Seneca Resources Corp. v. S & T Bank , 2015 Pa. Super. 181 ( 2015 )

J-S32037-15
2015 PA Super 181SENECA RESOURCES CORPORATION, : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellee :
:
v. :
:
S & T BANK, TRUSTEE OF THE :
RAYMOND C. HUMPHREY TRUST, :
WILBER L. HUMPHREY INSURANCE :
TRUST B, S & T BANK, CO-TRUSTEE OF :
THE DANYA MARDER SPECIAL NEEDS :
TRUST, JAMES HUMPHREY AND RITA H. :
HUMPHREY, HUSBAND AND WIFE, :
MARY H. MARDER AND KATHLEEN :
SAMANTHA MARDER, :
:
Appellants : No. 2057 WDA 2014
Appeal from the Order entered on December 2, 2014
in the Court of Common Pleas of Jefferson County,
Civil Division, No. 602-2009 C.D.
BEFORE: SHOGAN, OLSON and MUSMANNO, JJ.
OPINION BY MUSMANNO, J.: FILED AUGUST 31, 2015
S & T Bank, Trustee of the Raymond C. Humphrey Trust, Wilber L.
Humphrey Insurance Trust B, S & T Bank, Co-Trustee of the Danya Marder
Special Needs Trust, James Humphrey and Rita H. Humphrey, husband and
wife, Mary H. Marder, and Kathleen Samantha Marder (collectively “the
Appellants”) appeal from the Order granting the Motion for Summary
Judgment filed by Seneca Resources Corporation (“Seneca”). We affirm.
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On April 17, 1962, Humphrey Industries Inc. (“Humphrey”), the lessor,
and Jefferson County Gas Company (“Jefferson”),1 the lessee, entered into
an oil and gas lease (“Lease”).2 The Lease allowed the lessee to produce,
store, withdraw, or transmit oil and gas from the “leased premises,” which
constituted approximately 25,000 acres situated in Elk and Jefferson
Counties. The Lease had a primary term of 40 years, with a secondary term
to continue as long as oil or gas was stored, produced or withdrawn from
any portion of the leased premises. At the inception of the Lease,
approximately 10,000 acres of the leased premises were undeveloped
(unoperated), and 15,000 acres were developed (operated). The Lease
stated that the lessee would pay royalties on any oil or gas produced from
the operated acreage on the leased premises.3 The Lease outlined a “lump
sum or rental payment” schedule for the unoperated acreage.
The trial court set forth the relevant underlying facts as follows:
By the time Seneca acquired its interest in the Lease, its
predecessor(s) had already drilled more than 300 oil and natural
gas wells, more than 100 of which were still producing, on the
1
The Appellants are successors in interest to Humphrey. Seneca is a
successor in interest to Jefferson.
2
The Lease was entered pursuant to a January 1, 1962 Agreement
(“Agreement”) between Humphrey and Jefferson. At the inception of the
Lease, Humphrey was “operating for gas” on the leased premises. Brief for
Appellants at 34 n.8.
3
The Lease also allows the lessee to make payments to the lessor for any
gas storage on the leased premises. However, the storage of oil or gas on
the leased premises is not at issue in this case. See Brief for Appellants at 8
n.2.
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operated acreage. Uncertain of the status of production and
Seneca’s continuing rights as of June 17, 2008, [] counsel for
[the Appellants] drafted a letter inquiring as to the amount of
acreage Seneca was still claiming under [the] Lease. In that
same document, [the Appellants’ counsel] advised Seneca of
[the Appellants’] position that its failure to develop the gas
bearing formations below the Tully limestone formation[4]
constituted a breach of its implied covenant to produce.
When Seneca replied 2 months later, it [stated that it was] the
rightful holder of 11,426 operated acres[,] on which 325 wells
had been drilled, 131 of which were still producing gas, as well
as 3,131 acres of unoperated land. It also claimed to have
drilled 25 new wells between November 2007 and August 27,
2008[,] and announced its intention to drill an additional 15 in
2008, with 15 to 20 to follow in 2009. It further noted that it
had made all requisite rental payments under the [] Lease
through December 2008 – a fact that [the Appellants do] not
dispute; denied that it had breached the implied covenant to
develop; and rejected the position that Pennsylvania imposed an
implied duty for a lessee to develop shallow and deep strata of a
leasehold simultaneously.
In a follow-up letter dated December 18, 2008, [the Appellants]
implicitly disagreed with much of Seneca’s analysis. They
instead took the position that when the primary term of the []
Lease expired …, Seneca became a tenant-at-will subject to
termination with respect to further drilling operations. They also
advised Seneca that the Lease itself only allowed it to hold the
unoperated acreage in exchange for rental payments for 10
years and that [the Appellants were] immediately terminating
[Seneca’s] rights with respect to that acreage, as well.
According to [the Appellants], Seneca’s only remaining rights
under the Lease were for the continued operation of producing
wells and their corresponding acreage.
Approximately 1 week later, [the Appellants] entered into
another gas and oil lease with Open Flow Gas Supply
[Corporation (“Open Flow”)]. On its face, that lease overlapped
with the [] Lease[.]
