Pennsylvania Superior Court Upholds Dismissal of Lease Challenge Complaint Seeking to Impose Duty on Lessors to Develop Marcellus Shale

June 27, 2013

Last week, the Pennsylvania Superior Court (Pennsylvania’s intermediate appeals court) affirmed an important trial court decision dismissing claims by landowners that natural gas producers had violated the express and implied terms of their oil and gas lease by failing to develop the Marcellus Shale under their property. See Caldwell et al. v. Kriebel Resources, Co. et al, No. 1305 WDA 2012 (Pa. Super. June 21, 2013).

By way of background, the landowners in Caldwell had entered into an oil and gas lease with Kriebel Resources covering “all oil, gas, surface and Drilling Rights … owned or claimed by landowners” with a primary term of two years, and extending so long as oil or gas are produced. Defendant producers had successfully developed the shallow formations, were producing in paying quantities and were paying royalties on the same. However, the landowners filed suit, alleging that the defendants’ failure to develop the Marcellus Shale violated the express terms of the lease, namely that gas be produced in paying quantities, as well as the implied covenant to develop. Alternatively, the landowners argued that the parties only intended the lease to cover the shallow strata and requested that the lease be reformed to reflect that understanding. Defendants filed preliminary objections in the nature of a demurrer (the Pennsylvania procedural equivalent of a motion to dismiss), and the court sustained the preliminary objections and dismissed the complaint.

The superior court affirmed the trial court’s decision. After noting that the lease contained an express waiver of implied covenants and did not require production in paying quantities, the superior court refused to extend the implied duty to develop to require the producer to develop all strata underlying the property, and also refused to extend the production in paying quantities requirement to multiple strata. The superior court did not even address the landowners’ request for reformation of the lease, and upheld the dismissal of the complaint. This case represents a significant recognition of lessee rights in the context of lease challenges by landowners seeking to void their leases in hopes of cashing in on Marcellus Shale development. Similar results should be forthcoming if courts follow a strict interpretation of lease language.