Non-Production During Secondary Term Results in Termination of Lease
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:
“[T]he first question the Court must decide is whether there has been a time, after the primary term of ten years, when gas production ceased, and the answer is uncontroversially yes. No gas was produced from this well from 2001 through July 31, 2006. the Lease continues as long as gas is produced. The Court finds that when gas is not produced, the Lease converts to a tenancy at will automatically…”
(See, Wilson v. Equitable Gas Co., p. 4). The Court further observed that a “tenancy at will” can be terminated at any time by the landowner and that the Wilsons were well within their rights to now terminate the 1920 Lease. As such, the Court granted the Wilsons’ Motion for Summary Judgment and declared that the 1920 Lease was “terminated and no longer valid.”
Pennsylvania has long frowned upon the practice of holding acreage with a non-producing lease. See, McKnight v. Manufacturers Natural Gas, Co., 23 A. 164, 166 (Pa. 1892) (“The defendant cannot hold the premises and refuse to operate them”); Brown v. Haight, 255 A.2d 508, 511 (Pa. 1969) (“…in 1947 when oil and gas were not produced in paying quantities, the grantee’s fee interest terminated automatically…”); Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001) (“…the lessee has an affirmative obligation to enter to develop and to produce the oil and gas or terminate the landowner’s contractual obligations…”); Hite v. Falcon Partners, 2011 WL 9632 (January 4, 2011) (“…when that primary term ended and Falcon failed to commence production, the agreements expired”). In Wilson, the trial court reaffirmed this long-standing policy. Absent an appropriate savings clause in the lease itself, periods of non-production during the secondary term will likely automatically terminate the lease. Landowners and gas producers alike must carefully review their respective leases when confronted with any cessation of production during the secondary term. As the Wilson decision illuminates, simply restoring production may not be enough to save a previously non-producing lease.