4
Largely, the Marcellus shale is trapped between the Onondaga limestone
beneath the shale, and the Tully limestone on top of the shale.
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Trial Court Opinion, 9/11/13, at 3 (citations omitted, footnote added).
In a prior appeal, this Court set forth the ensuing procedural history as
follows:
[Seneca instituted an action against the Appellants and Open
Flow.5] In bringing this lawsuit, Seneca essentially sought a
declaration that it had not breached the [] Lease, that [the
Appellants] had breached the [] Lease, and that Open Flow
intentionally interfered with the [] Lease. It further averred that
the [] Lease remained a valid contract, [] the Open Flow lease
was invalid, [] Seneca retained all the oil and gas rights to the
acreage, and [] Open Flow and [the] Appellants owned no gas
rights in the land. Seneca filed a first and second amended
[C]omplaint. The final [C]omplaint contained eight counts.
The action was voluntarily discontinued as to Open Flow on
February 13, 2012. [The] Appellants filed an [A]nswer, [N]ew
[M]atter, and eight counterclaims against Seneca. Seneca then
moved for partial summary judgment seeking the dismissal of
three of the eight counterclaims filed by [the] Appellants against
Seneca. [The] Appellants responded and filed a [M]otion for
summary judgment. [The Motion] claimed that Seneca breached
an implied duty to develop deep gas horizons under the
acreage[,] and asked the [trial] court to declare that the deep
gas horizons were forfeited from the [] Lease[,] so that any
natural gas below 5,000 feet had reverted to [the] Appellants, as
landowners. On September 11, 2013, the trial court entered an
[O]rder granting Seneca’s [M]otion for partial summary
judgment and dismissing three of [the] Appellants’
counterclaims. In the same order, the trial court denied [the]
Appellants’ [M]otion for summary judgment.
The September 11, 2013 [O]rder was not a final, appealable
order since this action remained pending against [the]
Appellants[,] and [] five counterclaims remained pending against
Seneca. … Recognizing that the [O]rder was not a final order
5
The parties stipulated that the action is limited to the release of 3,131
“unoperated” acres. See Brief for Appellants at 11 n.4; see also Second
Amended Complaint, 4/29/10, at 4 (stating that Seneca’s predecessors
released 7,833 acres of unoperated acreage and that Seneca holds 3,131
acres of unoperated land under the Lease).
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that could be appealed immediately, on October 8, 2013, four
weeks after the September 11, 2013 [O]rder was entered, [the]
Appellants filed an [A]pplication for determination of finality
pursuant to Pa.R.A.P. 341(c). The [Application] was granted on
October 15, 2013.
Seneca Resources v. S&T Bank, 104 A.3d 59 (Pa. Super. 2014)
(unpublished memorandum at 3-4) (footnote added, citation omitted).
Subsequently, the Appellants filed a Notice of Appeal of the September
11, 2013 Order. This Court quashed the appeal because the trial court had
failed to act on the Appellants’ Application, pursuant to Rule 341(c), within
thirty days of the entry of its September 11, 2013 Order. See id.(unpublished memorandum at 4-7). As a result, on December 2, 2014,
upon stipulation of the parties, the trial court entered an Order granting
summary judgment in favor of Seneca and disposing of all outstanding
claims and counterclaims based upon its reasoning in entering the
September 11, 2013 Order.
The Appellants filed a timely Notice of Appeal. The trial court ordered
the Appellants to file a Pennsylvania Rule of Appellate Procedure 1925(b)
concise statement. The Appellants filed a timely Concise Statement.
On appeal, the Appellants raise the following questions for our review:
1. Whether the lower court erred in holding that the [] Lease for
land covering 25,000 acres was not severable as to the
separately-defined “operated” and “unoperated” acreage
under the express terms of the Lease[?]
2. Whether the lower court erred in refusing to apply
Pennsylvania’s well-entrenched doctrine of implied covenant
to fully develop an oil and gas lease merely because the
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“operated” portion of the leased property was already under
development at the inception of the Lease[?]
Brief for Appellants at 7.
Our standard of review of a trial court’s grant of summary judgment is
well-settled:
A reviewing court may disturb the order of the trial court only
where it is established that the court committed an error of law
or abused its discretion. As with all questions of law, our review
is plenary.
In evaluating the trial court’s decision to enter summary
judgment, we focus on the legal standard articulated in the
summary judgment rule. Pa.R.C.P. 1035.2. The rule states that
where there is no genuine issue of material fact and the moving
party is entitled to relief as a matter of law, summary judgment
may be entered. Where the non-moving party bears the burden
of proof on an issue, he may not merely rely on his pleadings or
answers in order to survive summary judgment. Failure of a
non-moving party to adduce sufficient evidence on an issue
essential to his case and on which it bears the burden of proof
establishes the entitlement of the moving party to judgment as a
matter of law. Lastly, we will view the record in the light most
favorable to the non-moving party, and all doubts as to the
existence of a genuine issue of material fact must be resolved
against the moving party.
