Executive Summary In the Court’s first decision on oil and gas issues since three new justices were elected, the Pennsylvania Supreme Court recently held that the doctrine of estoppel by deed applies to oil and gas leases.
In Shedden v. Anadarko E. & P. Co., No. 103-MAP-2014 (Pa. Mar. 29, 2016), the Pennsylvania Supreme Court recently affirmed a Superior Court decision holding that estoppel by deed applies to oil and gas leases. The Supreme Court opinion, authored by Justice Todd, is the Court’s first opinion addressing issues concerning oil and gas law since the composition of the Court changed. Specifically, three new justices, David Wecht, Kevin Doughtery, and Christine Donohue, were recently elected to the Supreme Court in November 2015, and Justice Michael Eakin recently resigned from his position in March 2016. Justices Wecht and Doughtery both joined the majority decision, along with Chief Justice Saylor and Justice Baer. Justice Donohue did not participate in the decision because she was a judge on the Superior Court panel that decided the case below.
The Sheddens are the owners of 62 acres of land in Tioga County (the “Property”). At the time the Sheddens purchased the Property, they were unaware that their predecessors in interest had reserved a one-half interest of the oil and gas rights to the Property in a recorded deed in 1894 (the “1894 Reservation”).1 The Sheddens leased their oil and gas rights to Anadarko in May 2006 for a term of five years (the “Lease”). Prior to making payment, Anadarko discovered the 1894 Reservation, and subsequently revised the order of payment for a bonus payment on 31 acres, half of the 62 gross acres leased. The Sheddens accepted the order of payment. Two years after executing the Lease, the Sheddens quieted title on the reserved one-half interest.
In 2011, Anadarko invoked the extension clause in the Lease by sending the Sheddens a check representing an extension payment of $70 per acre for 62 acres. The Sheddens did not cash the check, and proceeded to file a declaratory judgment action seeking a declaration that the Lease was only for a one-half interest. Anadarko filed a motion for summary judgment, arguing that the doctrine of estoppel by deed precluded the Sheddens from arguing that the Lease granted Anadarko only a one-half interest. The trial court granted Anadarko’s motion for summary judgment.
The Superior Court affirmed the trial court’s ruling in a unanimous published opinion. It noted that estoppel by deed is a well-established doctrine in Pennsylvania, and that it barred the Sheddens from arguing that the Lease only conveyed a one-half interest in the oil and gas rights to the Property. The court also rejected the Sheddens’ argument that because the Sheddens had only received a bonus payment for one-half of the acreage, the Lease was only for a one-half interest of the oil and gas in the Property. The court noted that the language in the Lease specifically provided that the Sheddens were only entitled to the share of rentals and royalties equivalent to the proportion of gas that they actually owned.
In the Supreme Court, the Sheddens did not dispute that the doctrine of estoppel by deed applied to oil and gas conveyances, but instead argued that the Superior Court erred because: 1) the bonus payment for one-half of the acreage was a modification of the consideration and scope of the Lease, and 2) the doctrine of estoppel by deed is not justifiable in this case because Anadarko was not prejudiced by the Sheddens’ misrepresentation that they owned 100 percent of the oil and gas rights to the Property.
The Supreme Court first addressed the Sheddens’ modification argument, and held that the Lease was not modified by the initial payment for one-half of the acreage. The express language in the Lease provided that the Sheddens were only entitled to payment in proportion to the oil and gas rights they actually owned. Because the bonus payment was in conformity with the express terms of the Lease, the payment could not be considered evidence of an intent to modify the Lease.
Second, the Sheddens argued that because estoppel by deed is an equitable doctrine, there must be a finding of detrimental reliance by Anadarko. Anadarko argued that the Sheddens were attempting to conflate equitable estoppel, which does require detrimental reliance, and estoppel by deed, which does not.
The Court agreed with Anadarko that estoppel by deed does not require detrimental reliance, noting that equitable estoppel is an equitable doctrine that “recognizes that an informal promise implied by one’s words, deeds or representations which lead another to rely justifiably thereon to his own injury or detriment, may be enforced in equity.” Novelty Knitting Mills, Inc. v. Siskind, 457 A.2d 502 (Pa. 1983). In contrast, the doctrine of estoppel by deed precludes a landowner who leases property which he does not own, but of which he later acquires ownership, from denying the lease based on the argument that the landowner did not own the property at the time the lease was executed. Estoppel by deed, while rooted in equity, has broader considerations, namely ensuring that certain formal documents are final and conclusive evidence of their contents. Accordingly, the Court held that the Sheddens were estopped from arguing that Anadarko only had a one-half interest to the oil and gas on their Property, upholding the Superior Court’s decision that the property concept of estoppel by deed applies to oil and gas leases.
- The Court notes in its opinion that, although the Sheddens claimed they lacked notice of the reservation, they arguably had record notice given that the reservation was properly recorded.
Client Alert 2016-095