In a typical oil and gas lease, there are three primary sources of compensation to the landowner: the production royalty, the delay rental and the shut-in royalty. Many older oil and gas leases also contain what is known as a forfeiture clause, which allows for the termination of the lease if certain conditions or payments are not satisfied by the gas driller. In a recent decision, the Pennsylvania Superior Court held that the failure to pay a production royalty did not trigger the lease’s forfeiture clause.
The Superior Court in McCausland v. Wagner, 2013 Pa. Super. 256 (Sept 20, 2013) (No. 1186 WDA 2012), opined that, although it was undisputed that the production royalty payments were not made, the forfeiture clause was nonetheless inapplicable since there was a producing well on the leased premises. In light of the McCausland decision, landowners and gas drillers alike should carefully review their leases and the scope of any forfeiture clause.
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