Energy

Babst Calland: Pennsylvania Federal Court Holds 1961 Dual Purpose Lease Still In Effect

By Matthew L. Lambach |

In the case titled Mason v. Range Res.-Appalachia LLC (2015 U.S. Dist. LEXIS 97471), the United States District Court for the Western District of Pennsylvania recently held that a 1961 oil and gas lease remained in effect pursuant to the terms of the lease [enhanced opinion available to lexis.com subscribers | Lexis Advance].  The lease provided the lessee the right to enter the leased premises to explore, drill, produce and market oil and gas as well as inject, store and withdraw gas and protect gas stored therein.  The habendum clause of the lease provided that the lease would extend into its secondary term so long as the lessee operated the property (i) in search for oil and gas; (ii) for production of oil and gas; (iii) for storage of oil and gas; or (iv) “for the protection of any gas stored in such storage field” (emphasis added).  These types of oil and gas leases are commonly referred to as “Dual Purpose” Leases.  The leased premises is situated within a protective area for a 11,000 acre storage field located in Washington County, Pennsylvania, and no well has been drilled on and no production occurred on the leased premises. 

The landowners argued, among other things, that the 1961 lease has expired because (i) the lease provides the lessee the right to use the premises to produce gas, store gas and protect gas stored on the leased premises; (ii) the lessee may not use the leased premises for the protection of gas stored on adjoining lands until it first produced gas on the leased premises; and (iii) the annual payments were insufficient to extend the lease into its secondary term.  The court applied the rationale set forth in Penneco Pipeline v. Dominion Transmission, Inc. and the rules of contract interpretation to conclude that the lease had entered into its secondary term and remained in effect.  The court held that the only reasonable construction of the granting and habendum clauses is that the lessee may use the land for protecting gas stored immediately under the leased premises or gas stored under adjoining land or both.  Because the lessee was using the leased premises to protect gas stored under adjoining land and tendered annual rental payments, it concluded that the 1961 lease is still in effect.

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