On January 14, 2011, the Pennsylvania Superior Court issued a decision in favor of Pennsylvania landowners when it held that an oil and gas exploration lease’s indefinite delay rental provision was void. The case, Hite v. Falcon Partners, has the potential to impact both present and future oil and gas leases for Marcellus Shale drillers and landowners alike.
In the case, Falcon Partners, the holder of gas leases with several landowners, had not commenced drilling operations when the primary term of the lease lapsed. When the landowners were presented with competing offers by other gas companies to lease their gas rights, the landowners requested that Falcon Partners terminate the existing leases. When Falcon Partners refused, the landowners filed suit in the Court of Common Pleas of Cambria County. The dispute issued between the landowners and Falcon Partners was whether the landowners were permitted to terminate the leases, despite a provision in the leases that allowed Falcon Partners to continue to pay $2.00 per acre, per year, as delayed rental. Delayed rental payments are often used in the oil and gas industry to extend the term of a lease when no production occurs or operations have been commenced during the primary term of the lease.
Both the lower court and the Pennsylvania Superior Court, on appeal, ruled in favor of the landowners. The Superior Court ultimately ruled that a lessee could not postpone oil and gas development indefinitely by the mere payment of delay rentals beyond the primary term of the lease. With this decision in hand, landowners who are beyond an initial lease term now have the ability to attempt and force the lessee to terminate a lease if productions or operations have not commenced during the primary lease term.