On February 4, 2015, less than one month after hearing oral argument on the matter, the Pennsylvania Superior Court affirmed the April 2014 decision of Greene County Court of Common Pleas Judge William R. Nalitz in Warren v. Equitable Gas Company, No. 697 WDA 2014. Judge Nalitz had examined a “dual-purpose” oil and gas lease, which by its terms would remain in effect for a 10 year primary term “and as long thereafter … as said land is operated for the exploration or production of natural gas, or as gas or oil is found in paying quantities, or stored thereunder, or as long as said land is used for the storage of gas or the protection of gas storage on lands in the general vicinity of said land.” (Emphasis added). The Judge found that the lease could not be terminated due to a lack of production, but instead remained in effect as long as production, or storage, or protection of storage took place on the property. In a non-precedential decision, the Superior Court agreed with Judge Nalitz, finding that he “correctly determined that the lease allowed for gas to be stored on the property, as well as produced, such that Equitable’s continued gas storage without gas production activities allowed for the lease’s term to continue, even in the absence of gas production.” (Original emphasis).

The Superior Court began its analysis by contrasting the case before it with Pomposini v. T.W. Phillips Gas and Oil Co., 580 A.2d 776 (Pa. Super. 1990), a case in which it found that because an oil and gas lease did not expressly allow for storage, storage on the property was impermissible. The court here held that, unlike in Pomposini, the lease did allow for the storage of gas, and thus it was permissible for that storage to extend the lease even in the absence of production. The court then addressed whether or not the storage and production provisions of the lease were severable, such that even if the lessee retained storage rights under the lease it could lose the right to produce. Relying on the Pennsylvania Supreme Court’s decision in Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001), the Superior Court found that Judge Nalitz had properly examined the lease language, circumstances of execution, and the intent of the parties as derived from the lease in refusing to find severability. The Superior Court again relied on Jacobs in refusing to find that the lessee had breached any implied covenant to produce, noting that Jacobs implied such a covenant “where the only compensation to the landowner contemplated in the lease is royalty payments resulting from the extraction of that underground resource.” (Superior Court’s emphasis). Here, reasoned the Superior Court, the lease’s explicit requirement of storage payments meant there was compensation other than that tied to production, and thus no implied covenant applied. Finally, the Superior Court found that the dual-purpose lease was not unconscionable, and that because all of the lessors’ attempts to invalidate the lease had failed for the reasons described above, “Equitable’s ongoing gas storage activities extended the lease term to the present day.”

Although the decision is non-precedential, the Superior Court joined the seven other Pennsylvania judges in federal court who have likewise held that dual-purpose leases are not severable and agreed with Penneco Pipeline Corp. v. Dominion Transmission, Inc., 2007 WL 1847391 (W.D. Pa. June 25, 2007), aff’d 300 Fed.Appx.186 (3d Cir. 2008) that the lease remained in full force and effect as to both production and storage.

Client Alert 2015-026