On March 14, 2014, the Superior Court of Pennsylvania ruled in
favor of an oil and gas exploration company, applying the doctrine
of estoppel by deed to prevent a landowner from partially
repudiating an existing oil and gas lease. This decision is
significant for oil and gas lessees as it stands for the
proposition that oil and gas leases will remain valid
in their original form despite the later
discovery of clouds on the lessor's title requiring legal
action to resolve.
The dispute arose in relation to a 2006 agreement between Leo and
Sandra L. Sheddon and Anadarko E&P Co., LP. Under the lease
agreement, the Sheddons agreed to lease 62 acres to Anadarko for
oil and gas exploration for a primary term of 5 years. The lease
also gave Anadarko the option to extend the term of the lease upon
additional bonus payment by Anadarko.
After executing the lease, Anadarko performed customary due
diligence to confirm the Sheddon's ownership of the leased oil
and gas estate. Anadarko's investigation revealed an 1894
reservation of one-half (1/2) interest in the oil and gas estate
underlying the Sheddon's 62 acre tract, creating a cloud on
title as to that interest. Based on its discovery, Anadarko only
issued an original bonus payment to the Sheddons for one-half of
the leased premises, or 31 acres.
In 2008, the Sheddons filed suit to quiet title as to the 1894
one-half (1/2) oil and gas reservation. The Sheddons prevailed,
vesting them with ownership in the entire 62 acre oil and gas
estate.
In 2011, Anadarko exercised its extension option. Pursuant to the
extension provision, Anadarko issued payment to the Sheddons in the
amount of $70 per acre as to the entire 62 acre tract. However, the
Sheddons believed that Anadarko had forfeited the right to extend
the lease as to the entire 62 acre tract and could only extend the
lease as to 31 acres. The Sheddons sued to repudiate the lease
agreement as to 31 acres. In April of 2013, the Court of Common
Pleas of Tioga County, Pennsylvania, disagreed with the
Sheddon's position and entered summary judgment in favor of
Anadarko.
On appeal, the Superior Court of Pennsylvania affirmed the lower
court's decision. In reaching its decision the Court
specifically relied on the lease's covenant of warranty
provision. Under that provision, the Sheddons guaranteed that
they "ha[d] full title to the premises and to all the oil and
gas therein at the time of granting [the] lease." Further, the
Court noted that both the lease and the Memorandum of Lease (which
had been recorded in lieu of the lease to provide notice to outside
parties) reflected that the leasehold estate was comprised of 62
acres, whether actually more or less
[emphasis added]. The Court held that the subsequently acquired 31
acres of oil and gas were covered by the original agreement and the
Sheddons were barred under the doctrine of estoppel by deed from
repudiating any portion of the lease.
This article is presented for informational purposes only and is not intended to constitute legal advice.
