PA Supreme Court Sides With Landowners, Declines to Extend Primary Lease Term of Oil and Gas Lease

The Pennsylvania Supreme Court recently issued a major decision, unanimously holding that the primary term of an oil gas lease is not extended or tolled during the pendency of litigation by a lessor seeking a declaratory judgment. The decision is contrary to decisions in many other jurisdictions, which allow a prevailing lessee an extension of time beyond the primary term to gain production.[1]

The case, Harrison v. Cabot Oil & Gas Corp.,[2] involved a husband and wife who commenced a lawsuit against Cabot seeking a declaratory judgment that the oil and gas lease they entered into was invalid due to fraudulent inducement by one of Cabot’s agents. Cabot denied the allegations and filed a counterclaim seeking a declaratory judgment that in the event the Harrisons were unsuccessful, the primary term of the lease would be “equitably tolled” during the pendency of the lawsuit, and would be extended for an equivalent period of time.

The United States District Court for the Middle District of Pennsylvania granted
summary judgment in favor of Cabot on the lease validity issues but ruled in favor of the landowners on Cabot’s counterclaim. The district court reasoned that precedent in Pennsylvania supports the conclusion that Pennsylvania law does not allow for an extension of the lease beyond the express terms of the lease under the circumstances.[3] Cabot appealed this specific holding to the Third Circuit Court of Appeals arguing that the Pennsylvania Supreme Court “would recognize the rule that, where a lessor repudiates a lease by initiating litigation seeking to invalidate the lease, the lessee is entitled to an equitable extension of the lease term if the lessor's claim is denied.”[4] The Third Circuit then certified the question to the Pennsylvania Supreme Court.

Cabot argued its case to the Pennsylvania Supreme Court under basic contract principles: that litigation by the lessor deprives the lessee of the benefit of the bargain. Cabot asserted that lease-validity lawsuits essentially make it impossible to drill during the pendency of litigation due to the multi-million dollar investments of drilling for gas in unconventional formations, and that Pennsylvania should follow other jurisdictions and treat a meritless lease challenge as repudiation of the contract and apply equitable-extension principles.

The Harrisons argued that the Court should follow the federal district court’s reasoning and not allow the primary term to be extended by its express period.  They argued that equitable-extension principals applied to lease-validity actions punishes landowners for protecting their legal rights and Cabot was seeking “judicial affirmative action” by asking courts to rewrite contracts in the favor of oil and gas companies. Other landowners, in amicus briefs, argued that oil and gas lease-validity litigation is one of many risks associated with oil and gas extraction and that choosing not to produce during the pendency of litigation is a business judgment that does not warrant shifting the risk from multimillion-dollar companies to small landowners.

The Supreme Court agreed with the landowners and held that the risk factors associated with oil and gas development did not justify adopting a special approach to repudiation in favor of oil and gas companies. In doing so, the Court concluded that filing a declaratory judgment action is not a repudiation of the contract under Pennsylvania law. The Court recognized that Pennsylvania’s
Declaratory Judgment Act is remedial in nature, and is intended to be liberally construed and administered in furtherance of remedial aims.[5]

So what does this mean for landowners? Declaratory judgment litigation can take years to reach a conclusion. Mineral ownership disputes are becoming increasingly common and the law is still developing in this area, making outcomes especially uncertain. Now, landowners attempting to declare their mineral ownership rights in Pennsylvania can generally do so without worrying about extending the primary term of the lease merely by filing a declaratory judgment action. However, it should be noted that the Court’s decision was limited to a declaratory judgment action (as opposed to a breach of contract or rescission action) and the Court did not specifically opine on whether a more definite repudiation, such as by blocking access to land during litigation, would toll the primary term of a lease.

Also, the Court’s reasoning was based in part on the fact that oil and gas companies are free to negotiate extension or tolling provisions in their leases. Landowners in Pennsylvania should expect to see tolling provisions become commonplace in oil and gas leases. Landowners will want to consider the importance of having a definite and express primary term before signing a lease containing a tolling or extension provision.

Written by James Yskamp, PA Staff Attorney and Ohio Program Manager.

[1] 3 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 604.7 (2009).

[2] No. 75 MAP 2014.

[3] Harrison v. Cabot Oil & Gas Corp., 887 F. Supp. 2d 588, 596 (M.D. Pa. 2012).

[4] Petition for Certification in Harrison, No. 12–3613, at 5.

[5] See 42 Pa. Cons. Stat. Ann. § 7541(a).