Reliance on Force Majeure Clause to Extend Term of Oil and Gas Leases

The Pennsylvania Supreme Court previously rejected a broad equitable tolling doctrine under oil and gas leases where a lessor only has filed a declaratory judgment action seeking to invalidate the oil and gas lease. The court ruled that as a matter of Pennsylvania law, the filing of a lawsuit seeking a declaration of the parties’ rights does not amount to an unequivocal anticipatory repudiation of the lease, as in Harrison v. Cabot Oil & Gas, 110 A.3d 178 (Pa. 2015). The court further observed that if the parties had intended to toll the term of a lease during a pending challenge to its validity, they could have negotiated an express clause in the lease providing for tolling of the term of the lease under those circumstances. Although many lease forms now do contain an express provision that tolls the term of a lease and obligations under a lease during the pendency of any litigation over the validity of the lease, leases that do not contain such express language present significant practical challenges to lessees where a lessor is challenging lease validity. A lessee must either continue to invest to develop the lease during the pendency of a lawsuit, with the risk that investment may be lost if a court rules the lease is invalid; or cease development and risk the expiration of the lease, even if the lawsuit is found to be without merit, due to an inadequate time to develop the lease.

Harrison left open the possibility that different facts or circumstances may rise to the level of a repudiation or may otherwise support tolling based on different legal or contractual grounds other than equity. One of those circumstances may be lessor or third party interference with actual development. A recently decided Ohio U.S. Seventh District Court of Appeals case provides a potential alternative avenue for Pennsylvania lessees seeking tolling of the term of the lease if there is actual interference, under a force majeure clause that provides for a force majeure event upon the happening of “causes not reasonably in the lessee’s control.” In Haverhill Glen v. Eric Petroleum, 2016-Ohio-8030 (7th Dist. Dec. 2, 2016), the Seventh District Court in Ohio affirmed a trial court’s ruling granting summary judgment in favor of lessee Eric Petroleum, finding that the term of an oil and gas lease was extended as a result of actual interference with the development of the property. In Haverhill, the lessee sought to develop oil and gas in a parcel of property in Harrison County, Ohio, pursuant to a lease covering over 3,000 acres. The successor in interest to the original lessor owned only the mineral rights in the property, with the surface rights being owned by a third party. When the lessee attempted to enter the surface of the property for the purposes of surveying and determining potential well locations, the surface owner instructed the lessee to leave the property. Eventually, the surface owner demanded over a million dollars as compensation to permit the lessee to develop the minerals below the surface.