PA Opinion Reassures Stakeholders That Estoppel By Deed Applies to Oil and Gas Leases

April 4, 2016

The Supreme Court of Pennsylvania has recently confirmed that the doctrine of estoppel by deed applies to oil and gas leases and does not require detrimental reliance. See Shedden v. Anadarko, No. 103 MAP 2014, — Pa. — (Mar. 29, 2016). This outcome is not surprising, but the Court’s decision – its first in the oil and gas arena since the Court welcomed three new justices – reassures oil and gas stakeholders that the Court will continue to apply settled doctrine in construing oil and gas leases.

In Shedden, the landowners entered into a five-year oil and gas lease with respect to their 62-acre parcel of land. As consideration, the landowners were entitled to receive a bonus payment of $80 per acre.

At the time the lease was executed, the landowners believed that they owned the oil and gas rights to all 62 acres of their parcel. In reality, however, the landowners’ predecessors-in-interest had reserved by recorded deed one-half of the oil and gas rights to the property. This fact was uncovered before the landowners received their bonus payment; therefore, the landowners only received a check for 31 of the 62 acres.

Two years after executing the lease, the landowners filed a successful motion to quiet title and became the owners of the oil and gas rights on all 62 acres of their property. When the time came to extend the oil and gas lease, the landowners sought a declaration from the court that the lease only pertained to the oil and gas contained on the 31 acres that they owned at the time the original lease was executed.

The case turned on the applicability of the doctrine of estoppel by deed, which “precludes one who conveys an interest in land that he does not own, but subsequently acquires title thereto, from denying the validity of the first conveyance.” The landowners argued that, because estoppel by deed is an equitable doctrine, there must be a finding of detrimental reliance by the grantee. The Supreme Court disagreed. In coming to its conclusion, the Supreme Court noted that, while the doctrine was rooted in equity, its considerations were much broader. Accordingly, the doctrine was applicable regardless of any detrimental reliance, and the landowners therefore could not deny the validity of their initial conveyance of all of the oil and gas rights to the property.

The Supreme Court also rejected the landowners’ argument that the lease was modified by their acceptance of the bonus payment for one-half of the originally agreed-upon sum. In doing so, the Supreme Court referred to the clause in the lease that provided that the landowners were only entitled to payment in proportion to the oil and gas rights that they actually owned.

As noted, the decision did not come as a surprise to informed observers; indeed, there was some question as to why the Court even took the appeal in the first place. Nonetheless, the Supreme Court’s decision in Shedden confirms that estoppel by deed applies to oil and gas leases and eliminates any doubt as to whether detrimental reliance is a prerequisite to the doctrine’s application. Perhaps more importantly, it suggests that the Court – notwithstanding its new composition – is not inclined to rewrite existing principles governing the construction of oil and gas leases and will enforce those leases according to their terms, even in the face of landowner complaints about the inequitable effect of otherwise-unambiguous lease terms.