Thompson v. Ginkel, 95 A.3d 900, 904 (Pa. Super. 2014) (citation and
brackets omitted).
In their first claim, the Appellants contend that the trial court erred in
concluding that the Lease was entire and not severable. Brief for Appellants
at 19-20, 28. The Appellants argue that the Lease is severable as to the
operated and unoperated acreage because its express terms separately
define the duration of the Lease and the separate consideration for the
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respective acreage. Id. at 19, 28. The Appellants point out that the
consideration for the operated acreage “is in the form of royalties, that
continue for a 40-year primary term, and as long thereafter as production
continues.” Id. at 19 (emphasis omitted). The Appellants assert “that the
lessors had the right to terminate the Lease as to unoperated acres after the
stated term expired and the acreage was not converted into royalty-based
production acres.” Id. The Appellants further assert that because the
consideration for the unoperated acreage is in the form of delay rental
payments at a scheduled rate, this portion of the Lease becomes a tenancy
at will at the expiration of the primary term. Id. at 19, 26, 27. The
Appellants claim that the trial court’s reliance on Jacobs v. CNG
Transmission Corp., 332 F. Supp. 2d 759 (W.D. Pa. 2004), in determining
that the Lease was not severable, is misplaced. Brief for Appellants at 20-
23, 28. The Appellants argue that unlike Jacobs, where one part of the
lease could satisfy performance of the other part, the payment of royalties
for the operated acreage is not sufficient to hold the Lease beyond the
primary term for the unoperated acreage. Id. at 22. The Appellants
maintain that Seneca’s obligations and considerations, i.e., the requirement
to both pay royalties for operated acreage and delay rentals to hold
unoperated acreage, rendered the unoperated acreage severable. Id.
The Appellants further contend that the trial court made numerous
conclusions in determining that the Lease is not severable, which are not
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supported by the plain wording of the Lease. Id. at 23-28. Specifically, the
Appellants claim that contrary to the trial court’s finding that the Lease failed
to differentiate the types of consideration for operated and unoperated
acreages, the Lease clearly delineates different consideration for 10,000
unoperated acres and 15,000 operated acres. Id. at 23-24. The Appellants
further argue that while the trial court weighed the Lease’s description of the
leased premises as “25,000 acres more or less,” the terms of the Lease
defined the premises to include “15,000 acres of operated acreage and
10,000 acres of unoperated acreage.” Id. at 25. The Appellants maintain
that the habendum clause only applied to the operated acreage, and the
unoperated acreage became a tenancy at will at the expiration of the
primary term. Id. at 26-27. The Appellants claim that any clarifying
language sought by the trial court was unnecessary because of the parties’
intent to separate the terms and consideration for unoperated and operated
acreage. Id. at 27-28.
“[A] lease is in the nature of a contract and is controlled by principles
of contract law.” T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d 261,
267 (Pa. 2012). “To show a breach of contract, a party must establish: (1)
the existence of a contract, including its essential terms, (2) a breach of a
duty imposed by the contract, and (3) resultant damages.” McCausland v.
Wagner, 78 A.3d 1093, 1101 (Pa. Super. 2013) (citation and quotation
marks omitted). “When performance of a duty under a contract is due, any
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nonperformance is a breach.” Id.; see also Jedlicka, 42 A.3d at 267
(stating that “a party seeking to terminate a lease bears the burden of
proof.”). “If a breach constitutes a material failure of performance, the non-
breaching party is relieved from any obligation to perform; thus, a party who
has materially breached a contract may not insist upon performance of the
contract by the non-breaching party.” McCausland, 78 A.3d at 1101.
Conversely, if a party breaches a contract, but still substantially performs its
obligations, the breach is nonmaterial and the breaching party retains the
right to enforce the contract. Id.The interpretation of any contract is a question of law and
this Court’s scope of review is plenary. Moreover, we need not
defer to the conclusions of the trial court and are free to draw
our own inferences. In interpreting a contract, the ultimate goal
is to ascertain and give effect to the intent of the parties as
reasonably manifested by the language of their written
agreement. When construing agreements involving clear and
unambiguous terms, this Court need only examine the writing
itself to give effect to the parties’ understanding. This Court
must construe the contract only as written and may not modify
the plain meaning under the guise of interpretation.
Humberston v. Chevron U.S.A., Inc., 75 A.3d 504, 509–10 (Pa. Super.
2013) (quotation marks and citations omitted). Further, “[i]t is fundamental
that one part of a contract cannot be so interpreted as to annul another
part[,] and that writings which comprise an agreement must be interpreted
as a whole.” Southwestern Energy Prod. Co. v. Forest Res., LLC, 83
A.3d 177, 187 (Pa. Super. 2013) (citation omitted).
Our Supreme Court has recognized that
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the traditional oil and gas “lease” is far from the simplest of
property concepts. … Generally, however, the title conveyed in
an oil and gas lease is inchoate, and is initially for the purpose of
exploration and development.
