Not So Fast—Your Oil and Gas Lease Primary Term May Be Longer Than You Thought

Jeremy A. Mercer, Amy L. Barrette, and Elizabeth E. Klingensmith

Under Pennsylvania law, a defined primary term of an oil and gas lease may actually be longer than that stated term of year. In a September 12, 2017, unreported decision, the Pennsylvania Superior Court remanded a case to the trial court for consideration of whether a “limitation of forfeiture” provision, which required notice and opportunity to cure, extended the primary term by the length of the cure period. See L.D. Oil & Gas Enters., Inc. v. Loop, No. 1883 WDA 2016, 2017 WL 4001655 (Pa. Super. Ct. Sep. 12, 2017). In overturning the trial court’s grant of judgment on the pleadings to the lessor, the Superior Court returned the case to allow the trial court to take parol evidence of the impact of the “limitation of forfeiture” provision on the length of the primary term.

The oil and gas lease at issue contained a “lease term” provision setting forth a five-year primary term “or as long thereafter as operations are conducted on the Land in search of or operation of oil or gas, or for as long as a well capable of production is located on the Land.” Loop, 2017 WL 4001655, at *1. Additionally, the lease contained a “limitation of forfeiture” provision as follows:

LIMITATION OF FORFEITURE. Any provision of this Lease to the contrary notwithstanding, this Lease shall not terminate and shall not be subject to a civil action nor other proceeding to enforce a claim of forfeiture or termination unless Lessor has given Lessee written notice of Lessee’s breach or of the cause of termination and Lessee does not cure such a breach or remove such cause of termination within 180 days from the receipt of the notice.

Id.

Factually, the lessee admitted that it did not produce oil or gas from the Land prior to the date on which the stated primary term expired but “averred that it did conduct operations on the land in search of oil and gas” within 180 after it received a written notice from the lessor asserting termination. Id., at *2. Those operations resulted in the development of a producing well. Id. According to the lessee, the “limitation of forfeiture” provision essentially added 180 days to the length of the primary term and, during those additional days, the lessee satisfied the conditions of the lease such that the lease was propelled into its secondary term.

While the trial court concluded that the lease was ambiguous as to the effect of the “limitation of forfeiture” provision on the primary term, it resolved that ambiguity, on a motion for judgment on the pleadings, in favor of the lessor by concluding that the lessee’s interpretation was against public policy. Moreover, it concluded that the 180-day period amounted to no more than a “six-month notice to vacate the premises, since it would be impossible to cure the breach” of failure to produce within the primary term after that stated term expired. Id., at *3.

The Superior Court agreed that the lease was ambiguous as to the effect of the “limitation of forfeiture” provision on the primary term. Id., at *4. But, importantly, the Superior Court found the trial court erred by not taking parol evidence as to the import of that effect.

While the primary term of the lease is for five years, the limitation of forfeiture clause appears to extend that term for an additional 180 days. Because of this ambiguity, the parties would be permitted to present parol evidence; accordingly, it was improper for the trial court to enter judgment on the pleadings.

Id.

We will have to wait to see how the Venango County Court of Common Pleas resolves the ambiguity. While waiting, though, parties should review their leases to see whether the primary term really is for a term certain or whether it possibly is longer than the stated term of years.

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