Hite v. Partners

• Decision Date: 04 January 2011
• Citation: 13 A.3d 942,2011 PA Super 2
• Parties: Earl J. HITE and Bonita M. Hite, husband and wife, Frederick J. Hite and Karen A. Hite, husband and wife, Leroy G. Hite and Carol A. Hite, husband and wife, Robert M. Hite and Cheryl A. Hite, husband and wife, Leonard J. Buck and Patricia A. Buck, husband wife, Mary L. Hite, widow, Germain P. Hite and Jan M. Hite, husband and wife, John Myers, widower, Appelleesv.FALCON PARTNERS, A Pennsylvania Business Trust and XTO Energy, Inc., AppellantAppeal of Falcon Partners, A Pennsylvania Business Trust.
• Court: Pennsylvania Superior Court

13 A.3d 942

2011 PA Super 2

Earl J. HITE and Bonita M. Hite, husband and wife, Frederick J. Hite and Karen A. Hite, husband and wife, Leroy G. Hite and Carol A. Hite, husband and wife, Robert M. Hite and Cheryl A. Hite, husband and wife, Leonard J. Buck and Patricia A. Buck, husband wife, Mary L. Hite, widow, Germain P. Hite and Jan M. Hite, husband and wife, John Myers, widower, Appellees

v.FALCON PARTNERS, A Pennsylvania Business Trust and XTO Energy, Inc., AppellantAppeal of Falcon Partners, A Pennsylvania Business Trust.

Superior Court of Pennsylvania.

Argued Sept. 13, 2010.Filed Jan. 4, 2011.

Michael Handler, Assistant District Attorney, Ebensburg, for appellant.Calvin J. Webb, II, Ebensburg, for appellees.BEFORE: FORD ELLIOTT, P.J., STEVENS, and SHOGAN, JJ.OPINION BY STEVENS, J.:

This appeal stems from a dispute over several oil and gas leases, which culminated in the grant of summary judgment in favor of the Plaintiff/Appellee landowners. We affirm.

The leases, all of which are similarly worded, were originally entered into by Plaintiffs and Buffalo Valley, Ltd. They are either dated December 18, 2002, or October 30, 2003. In 2005, Buffalo Valley assigned its interest to MSB Leasing, which then assigned its interest to Defendant/Appellant Falcon Partners in 2007.

The leases grant and convey to the lessee “all the oil, gas, surface and Drilling Rights in, on and under” Plaintiffs' land. Leases at Paragraph 1. The term of each lease is stated as follows:

3. Term. Lessee has the right to enter upon the Property to drill for oil and gas at any time withinone [sic] (1) year from the date hereof and as long thereafter as oil or gas or either of them is produced from the Property, or as operations continue for the production of oil or gas, or as Lessee shall continue to pay Lessors two ($2.00) dollars per acre as delayed rentals, or until all oil and gas has been removed from the Property, whichever shall last occur.

Id. at Paragraph 3.¹

Despite the passage of years since the leases were signed, Falcon has not taken any action to actually commence drilling on Plaintiffs' properties. Thus, instead of the royalties they would be earning if oil or gas was produced, Plaintiffs have merely received delayed rental payments of two dollars per acre per year. In light of Falcon's inaction, it is unsurprising that Plaintiffs were interested when they received offers from other gas companies to drill the land. With those other offers in hand, Plaintiffs sent certified letters of notification to Falcon on June 20, 2008 and June 22, 2008, inquiring whether Falcon wished to match the price, terms and conditions of such offers pursuant to the Right of Renewal clause.² Falcon did not respond. Thereafter, on December 11, 2008 and December 16, 2008, the Plaintiffs sent notice to Falcon declaring termination of the agreements as the result of Falcon's inaction, and demanding that Falcon record a release document in confirmation. Falcon refused, and the Plaintiffs instituted the actions currently before us.

The parties filed cross-motions arguing that they are, respectively and opposed to the other, entitled to summary judgment as there is no genuine issue as to any material fact and the interpretation of the leases is purely a matter of law. Thereafter, on January 6, 2010, the lower court granted Plaintiffs' motions for summary judgment, and denied Falcon's motion for summary judgment. Order filed 1/6/10. Praecipe for entry of judgment was granted on February 2, 2010, and Falcon immediately appealed.³

In addressing this matter, we adhere to the well established standard for reviewing the lower court's grant of summary judgment which requires us to view the record in a light most favorable to Falcon, which will be considered the non-moving party since the lower court decided the cross-motions for summary judgment in Plaintiffs' favor. Szymanowski v. Brace, 987 A.2d 717, 721–722 (Pa.Super.2009). Further, while all doubts as to the existence of a genuine issue of material fact would normally be resolved against the moving party, here, since both parties sought summary judgment, they are in agreement that there are no genuine issues of material fact remaining. Id., 987 A.2d at 722. We may affirm the lower court's grant of summary judgment in Plaintiffs' favor only where it is clear that they are entitled to a judgment as a matter of law. Id. “Our scope of review of a trial court's order granting or denying summary judgment is plenary, and our standard of review is clear: the trial court's order will be reversed only where it is established that the court committed an error of law or abused its discretion.” Id.

