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Steptoe & Johnson PLLC: Production 'Irrelevant' Under Flat-Rate Leases

By Bridget D. Furbee

A good outcome for oil and gas operators in West Virginia was provided by the U.S. Court of Appeals for the Fourth Circuit on May 7, 2013.

Referencing "... longstanding West Virginia law," the Court affirmed the validity of a 1933 lease finding "... the quantity of production is irrelevant to the expiration of the secondary term ..." of a flat-rate mineral lease. Despite the language in the term or "habendum" clause that extended the term "... as long thereafter as oil or gas ... is produced ...," the 4th Circuit found that production was not required if the quarterly flat-rate rentals were paid. The royalty provision required payments of $75 "... each three months in advance for the gas from each and every well drilled ... while the gas from said well is marketed and used."

Charles and Martha Wellman also sought rescission of the lease due to alleged late or missing checks. However, Judge Robert Chambers, U.S. District Court Judge for the Southern District of W.Va., found that the Wellmans' acceptance and cashing of later checks effectively ratified any breach that may have occurred under the lease. With regard to payments after the ratification, the Court found no credible evidence to rebut the producer's evidence that payments were made in accordance with the lease.

As an unpublished (per curiam) opinion, Wellman v. Bobcat Oil & Gas, Inc., No. 12-1533 [enhanced version available to subscribers], does not provide binding precedent in the circuit. Nonetheless, the 4th Circuit affirmed summary judgment in favor of the producer based on longstanding W. Va. law and its "general disfavor" of oil and gas lease forfeitures.

Bridget Furbee focuses her practice in the area of energy law. She is the former in-house counsel for a major Fortune 500 energy company and has extensive experience in major transactions as well as litigation in the oil and gas industries.

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