Seneca Resources Corp. v. S & T Bank
122 A.3d 374
| Pa. Super. Ct. | 2015Background
- 1962 oil & gas lease: Humphrey (lessor) leased ~25,000 acres (15,000 "operated," 10,000 "unoperated") to Jefferson for a 40-year primary term and a secondary term "as long thereafter as oil or gas is stored, produced or withdrawn from all or any portion" of the leased premises.
- Lease provided royalties for production on operated acreage and scheduled lump-sum/delay rental payments for unoperated acreage (delay rentals listed through 1972); conversion of unoperated to operated acreage permitted if production commenced.
- Seneca (successor to lessee) continued production on many operated acres and paid delay rentals on unoperated acres through December 2008; Appellants (successor lessors) contend 3,131 unoperated acres reverted for failure to develop deep horizons.
- Appellants sent termination/inquiry letters in 2008 and then leased overlapping acreage to a third party (Open Flow); Seneca sued for declaratory relief and breach, Appellants counterclaimed asserting severability and breach of implied covenant to develop deep gas.
- Trial court granted summary judgment to Seneca (following prior interlocutory proceedings); Appellants appealed, arguing (1) lease severable between operated/unoperated acreage and (2) lessee breached implied covenant to develop unoperated/deeper strata.
Issues
| Issue | Plaintiff's Argument (Appellants) | Defendant's Argument (Seneca) | Held |
|---|---|---|---|
| Whether the Lease is severable between operated and unoperated acreage | Lease expressly separates operated/unoperated acreage with distinct consideration and terms, so unoperated acres should revert if not developed | Lease treats entire 25,000 acres as single leased premises; habendum applies to "all or any portion" so lease is entire | Lease is entire; operated and unoperated acreages are not severable |
| Whether implied covenant to develop requires drilling the unoperated/deeper horizons | Implied covenant requires diligent development of whole leasehold; failure on 3,131 acres (deep horizons) breaches covenant | Express lease terms and payments (delay rentals, royalties, conversion language, habendum) displace implied covenant for unoperated acres while any portion produces | Implied covenant claim barred by the lease language: habendum and compensation scheme foreclose finding of breach as to unoperated acreage |
Key Cases Cited
- Jedlicka v. T.W. Phillips Gas and Oil Co., 42 A.3d 261 (Pa. 2012) (explains oil & gas lease estates, habendum clause effect, and fee simple determinable upon production)
- Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001) (framework for determining lease severability: intent, contract language, consideration, parties' conduct)
- Hutchison v. Sunbeam Coal Corp., 519 A.2d 385 (Pa. 1986) (court will not imply a different contract than parties expressly adopted)
- Hite v. Falcon Partners, 13 A.3d 942 (Pa. Super. 2011) (delay rentals are consideration in lieu of immediate production; royalty-based leases construed to promote full, diligent development)
- Sauder v. Mid-Continent Petroleum Corp., 292 U.S. 272 (U.S. 1934) (equitable relief where lessee drills on part of lease but abstains from developing adjacent land; lessor may be entitled to cancellation)