Also applicable to this lease dispute are the principles of contract and property law. Jacobs, 332 F.Supp.2d at 772.

[A]n oil and gas lease reflects a conveyance of property rights within a highly technical and well-developed industry, and thus certain aspects of property law as refined by and utilized within the industry are necessarily brought into play. [ Daset Mining Corp. v. Industrial Fuels Corp., 326 Pa.Super. 14, 473 A.2d 584, 592 (1984) ]; [ Hutchison v. Sunbeam Coal, 513 Pa. 192, 195 n. 1, 519 A.2d 385, 387 n. 1 (1986) ] (using the term “lease” with regard to the conveyance of mineral rights “is in some respects a misnomer [because] what is really involved is a transfer of an interest in real estate, the mineral in place.”). The Supreme Court has aptly observed that “the traditional oil and gas ‘lease’ is far from the simplest of property concepts.” Brown v. Haight, 435 Pa. 12, 255 A.2d 508, 510 (Pa.1969). In the context of oil and gas leases, the title conveyed is inchoate and initially for the purpose of exploration and development. Calhoon v. Neely, 201 Pa. 97, 50 A. 967, 968 (Pa.1902); accord Burgan v. South Penn Oil Co., 243 Pa. 128, 89 A. 823, 826 (Pa.1914) (“The title is inchoate, and for purposes of exploration only until oil is found.”). If development during the primary term is unsuccessful, no estate vests in the lessee. Id. If oil or gas is produced, the right to produce becomes vested and the lessee has a property right to extract the oil or gas. [ Calhoon v. Neely, 201 Pa. 97, 101, 50 A. 967, 968 (1902) ]; Barnsdall v. Bradford Gas Co., 225 Pa. 338, 74 A. 207, 208 (Pa.1909) (an oil and gas lease that results in production “creates a corporeal interest in the lessee in the demised premises, and is not merely a license to enter and operate for oil and gas.”). In such circumstances the lessee will be protected in accordance with the terms of the lease and will be required to operate the leasehold for the benefit of both parties. [ Venture Oil Co. v. Fretts, 152 Pa. 451, 461, 25 A. 732, 734 (1893) ]; Calhoon, 50 A. at 968; Burgan, 89 A. at 826.

Jacobs, 332 F.Supp.2d at 772–773. Royalty-based leases are to be construed in a manner designed to promote the full and diligent development of the leasehold for the mutual benefit of both parties. Id., 332 F.Supp.2d at 781.

In the matter sub judice, we acknowledge that the parties' dispute is but one of many in a long line of cases involving the oil and gas industry in Pennsylvania—a fact which is hardly surprising, since the very first commercial oil well in the United States was drilled in Crawford County, Pennsylvania, in 1859. Since that time, countless landowners have contracted with oil and gas companies to reap the financial benefits of the resources hidden deep beneath their property. While the form of the leases created to memorialize such agreements has varied, the leases at issue in the matter currently before us are unusual. Specifically, the language pertaining to the one year primary term and the delay rental due on an annual basis, used in conjunction, is not typical, and, as we will explain, requires us to affirm the lower court's summary judgment in Plaintiffs' favor.

We do so with an acknowledgment that the features of oil and gas leases have evolved over time. Initially, the leases entered into by landowners and the companies seeking to extract the oil and gas beneath their land typically granted the lessee company the right to drill for the purpose of producing oil and gas for a definite, or primary term, and set forth the manner in which the landowner would be paid. The use of a definite term placed the lessee at a disadvantage, however, if production started late in the term of the lease, or extended beyond the term's end. Jacobs, 332 F.Supp.2d at 765, fn. 1, 786, fn. 15. As a result, leases began incorporating an option to renew, and eventually came to use a habendum clause which provided that the interest conveyed by the lease continued for a prescribed term of years, and “as long thereafter as” or “so long as” a specified product or products was obtained from the land in paying quantities, or some other specified activity continued. Id., 332 F.Supp.2d at 765 fn. 1. Such clauses were typically understood to establish a definite (or primary) term in which the lessee was permitted to develop the property, with an option for an indefinite secondary term permitting the lessee to reap the long-term value and return on the money spent developing the property during the primary term. Id.

Early lease forms also generally contained an expressed obligation on the part of the lessee to immediately develop the property or suffer forfeiture. Jacobs, 332 F.Supp.2d at 765, fn. 3. Even when such an obligation was not expressed, the courts recognized an implied covenant to develop the leasehold. Id.; Jacobs v. CNG Transmission Corp., 565 Pa. 228, 240–243, 772 A.2d 445, 452–454 (2001) ( citing Aye v. Philadelphia, 193 Pa. 451, 455–456, 44 A. 555, 555–556 (1899); McKnight v. Manufacturers' Natural Gas Co., 146 Pa. 185, 204, 23 A. 164, 166 (1892); Stoddard v. Emery, 128 Pa. 436, 18 A. 339 (1889)). As a result, in conjunction with the use of a definite primary term and a habendum clause containing a “thereafter” provision, leases also...