson County seeking a declaration that the leases were terminated. The trial court entered judgment in Heasley's favor and KSM appealed. On appeal, KSM relied on the Pennsylvania Supreme Court's decision in T.W. Phillips Gas and Oil Co. v. Komar for the proposition that a lease providing for a flat royalty rather than one based on a percentage of production could be held by making the required payments.

In the Phillips case, the lease at issue required payment of a flat quarterly royalty, the amount of which was based on measured gas pressure, from completion of a well until its abandonment, regardless of whether there was production from the well. Although the leases at issue in Heasley also provided for a flat quarterly royalty based on measured gas pressure, payment was to be made while gas from the leased premises was used off the premises, and the leases further provided for extension of the primary term by production. The Superior Court distinguished Phillips on this basis, found that when production had ceased, the lease had become an at-will tenancy, and affirmed the order of the lower court.

Parties who acquire an older lease providing for fixed royalty payments tied to measured gas pressure should take particular note of the lease habendum clause to ascertain how the lease can be held after termination of the primary term.