Pennsylvania Superior Court Rules that Withheld Royalty Payments Could Not Void Oil and Gas Lease

October 11, 2013

On September 20, 2013, the Superior Court of Pennsylvania published a decision affirming that a landowner-lessor could not seek payment of withheld natural gas royalties while simultaneously declaring the lease to be void.

In McCausland v. Wagner et al., the landowner-plaintiff brought suit against the lessee to recover withheld royalty payments, seeking both money damages and a declaration that the lease was invalid. The parties eventually reached and memorialized a monetary settlement that expressly reserved the landowner’s right to pursue a judicial determination of the lease’s validity. Despite the settlement, the landowner subsequently filed a motion for summary judgment seeking to have the trial court void the lease. The court denied this motion, instead granting summary judgment on the defendant-lessee’s behalf.

On appeal, the Superior Court affirmed, finding that the remedies sought by the landowner were inconsistent. Because the landowner accepted royalty payments under the settlement agreement, he waived the right to declare a forfeiture. Notably, the Court also found that the lease’s forfeiture clause applied only to a failure to make delay rental payments, and not royalty payments.

The decision also includes language favorable to industry lessees regarding the rights conveyed by an oil and gas lease, an issue that has recently arisen in Ohio state and federal courts. In McCausland, the Court reinforces Pennsylvania’s position that “an oil and gas lease reflects a conveyance of property rights within a highly technical and well-developed industry,” going on to discuss the vesting of property rights to the oil and gas upon discovery and production of the same. Such language will likely assist lessees’ potential future disputes with landowners.