Pennsylvania Court: Sublease of Production Rights Does Not Sever “Dual-Purpose” Oil and Gas Leases

March 24, 2016

In a published opinion, the Pennsylvania Superior Court ruled that utilization of the subject land for gas storage held production rights under a “dual-purpose” lease providing for both storage and production. See Loughman v. Equitable Gas Co., LLC, 2016 PA Super 71, — A.3d — (Mar. 22, 2016). This is the most recent in a long line of decisions reaching the same conclusion, in Pennsylvania federal and state courts and in the courts of other jurisdictions, as we have previously reported, and is the first Pennsylvania decision that is binding on lower Pennsylvania courts.

In Loughman, the landowner entered into an oil and gas lease in 1966 which provided that it would remain in effect as long as the “land is operated for the exploration or production of gas or oil, or as gas or oil is found in paying quantities thereon, or stored thereunder or as long as said land is used for the storage of gas or the protection of gas storage on lands in the general vicinity of said land.” In 2011, the lessee sublet the production rights to the oil and gas in the lands covered by the lease. The landowners argued that this sublease severed the production and storage rights, and therefore, the use of the land for storage could not maintain the production rights.

The Superior Court held that the lease’s habendum clause, which was “clearly and unambiguously” written in the disjunctive, provided that the lease shall continue so long as the land is utilized for either production or storage. Thus, the court concluded that the parties intended that the lease be nonseverable. The court explained that the sublease specifically expressed no intent to sever the production and storage rights and, in the event the sublessee elected to surrender its rights, “the non-severed production rights” would revert back to the lessee.

Further, the court noted that the lease permitted the lessee to be the “sole judge” as to whether the leased premises were being used for gas storage or the protection of stored gas. This implies that such provisions, which are not uncommon in dual-purpose leases, are valid and enforceable – an issue on which Pennsylvania courts had yet to rule.

In reaching its conclusion, the Superior Court rejected the decision of a West Virginia federal district court, which ruled that a similar lease was severable. That district court opinion was reversed by the U.S. Court of Appeals for the Fourth Circuit in December 2015, as we have reported, and the Pennsylvania Superior Court agreed with the Fourth Circuit’s construction of the use of the disjunctive “or” in the lease’s habendum clause.

This most recent decision on dual-purpose leases seemingly forecloses any attacks on the severability of dual-purpose leases in Pennsylvania. (While the landowner could seek review in the Pennsylvania Supreme Court, the uniformity in Pennsylvania decisions to date would seem to militate against a grant of review.)

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