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District Court Upholds Primacy of Lease’s Change of Ownership Clause

On May 20, 2016, the Middle District of Pennsylvania granted summary judgment in favor of Babst Calland’s client in Montrose Hillbillies II, LLP v. WPX Energy Keystone, LLP and Stern Marcellus Holdings, LLC , a case involving the extension of the primary term of an oil and gas lease.   The plaintiff, a successor lessor, filed a quiet title action to strike the extension of an oil and gas lease where the extension payment was tendered to the prior owner of the property, rather than to the plaintiff.  The plaintiff asserted that the payment was insufficient to extend the lease.  The defendant lessee maintained that the primary term of the lease was properly extended pursuant to the lease terms because neither the plaintiff nor the prior lessor provided the lessee notice of the ownership change, and it was the lessor’s duty to do so under the lease.  The District Court held that the defendants’ payment to the prior owner fulfilled any extension obligation under the lease, as the plaintiff admitted that the defendants were not notified of the ownership change.

The District Court rejected the plaintiff’s argument that it was not bound by the extension provision and notice of ownership change provision because such terms were not disclosed in the memorandum of oil and gas lease filed of record in place of the actual lease.   The memorandum contained the basic terms of the lease but did not provide all the provisions of the agreement between the lessor and lessee.  The plaintiff asserted that it was a bona fide purchaser without constructive notice of the unrecorded provisions, including the extension provision and notification requirement for ownership change, and was entitled to rely solely on the recorded memorandum of lease.  The District Court held that there is a duty under Pennsylvania law for a purchaser to undertake a reasonable inquiry into the title of the property being purchased before being considered a bona fide purchaser.  The Court held that due diligence by the purchaser includes both an examination of recorded documents and an inquiry of the possessor or other parties where there is reason to believe such persons may know facts related to the title of the property.   Under the circumstances of the case, the Court found that the plaintiff had notice of the lease and it was reasonable for it to have requested a copy of the full lease to become aware of each of its provisions.