If development during the agreed upon primary term is
unsuccessful, no estate vests in the lessee. If, however, oil or
gas is produced, a fee simple determinable is created in the
lessee, and the lessee’s right to extract the oil or gas becomes
vested. A fee simple determinable is an estate in fee that
automatically reverts to the grantor upon the occurrence of a
specific event. The interest held by the grantor after such a
conveyance is termed a possibility of reverter. Such a fee is a
fee simple, because it may last forever in the grantee and his
heirs and assigns, the duration depending upon the concurrence
of collateral circumstances which qualify and debase the purity of
the grant.
Within the oil and gas industry, oil and gas leases generally
contain several key provisions, including the granting clause,
which initially conveys to the lessee the right to drill for and
produce oil or gas from the property; the habendum clause,
which is used to fix the ultimate duration of the lease; the
royalty clause; and the terms of surrender.
***
Typically … the habendum clause in an oil and gas lease provides
that a lease will remain in effect for as long as oil or gas is
produced “in paying quantities.” Traditionally, use of the term
“in paying quantities” in a habendum clause of an oil or gas
lease was regarded as for the benefit of the lessee, as a lessee
would not want to be obligated to pay rent for premises which
have ceased to be productive, or for which the operating
expenses exceed the income.
Jedlicka, 42 A.3d at 267-68 (citations, brackets, and some quotation marks
omitted).
Additionally, in conjunction with the leasing and habendum clauses,
“leases also began to incorporate ‘delayed rental’ clauses, which relieved the
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lessee of the obligation to develop the property immediately upon entering
into an agreement.” Hite v. Falcon Partners, 13 A.3d 942, 946 (Pa.
Super. 2011). The rental “payments are in the nature of liquidated damages
for the lessee’s decision to forego production and are viewed as the
consideration paid to the landowner in lieu of the royalty that would be paid
if production operations were to be undertaken immediately.” Id. at 946-47(citation omitted). The payment of a delay rental to postpone the
exploration and development of a property and maintain the effectiveness of
the lease is limited to the primary term of the lease. Id. at 947.
In determining whether an oil and gas lease is severable, our Supreme
Court, in Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001),
explained that
there is no bright line rule requiring that a court first find that
the intent of the parties is unclear as to entirety/severability
before it may look to factors such as the conduct of the parties
and the character of the consideration to determine whether an
agreement is entire or severable. The central task is to
ascertain the intent of the parties. That intent may be apparent
from the explicit language of the [lease] … or it may be obvious
from a “construction” of the agreement, including the nature of
the consideration[.6] … In short, principles of construction may
reveal the intent of the parties no less than the actual language
addressing entirety/severability. Thus, … absent express
6
“[T]he character of the consideration may determine the severability of the
contract.” Jacobs, 772 A.2d at 451 (citation omitted). “[I]f the
consideration is single, the contract is entire ... whatever the number or
variety of items embraced ... but, if the consideration is apportioned, either
expressly or by necessary implication ... the contract will generally be held
to be severable....” Id. (citation omitted); see also Jacobs, 332 F. Supp.
2d at 775 (stating that the fact that the parties apportioned the
consideration does not automatically render the agreement severable).
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language that a [lease] is entire, a court may look to the [lease]
as a whole, including the character of the consideration, to
determine the intent of the parties as to severability and may
also consider the circumstances surrounding the execution of the
[lease], the conduct of the parties, and any other factor
pertinent to ascertaining the parties’ intent. The court need not
make a specific predicate finding of ambiguity before
undertaking the inquiry[;] indeed, if the contract were crystal
clear as to the parties’ intent, severability likely would not be a
contested issue.
Jacobs, 772 A.2d at 452 (footnote added).7
Here, the Lease states the following, in relevant part:
… Lessor does hereby grant, demise, lease and let unto the said
Lessee, its successor or assigns the hereinafter described “leased
7
The Supreme Court of Pennsylvania’s decision in Jacobs, addressing
whether an oil and gas lease is severable, was in response to a Petition for
Certification of Questions of Law from the United States Court of Appeals for
the Third Circuit. See Jacobs, 772 A.2d at 446. The Supreme Court, while
announcing the rule regarding severability, did not analyze the lease at issue
in the Jacobs case. Instead, the United States District Court for the
Western District of Pennsylvania resolved the case. In Jacobs, the oil and
gas lease was a production and storage lease, which had a primary term of
ten years, but could be extended indefinitely by either the production or
storage of gas. Jacobs, 332 F.Supp.2d at 765. Under the lease, the lessor
received consideration that took several forms: (1) royalties from producing
wells; (2) free gas; (3) delay rental when no wells yielding royalties have
been drilled and no payments for storage of gas are due and payable; and
(4) payment for storage privileges. Id. at 766-67. During the primary term
of the lease, the lessee utilized the property to store gas, but did not drill
any oil or gas wells on the property. Id. at 768. As a result, the lessor filed
an action, claiming that the production and storage provisions of the lease
were severable. Id. at 769. The district court concluded that the lease was
not severable because the leasing clause and the habendum clause did not
address distinct contractual undertakings, but rather indicated that the
“production and storage were interrelated components of developing the
leasehold.” Id. at 778. The trial court further found that the lessee’s
obligation to pay delay rentals, royalties, and storage rentals evidenced the
parties’ intent to enter into the lease with the single objective of operating
the premises in a manner designed to achieve the fullest development of
both production and storage rights. Id. at 783.
