Babst Calland: 3rd Circuit Rules In Favor Of Shell Because Of Lease Unitization Clause

Babst Calland: 3rd Circuit Rules In Favor Of Shell Because Of Lease Unitization Clause

By Alana E. Fortna |

On November 18, 2013, the Third Circuit affirmed a summary judgment ruling out of the Middle District of Pennsylvania in favor of Shell Western Exploration and Production, LP (Shell) in a case captioned as George W. Linder, et al. v. SWEPI, LP, a/k/a Shell Western Exploration and Production, LP; Case No. 13-1674 (3d Cir. November 19, 2013) [enhanced opinion available to subscribers].  The plaintiffs conveyed their oil and gas rights for 338 acres to Shell’s predecessor-in-interest via a lease (the Lease).  The Lease had a primary term of ten years and, by its terms, would continue in effect past the primary term if productive activity continued on the leasehold.  Shell’s predecessor-in-interest unitized an area of 526.94 acres, which included 137.81 acres of the plaintiffs’ 338-acre leasehold.  The primary term of the Lease expired in September 2010, but the parties agreed that the Lease continued in effect because Shell continued to engage in productive activity on the leasehold.  However, the plaintiffs demanded a delay rental payment for the non-unitized portion of the Lease based on the Lease’s Unitization Clause which provided: “If the total unitized Leasehold acreage is less than 50 percent of the total Leasehold acreage, Delay Rental will continue to be paid on the non-unitized acreage.”  Shell agreed to pay the delay rentals for the non-unitized acreage.  Both parties then changed their positions a number of times as to whether the Lease remained in effect for the 200.19 acres that were never unitized.  The plaintiffs ultimately filed a lawsuit in state court seeking a declaratory judgment that the Lease expired as to the non-unitized acreage.  Shell removed the case to the United States District Court for the Middle District of Pennsylvania, and moved for summary judgment in its favor.  The District Court granted summary judgment finding that, as a matter of law, the Lease did not expire with respect to the non-unitized acreage.

The plaintiffs then appealed to the Third Circuit with their principal argument being that “upon the occurrence of unitization of less than 50 percent of the entire leasehold, there are as a matter of law two leasehold parcels.”  The Third Circuit affirmed the ruling of the District Court holding that the plaintiffs’ position is an “untenable reading of the Lease.”  In so holding, the Third Circuit relied upon the “obvious reading” of the Lease terms finding that the Lease continues in effect while operations are conducted on the leasehold, and the Lease refers to the leasehold as a single, undivided entity that is 338 acres in size.  Moreover, the Third Circuit quickly dismissed the plaintiffs’ argument that the Lease’s Unitization Clause supports their interpretation.  In this regard, the Third Circuit held that this language does nothing to separate the unitized and non-unitized acreages—rather, it simply obligated Shell to pay a delay rental on the non-unitized acreage.  Additionally, citing to Pennsylvania case law, the Third Circuit held that Shell’s failure to timely pay the delay rental did not constitute a material breach of the Lease because a brief delay in payment where the Lease contains no “time-is-of-the-essence” provision does not amount to a material breach.  Lastly, the Third Circuit held that Shell did not surrender the non-unitized acreage by initially agreeing in a letter to do so, because the Lease’s surrender clause requires the recording of a Surrender of Lease as a necessary prerequisite to the legal surrender of any rights.  Accordingly, based on what it viewed as the obvious interpretation of the Lease provisions, the Third Circuit affirmed the District Court’s decision to grant summary judgment in favor of Shell.

Copyright 2013 • Babst, Calland, Clements and Zomnir, P.C. • Two Gateway Center, Pittsburgh, PA 15222 • 412-394-5400 • Administrative Watch is privately distributed by Babst, Calland, Clements and Zomnir, P.C., for the general information of its clients, friends and readers. It is not designed to be, nor should it be considered or used as, the sole source of analyzing and resolving legal problems. If you have, or think you may have, a legal problem or issue relating to any of the matters discussed in the Administrative Watch, consult legal counsel.

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