The Oil and Gas Addendum
Pennsylvania Superior Court Interprets Forfeiture Clause in Oil and Gas Lease
In McCausland v. Wagner, the Pennsylvania Superior Court was confronted with the question of whether the lessor under an oil and gas lease was entitled to terminate the lease due to the lessee’s failure to pay royalties under the lease. 2013 PA Super 256 (Pa. Super. Sept. 20, 2013). The lessor argued that the forfeiture clause in the lease entitled him to terminate the lease, even though he had accepted payments for the belated royalties under a separate settlement reached with the lessee. The Superior Court disagreed.
The court began its analysis by noting that oil and gas leases are unique in that they implicate both contract and property interests. Specifically, the court explained that an oil and gas lease works by vesting title to the minerals in the lessee if oil and gas is discovered on the property. Upon the vesting of title, the lessee must operate the leasehold for the mutual benefit of him/herself and the lessor, particularly if the lease is royalty-based. Moreover, where a forfeiture clause is contained in the lease, the clause is to be construed narrowly because the law disfavors forfeiture.
Applying these general principles, as well as the principles of contract law, the court concluded that the forfeiture clause at issue did not permit the lessor to terminate the lease after it had accepted payment for the belated royalties that were owed under the lease. The court also noted that, even had the lessor not accepted the payments, the forfeiture clause in any event applied only to the failure to make rental, not royalty, payments. The court held that this was consistent with industry practice, which originally employed forfeiture clauses as a means of incentivizing lease development before a well was drilled on the property. In other words, the court found that it would be inconsistent with the purpose of forfeiture clauses to construe them broadly as allowing termination of the lease for failure to pay a royalty after a well was already drilled on the property.
This decision highlights the importance of electing remedies, especially where the contract contains a forfeiture clause. In addition, although the court did not state as much, Pennsylvania law generally construes forfeiture clauses as independent covenants. McHenry v. Mitchell, 68 A. 729 (Pa. 1908). This possibly explains why the court did not find that the lessor was entitled to forfeit the lease (particularly after recovering damages) due to the lessee’s nonpayment except as provided by the lease. On this point, it is also interesting to note that one of the primary authorities that the court relied upon in support of its interpretation of the forfeiture clause expressly noted that an oil and gas lease theoretically could give the right to recover accrued payments after forfeiture, even though the lease at issue in that case did not contain such a provision. The Superior Court did not address this issue, however, making it unclear what effect, if any, such a provision in the lease would have had on the court’s decision.
Oil and gas development can present unique and complex issues that can be intimidating and challenging. At Houston Harbaugh, P.C., our oil and gas practice is dedicated to protecting the interests of landowners and royalty owners. From new lease negotiations to title disputes to royalty litigation, we can help. Whether you have two acres in Washington County or 5,000 acres in Lycoming County, our dedication and commitment remains the same.
We Represent Landowners in All Aspects of Oil and Gas Law
The oil and gas attorneys at Houston Harbaugh have broad experience in a wide array of oil and gas matters, and they have made it their mission to protect and preserve the landowner’s interests in matters that include:
- New lease negotiations
- Pipeline right-of-way negotiations
- Surface access agreements
- Royalty audits
- Tax and estate planning
- Lease expiration claims
- Curative title litigation
- Water contamination claims
Robert Burnett - Practice Chair
Robert’s practice is exclusively devoted to the representation of landowners and royalty owners in oil and gas matters. Robert is the Chair of the Houston Harbaugh’s Oil & Gas Practice Group and represents landowners and royalty owners in a wide array of oil and gas matters throughout the Commonwealth of Pennsylvania. Robert assists landowners and royalty owners in the negotiation of new oil and gas leases as well as modifications to existing leases. Robert also negotiates surface use agreements and pipeline right-of-way agreements on behalf of landowners. Robert also advises and counsels clients on complex lease development and expiration issues, including the impact and effect of delay rental and shut-in clauses, as well as the implied covenants to develop and market oil and gas. Robert also represents landowners and royalty owners in disputes arising out of the calculation of production royalties and the deduction of post-production costs. Robert also assists landowners with oil and gas title issues and develops strategies to resolve and cure such title deficiencies. Robert also advises clients on the interplay between oil and gas leases and solar leases and assists clients throughout Pennsylvania in negotiating solar leases.
Brendan A. O'Donnell
Brendan O’Donnell is a highly qualified and experienced attorney in the Oil and Gas Law practice. He also practices in our Environmental and Energy Practice. Brendan represents landowners and royalty owners in a wide variety of matters, including litigation and trial work, and in the preparation and negotiation of:
- Pipeline right of way agreements
- Surface use agreements
- Oil, gas and mineral conveyances