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premises,” for the sole and only purpose of drilling and operating
for oil and gas, of storing gas in any formations underneath the
surface, and withdrawing therefrom gas originally produced from
other lands, and of laying such pipe lines and building such
tanks, stations and structures thereon, and drilling any water
well or wells as may be necessary to produce, store, withdraw
and transmit such oil and gas covering 25,000 acres more or
less, situate in Elk and Jefferson Counties, Pennsylvania.
Said “leased premises” total 25,000 acres more or less in
Jefferson and Elk Counties, Pennsylvania, and include all oil and
gas lands owned by Lessor in said Counties[.]
***
This lease shall be for a term of forty (40) years and as long
thereafter as oil or gas or either of them is stored in, produced
or withdrawn from all or any portion of said leased premises by
the Lessee, its successors or assigns, subject to payments and
cancellation as hereinafter set forth.
IN CONSIDERATION OF THE PREMISES[,] the Parties hereto
agree as follows:
1. Lessee agrees to deliver to the credit of the Lessor, its
successors or assigns free of cost in the pipe line to which it may
connect its wells, the equal one-eighth (1/8th) part of all oil
produced and saved from the leased premises.
2. That 10,000 acres more or less of the leased 25,000 acres are
not presently under development (unoperated) and that 15,000
acres of the leased 25,000 acres are developed (operated) and
the unoperated and operated acreage shall be subject to the
terms and conditions hereinafter set forth as to each. …
However, should any of the unoperated acreage become
productive at any future date, the terms and conditions relating
to the operated acreage will become applicable.
3. Lessee agrees to pay Lessor annually in advance for the
10,000 acres (unoperated) as follows:
a. Year Lump Sum or Rental Payment
1962 $10,000
1963 9,000.00 or $1.00 per acre, whichever is greater
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1964 8,000.00 or $1.00 per acre, whichever is greater
1965 7,000.00 or $1.00 per acre, whichever is greater
1966 6,000.00 or $1.00 per acre, whichever is greater
1967 5,000.00 or $1.00 per acre, whichever is greater
1968 4,000.00 or $1.00 per acre, whichever is greater
1969 3,000.00 or $1.00 per acre, whichever is greater
1970 2,000.00 or $1.00 per acre, whichever is greater
1971 1,000.00 or $1.00 per acre, whichever is greater
1972 $1.00 per acre
***
5. It is understood and agreed between the Parties hereto that
Lessee shall have the right to define or designate any part or
parts of the leased land (25,000 acres more or less) as a gas
storage area or areas; and in that event, in lieu of the payment
called for in paragraphs 3 and 4 hereof, payment for said gas
storage area shall be made annually in advance, at the rate of
$200.00 per well or $2.00 per acre, whichever is greater in said
defined area.
Lease, 4/17/62, at 1, 2-3, 4-5.
The language of the Lease does not expressly state that it is entire.
Thus, consonant with Jacobs, we must consider whether the unoperated
acreage terms were severable from the operated acreage terms by
examining the Lease’s language, the character of the consideration, the
circumstances surrounding the lease’s execution, conduct of the parties, and
any discernible intent of the original contracting parties that could be derived
from the Lease. See Jacobs, 772 A.2d at 452.
According to the Lease, the parties explicitly agreed that the “leased
premises” encompass 25,000 acres for a primary term of 40 years and a
secondary term that would continue indefinitely in its entirety as long as oil
or gas was produced or withdrawn from any portion of the leased premises.
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Neither the leasing clause nor the habendum clause makes any distinction
between operated and unoperated acreage in specifying the leased
premises. Further, there is no indication in these clauses suggesting that
the Lease could be extended beyond the expiration of the primary term as to
the operated acreage, while expire as to the unoperated acreage for failing
to produce or withdraw gas. Thus, the clear and unambiguous language of
the Lease grants Seneca a fee simple determinable of the entire leasehold,
so long as the lessee stores, produces, or withdraws oil or gas from any
portion of the 25,000 acres. See Jedlicka, 42 A.3d at 267; see also
Sabella v. Appalachian Dev. Corp., 103 A.3d 83, 103 (Pa. Super. 2014)
(stating that “an oil and gas lease, upon vestiture arising from successful
discovery and production of oil, conveys a potentially indefinite fee simple
determinable.”).
