Thursday, September 26, 2013

Superior court finds forfeiture clause inapplicable where royalties are not paid after the completion of a well

On September 20, 2013, the Superior Court of Pennsylvania upheld a trial court’s decision that forfeiture clauses in oil and gas leases customarily apply to failures to complete a well or make delay rental payments in the primary term. McCausland v. Wagner,  2013 WL 5296824 (Pa. Sup. Ct. September, 20 2013). In 1964, Elmer McCausland (a landowner) entered into an oil and gas lease with the Wagners (producers). The lease contained a forfeiture clause that provided that failure to make delay rental payments or complete one well on the leasehold in the primary term would render the lease null and void. Further, the clause provided that once the lease was rescinded the landowner would have no “right of action in law and equity” against the producer. In 2009, McCausland initiated the instant action alleging he had not received royalties from gas produced since November of 2005. He sought both monetary damages and a declaration that the lease was null and void. A settlement awarding McCausland $37,258.94 dollars for past royalties plus 3.5% interest was reached in 2010. The operator continued to make and the landowner continued to receive royalty payments after the settlement.

In December of 2011, McCausland filed the motion at issue to have the trial court declare the lease null and void. Wagner cross motioned for summary judgment asking the court to find the lease still in effect. The trial court granted Wagner’s motion and denied McCausland’s, and declared the lease to still be in effect.

The superior court held that the trial court did not clearly err in denying McCausland’s motion for summary judgment because the forfeiture clause only pertained to missed delay rental payments in the primary term of the lease. The court explained that Wagner’s argument to the contrary lacked merit for two reasons. First, the court stated McCausland deprived himself the right to declare forfeiture under the lease because although the facts demonstrated Wagner missed royalty payments that after the settlement McCausland accepted further payments. Second, the court reasoned where a well is completed and producing the forfeiture clause traditionally does not apply because the clause’s purpose is to guarantee development, or payment where development does not occur, in the primary term. Here, a well was completed and the lease was no longer in the primary term.  Therefore, the Superior Court upheld the order granting summary judgment for the producer, Wagner.

Written by: Garrett Lent, Research Assistant
Agricultural Law Resource and Reference Center
September 2013

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