Pennsylvania Court Enforces Change of Ownership Clause

October 8, 2014

On September 29, 2014, a Pennsylvania federal judge ruled on a case of first impression in a dispute over whether an oil and gas land lease was extended or expired by its own terms. In Danko Holdings LP v. EXCO Resources (PA) LLC et al., the U.S. District Court for the Middle District of Pennsylvania held that an extension payment made by the defendant’s predecessor-in-interest to the plaintiff’s predecessors-in-interest successfully extended the original lease, even though the original lessors had subsequently sold their interest to plaintiff, because neither plaintiff nor its predecessor satisfied the lease’s express change of ownership provision. No. 4:14-CV-00274 (M.D. Pa. Sept. 29, 2014).

On May 3, 2005, Thomas G. Stubler and Beth B. Stubler (the “Stublers”) entered into an oil and gas lease (the “Lease”) with The Keeton Group, LLC, with respect to certain property located in Lycoming County (the “Leased Premises”). The Lease contained a primary term of five years that expired on May 2, 2010, and the following provisions of note:

EXTENSION OF TERM: Lessee may extend the primary term for one additional period equal to the primary term by paying to Lessor, at any time within the primary term, proportionate to Lessor’s percentage of ownership an Extension Payment equal in amount to the annual Delay Rental…

CHANGE OF OWNERSHIP: Lessee shall not be bound by any change in the ownership of the Leasehold until furnished with such documentation as Lessee may reasonably require. Pending the receipt of documentation, Lessee may elect either to continue to make or withhold payments as if such a change had not occurred.

Through a separate series of conveyances, plaintiff Danko Holdings, L.P. (“Danko”) obtained title to a portion of the surface estate of the Leased Premises, and EXCO Resources (PA), LLC (“EXCO”) received all right, title and interest in the oil and gas in the Leased Premises. Significantly, neither Danko nor the Stublers provided notice of the change of ownership, as required by the terms of the Lease. Accordingly, when EXCO’s predecessor sought to extend the Lease, it made the requisite Extension Payment to the Stublers.

On January 13, 2014, Danko sued EXCO, seeking a declaration that the Lease expired by its own terms and asserting claims for ejectment, trespass, and conversion, because Danko did not receive the Extension Payment.

The Court dismissed, ruling that the plain language of the change in ownership clause applied, and that EXCO and/or its predecessors extended the term of the Lease by making the Extension Payment to the Stublers. The Court held it irrelevant whether EXCO or its predecessors had any actual or constructive notice of the ownership change.

The Court, noting that it could not find Pennsylvania authority directly addressing the effect of a change of ownership provision in an oil and gas lease, relied on persuasive authority from other jurisdictions as well as oil and gas law treatises in granting EXCO’s motion to dismiss. The Court specifically stated that “constructive notice is generally not sufficient to obviate the language of a change of ownership provision that specifically requires a lessor to provide documentation.” Furthermore, “a lessee should not be subject to liability both to make delay payments and to investigate the ownership of the property each time it makes payment.”

This decision reaffirms that the intent of the original parties, as expressed in the plain language of an agreement, will control. Even when a lessee could be said to have constructive or actual notice of a transfer of interest, courts will enforce change of ownership clauses strictly according to their unambiguous terms. The decision further confirms that oil and gas operators are under no duty to search public property records whenever they contemplate taking some step, in order to confirm that their leases have not been affected by lessors’ ensuing property transactions, but that lessees may effectively put the burden on lessors or lessors’ successors to provide formal written notice of intervening property transfers.