While the Lease provides separate consideration for the unoperated
and operated acreage, the character of the lessee’s duties of payment does
not support the Appellants’ argument that the Lease is to be construed as
severable. The Lease provides that the lessor is entitled to royalties earned
from the production on the operated acreage of the leased premises. Lease,
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4/17/62, at 2.8 Further, the Lease provided for monetary compensation with
respect to the “unoperated” acreage to provide the lessor with revenue over
this land for a period of ten years. See Trial Court Opinion, 9/11/13, at 6
(stating that “the lessor would not realize any revenue from the unoperated
acreage without instituting a payment scheme unrelated to production or
storage.”). Although the Lease does not expressly state that consideration
for the unoperated acreage should continue after 1972, the parties do not
dispute that Seneca paid the consideration until December 2008, six years
after the end of the 40-year term. See, e.g., Brief for Appellee at 23; Brief
for Appellant at 11, 44. Importantly, the Lease permits conversion of the
unoperated acreage to operated acreage by commencing production at any
time, and does not limit conversion to either the 10-year term (1972) or the
40-year term (2002). See Lease, 4/17/62, at 3 (stating that “should any of
the unoperated acreage become productive at any future date, the terms
and conditions relating to the operated acreage will become applicable.”)
(emphasis added). Moreover, the Lease explicitly states that any portion of
the “leased premises” could be designated for storage, and payment for
storage would be in lieu of any royalties or rental payments. See Lease,
4/17/62, at 4-5.
8
The Lease only identifies royalties due to the production of oil; however,
Seneca concedes that it also pays royalties from the production of gas on
the leased premises. See Brief for Appellee at 3 (stating that “[i]n
accordance with the Lease, Seneca timely paid, and continues to pay, the
[Appellants] royalties earned based on the volume of gas produced from the
leased acreage.”).
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Thus, the fact that consideration provisions include royalties, delay
rentals, and storage rentals, and that unoperated acreage may be converted
to operated acreage at any time, reflect an intent by the parties to enter an
agreement to achieve the fullest development of the entire 25,000 acres of
the leased premises. See Penneco Pipeline Corp. v. Dominion
Transmission, Inc., 2007 WL 1847391, *16 (W.D. Pa. 2007) (stating that
the compensation provisions did not evidence a severable lease where the
“delay rentals, royalties, and storage rentals, are not distinctly allocated to
production or storage rights, but rather, are written in such a way that
payment for one purpose interrelates and impacts on the payment for the
other.”); Jacobs, 332 F.Supp.2d at 783 (concluding that “[t]he provisions of
consideration under the lease are not distinctly allocated to the dual
purposes identified in the leasing clause, but instead are drafted in such a
manner that payment for one purpose interrelates to and impacts on the
payment for the other.”); see also McCausland, 78 A.3d at 1101 (stating
that “[r]oyalty-based leases are to be construed in a manner designed to
promote the full and diligent development of the leasehold for the mutual
benefit of both parties.”) (citation omitted).
Furthermore, with regard to the other Jacobs factors, we note that
the parties had entered into the Agreement four months prior to the Lease.
In the Agreement, the parties identified the total land to be leased as 25,000
acres. Agreement, 1/1/62, at 2 (unnumbered). Additionally, in 1974, the
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Appellants assigned their rights to certain acreage implicated by the Lease to
Koppers Company, Inc. (“Koppers”).9 Assignment, 6/3/74, at 1
(unnumbered). In the Assignment, the Appellants clearly stated that the
conveyance was subject to the rights provided to Jefferson under the Lease.
Id. Importantly, the Appellants stated that under the Lease, they “leased
unto [Jefferson] 25,000 acres of land for the exploration and development of
oil and gas under the terms and conditions therein set forth[.]” Id. These
documents evidence that the Appellants understood that the “leased
premises” includes 25,000 acres, not separate and severable operated and
unoperated acreages.10
Based upon the foregoing, we conclude the Lease is entire, and that
the operable and unoperable acreages are not severable.
9
Seneca claims that certain parcels assigned to Koppers were designated by
the Lease as unoperated acreage. See Brief for Appellee at 24.
10
In their Statement of the Case, the Appellants cite to a 1990 lease they
entered into with Empire Exploration, Inc. (“Empire”). Brief for Appellants at
12-13. Purportedly, this lease covered 594 acres of unoperated acreage
listed in the Lease, and expired in December 2008, with no drilling of the
land. Id.; see also Brief for Appellee at 25. The Appellants claim that the
1990 lease confirmed that the title to the unoperated portion of the Lease
reverted to the lessor. Brief for Appellants at 13. However, the Appellants
did not raise the 1990 lease with Empire in their Argument section, or argue
that this lease supports the proposition that the Lease is severable. See
Pa.R.A.P. 2117(b) (stating that “[t]he statement of the case shall not
contain any argument.”); see also Pa.R.A.P. 2119(a). In any event, we
note that the Appellants and Empire entered into a “Protective” oil and gas
lease. 1990 Protective Lease, 12/14/90, at 1 (unnumbered). Specifically,
the 1990 lease stated that “no royalties, or rentals to deter commencement
of drilling operations, shall be paid or delivered hereunder until LESSOR’S
interest in the land above described has been finally determined by a court
of competent jurisdiction.” Id. at 4 (unnumbered).
