Energy & Natural Resources Alert: Pennsylvania Supreme Court Confirms that the Doctrine of Estoppel by Deed Applies to Oil and Gas Leases

In Shedden v. Anadarko E. & P. Co., L.P., No. 103 MAP 2014, 2016 WL 1228867 (Pa. Mar. 29, 2016), the lessors brought an action against Anadarko, seeking a declaration that an oil and gas lease purporting to cover their 62-acre property only covered 31 acres.  The lessors’ claim was based on the fact that at the time the parties agreed to the lease, the lessor only owned a one-half interest in the oil and gas underlying the 62-acre property and accepted a bonus payment under the lease for 31 net acres.  However, prior to bringing this action, the lessors acquired the outstanding oil and gas interest through a quiet title judgment.  The Supreme Court of Pennsylvania held that:

  1. because the oil and gas lease contained a covenant of general warranty, the doctrine of estoppel by deed barred the lessors from denying that the lease covered the oil and gas underlying all of the lessors’ 62-acre tract of land; and
  2. the lessee’s bonus payment to lessors for the 31 net acres, and lessors’ acceptance of said payment, did not represent a modification of the oil and gas lease

Facts

In 2006, the lessors entered into an oil and gas lease with Anadarko, as lessee, that covered all of their right, title, and interest in the oil and gas underlying a 62-acre tract of land located in Tioga County, for a primary term of five years, with the option to extend the term of the lease.  The terms of the lease contained a covenant of warranty that stated: “The LESSOR covenants and agrees … [t]hat LESSOR has full title to the premises and to all the oil and gas therein at the time of granting this Lease, and forever warrants title to the leasehold estate hereby conveyed to LESSEE.”

Unbeknownst to the parties at the time they entered into this lease, the lessors owned only a one-half interest in the oil and gas underlying the property (the other one-half having been reserved in an 1894 deed). Anadarko discovered the reservation before it tendered the bonus payment due under the lease, and informed the lessees that it would pay a bonus as to only 31 of the 62 acres.  In its revised order of payment, the lessee described the leased premises as being “a tract of land containing 62.00 gross acres, 31.00 net acres.” The lessors accepted this reduced bonus payment.

Two years after entering into the lease, the lessors filed a quiet title action against the owners of the outstanding one-half oil and gas interest, which the trial court granted. As a result, the lessors became vested with the entire undivided interest in the oil and gas underlying the 62-acre property.

In 2011, the lessee invoked an extension clause in the lease by sending the lessors an extension payment that covered all 62 acres. The lessors did not accept the payment and instead filed a lawsuit seeking a declaration that the lease covered only a one-half interest. The lessors’ argument was twofold. First, they claimed that the lease could not have leased a 100% interest in the oil and gas underlying the 62-acre property because they only owned a one-half interest at the time the lease was executed. Second, they claimed that the 2006 revised order of payment for 31 net acres constituted a modification of the lease.

The trial court and the Superior Court both held that estoppel by deed barred the lessors from arguing that the lease only covered a one-half interest. Moreover, each court rejected the lessors’ claim that the 2006 revised order of payment constituted a modification of the lease. The lessors appealed the Superior Court’s judgment on both issues to the Supreme Court of Pennsylvania.

Holding

The Court began by addressing the lessors’ modification argument. In Pennsylvania, an oil and gas lease is governed by contract law, which provides that the terms of a contract may be modified by a subsequent agreement that is supported by sufficient consideration.  The lessors argued that by tendering payment for only 31 net acres under the 2006 revised order of payment, the lessees elected to forego any attempt to lease the outstanding one-half oil and gas interest. The lessee, on the other hand, defended its decision to pay a lower bonus payment by pointing to the following clause in the oil and gas lease: “[i]f LESSOR owns less than all of the oil and gas rights in the premises, LESSOR shall be entitled to only a share of the rentals and royalties equivalent to the proportion of such oil and gas rights owned by LESSOR.”

Based on this clause, the Court held that the lease was not modified as a result of the lessee’s payment of, and the lessors’ acceptance of, a bonus payment of one-half the originally agreed-upon sum. In fact, rather than being a modification of the lease, the lessee’s payment of a reduced bonus was in accord with the precise terms of the oil and lease, which means it cannot be considered as additional consideration to modify the Lease.

In regards to the estoppel argument, the Court pointed out that in Pennsylvania, where a lease contains a general warranty covenant, the doctrine of estoppel by deed prevents a person who leases property which she does not own, but of which she later acquires ownership, from denying the validity of the lease on the basis that she did not have ownership at the time the lease was executed. The lessors did not deny the viability of the doctrine in this context, but instead argued that the doctrine’s application requires a finding of detrimental reliance by the lessee in this case.

The Court, however, disagreed that such a finding was necessary. As a result, the Court held that the doctrine of estoppel by deed applied in this case to the 2006 oil and gas lease and found that the lessors were barred from claiming that the lease only covered a one-half oil and gas interest.

For Additional Information

A complete copy of the Pennsylvania Supreme Court Opinion can be found here.

If you have any questions about this Alert, please contact Brian Boyer, David Hall or any of the attorneys in our Energy and Natural Resources Services Group.

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