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In their second claim, the Appellants contend that the trial court erred
in refusing to apply Pennsylvania’s doctrine of implied covenant to fully
develop an oil and gas lease for the 3,131 acres of unoperated land.11 Brief
for Appellants at 29, 38. The Appellants argue that the trial court’s
determination that the operated acres of the leased property were already in
development at the inception of the Lease abrogates the doctrine of implied
covenant to develop the unoperated acreage is erroneous. Id. at 29, 33-34,
38. The Appellants assert that the implied covenant to develop imposes an
obligation on the lessee to develop the entire leased premises, and to hold
otherwise would allow lessees to hold a vast amount of undeveloped land in
perpetuity. Id. at 34, 38. The Appellants claim that Seneca is obligated to
demonstrate that it acted with reasonable diligence to develop the land, and
by failing to do so, must explain and excuse the lack of activity. Id. at 39-
41, 44. The Appellants point out that Seneca has only drilled wells in the
operated acres of the Lease, and has failed to develop the 3,131 acres of
unoperated land, despite the land being commercially viable. Id. at 42-43,
44. The Appellants argue that because the unoperated acreage was
11
Paragraph 10 of the Lease states the following:
All expressed or implied covenants of this lease shall be subject
to all Federal and State laws, executive orders, rules or
regulations, and this lease shall not be terminated in whole or
part, nor Lessee held liable in damages, for failure to comply
therewith if compliance is prevented by, or if such a failure is the
result of, any such law, order, rule or regulation.
Lease, 4/17/62, at 7.
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commercially viable, and Seneca has failed to explain its failure to develop
the land, the implied covenant to develop has been breached and the
Appellants are entitled to enter into a new oil and gas production agreement
with another party. Id. at 43-45.
In Pennsylvania, “[a]n implied covenant to develop the underground
resources appropriately exists where the only compensation to the
landowner contemplated in the lease is royalty payments resulting from the
extraction of that underground resource.” Jacobs, 772 A.2d at 455; see
also id. at 454 (stating that “[t]he basis for the implied covenant … is a
recognition that the lessor has entered into a bargain expecting to be
compensated for the lease of the land, and principles of fairness dictate that
the lessee be obligated to make diligent efforts to ensure that the lessor
receives the benefit of his bargain.”); Hite, 13 A.3d at 946 (noting that
“[e]ven when such an obligation was not expressed, the courts recognized
an implied covenant to develop the leasehold.”). However, while the implied
covenant to develop doctrine exists, “the specific agreement of the parties
may preclude the application of the doctrine.” Jacobs, 772 A.2d at 455;
see also Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 388 (Pa.
1986) (stating that “[t]he law will not imply a different contract than that
which the parties have expressly adopted. To imply covenants on matters
specifically addressed in the contract itself would violate this doctrine.”). For
example, where “the parties have expressly agreed that the landowner shall
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be compensated if the lessee does not actively extract the resource, then
the lessee has no implied obligation to engage in extraction activities.”
Jacobs, 772 A.2d at 455; see also id. (stating that “so long as the lessee
continues to pay the landowner for the opportunity to develop and produce
oil or gas, the lessee need not actually drill wells.”) (emphasis added). “At
the point where that compensation ceases due to the expiration of the term
of the lease, or pursuant the terms of the lease itself, the lessee then has an
affirmative obligation either to develop and produce the oil or gas or
terminate the landowner’s contractual obligations.” Id.
Here, the trial court, relying on our Supreme Court’s decision in
Jacobs, found that because a portion of the leased premises was already
developed at the time Seneca acquired the rights to the Lease, the implied
covenant to develop was inapplicable to the property as a whole. See Trial
Court Opinion, 9/11/13, at 7 (stating that “because Seneca assumed the role
of lessee to [the] Lease already developed by its predecessors―activities
attributed to Seneca as successor in interest―the implied covenant to
develop is no longer applicable to the Lease.”). While an implied covenant
to develop oil or gas exists in Pennsylvania, see Jacobs, 772 A.2d at 455,
the fact that lessees enter into a lease where land had already been partially
developed by its predecessors does not alone preclude the obligation to
develop the remainder of the land. See Hill v. Joy, 24 A. 293, 293 (Pa.
1892) (stating that where the lessee operated 90 acres of land, while leaving
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190 acres of unoperated land, there is an implied covenant on the lessee’s
part to work the mine in a proper manner and with reasonable diligence, so
that the lessor receives the compensation which both parties contemplated
when entering into the lease); see also Delmas Ray Burkett, II
Revocable Trust ex rel. Burkett v. Exco Resources (PA), LLC, 2014 WL
585884, *8 (W.D. Pa. 2014) (interpreting Jacobs and concluding that “when
an oil and gas lease is held by production, this status does not negate
application of the implied covenant of development.”); see generally
Sauder v. MidContinent Petroleum Corp., 292 U.S. 272, 281 (1934)
(holding that the lessee of an oil and gas lease who produced oil on a forty-
acre tract, but abstained from drilling on an adjacent section of land, could
not hold the undeveloped part of the land indefinitely without drilling or
establishing an intention to drill in the future; as a result, the lessor was
equitably entitled to cancel the lease).12 In point of fact, leases where
payments are based on production royalties are to be “construed in a
manner designed to promote the full and diligent development of the
leasehold for the mutual benefit of both parties.” Hite, 13 A.3d at 945(emphasis added); see also Jacobs, 772 A.2d at 454 (stating that “[t]he
basis for the implied covenant … is a recognition that the lessor has entered
12
We note in Stoddard v. Emery, 18 A. 339, 339 (Pa. 1889), the
Pennsylvania Supreme Court held that where the number of wells to be
drilled is specified by a lease, that number controls and no implied covenant
to develop further can be read into the lease. However, as noted above, the
Lease does not fix the number of wells to be drilled and/or operated. Thus,
Stoddard is inapplicable to the instant case.
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into a bargain expecting to be compensated for the lease of the land, and
principles of fairness dictate that the lessee be obligated to make diligent
efforts to ensure that the lessor receives the benefit of his bargain.”).
Significantly, the Jacobs Court, without limitation to leases where no
production has taken place, maintained that a “defendant cannot hold the
premises and refuse to operate them.” Jacobs, 772 A.2d at 455.
Thus, the fact that the leased premises are under production at the
time of the entry of the Lease does not, in itself, invalidate the implied
covenant to develop. Accordingly, the trial court’s reasoning in granting
summary judgment in favor of Seneca on the implied covenant to develop
claim was erroneous. However, this does not end our discussion, as we
must scrutinize the plain language of the Lease to determine whether it
precludes the application of implied covenant to develop. See Jacobs, 772
A.2d at 455.13
It is undisputed that the Appellants and Seneca were operating under
the habendum clause of the Lease, which provides that the Lease would be
extended, beyond the primary term of 40 years, if “oil or gas or either of
them is stored in, produced or withdrawn from all or any portion of said
leased premises[.]” Lease, 4/17/62, at 2 (emphasis added). As noted
above, the leased premises was comprised of approximately 25,000 acres,
13
It is well-settled that “we may affirm the trial court’s order on any valid
basis.” Plasticert, Inc. v. Westfield Ins. Co., 923 A.2d 489, 492 (Pa.
Super. 2007).
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including the 3,131 acres at issue here, and did not constitute separate
operated and unoperated acreages. Id. at 1. It is undisputed that Seneca
continues to drill and withdraw gas from a portion of the leased premises.
See Brief for Appellants at 11, 42; Brief for Appellee at 3-4, 29-30, 36; see
also Trial Court Opinion, 9/11/13, at 3.
Thus, as the parties have stipulated that the drilling and operating
requirements under the Lease are satisfied, the Lease will extend for an
indefinite secondary term as long as any portion of the leased premises are
being drilled or operated for the production of oil or gas. See Hutchison,
519 A.2d at 388 (stating that the law does not imply a different contract
than that which the parties have expressly adopted). Indeed, as noted in
the above discussion regarding severability, the Lease makes no mention of
any duty or mandate to drill or operate the unoperated acreage for the
production of gas to continue the Lease as to that acreage in full force and
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effect.14 See Jacobs, 772 A.2d at 453. Based upon the foregoing, we
conclude that the Lease between the Appellants and Seneca forecloses a
finding of a breach of the implied covenant to develop and produce oil and
gas on the unoperated acreage. See Caldwell v. Kriebel Res. Co., LLC,
72 A.3d 611, 615 (Pa. Super. 2013) (concluding that the implied duty to
develop various strata was inapplicable where the parties were operating
under the habendum clause of their agreement, which provided that the
agreement would be extended “so long as oil or gas was being produced,”
and the drilling activities to date had involved only shallow gas drilling); see
also Exco Resources (PA), LLC, 2014 WL 585884, *7-8 (holding that
implied covenant to develop acreage outside that drained by the current
wells, and the entire premises below 3,500 feet, did not apply where the
parties’ agreement extended for an indefinite secondary term so long as,
14
We note that the Lease required Seneca to pay delay rental payments to
the Appellants on the unoperated acreage for a period of ten years beginning
in 1962. Lease, 4/17/62, at 3. While the Lease does not expressly state
that consideration for the unoperated acreage should continue after 1972,
Seneca continued to pay the Appellants $1.00 per unoperated acre until
December 2008, six years after the end of the 40-year primary term of the
Lease. See Brief for Appellee at 23; Brief for Appellants at 11, 44. The
Appellants’ acceptance of Seneca’s sustained delay rental payments during
the primary term of the Lease established that Seneca did not have an
implied covenant to develop during that time. See Jacobs, 772 A.2d at
455; see also Hite, 13 A.3d at 949 (stating that the mere payment of a
delay rental beyond the end of the primary term of the lease does not
extend the lease for an indefinite term or create a fee simple determinable in
the lessee).
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inter alia, the premises are being drilled or operated for the production of oil
or gas).15
Based upon the foregoing, we affirm the trial court’s entry of summary
judgment in favor of Seneca.
Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 8/31/2015
15
The Appellants cite to numerous cases to support their argument.
However, upon our review of the Lease, the actions of the parties during the
primary and secondary terms of the Lease, and relevant case law, we deem
the cases cited by the Appellants to be inapposite to the case at bar.
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