Home | Perspectives |Shale Energy Law Blog | PA Federal Court Finds Operator Obligated to Pay Bonuses Under Surrendered Lease
Print Friendly, PDF & Email
PA Federal Court Finds Operator Obligated to Pay Bonuses Under Surrendered Lease

On July 15, a Judge for the U.S. District Court for the Middle District of Pennsylvania found that SWEPI LP (“SWEPI”) was obligated to pay bonuses under an oil and gas lease that it had surrendered prior to a 90 day title verification period. In Masciantonio , et al. v. SWEPI LP, the plaintiff-landowners executed oil and gas leases, with attached addenda, in favor of SWEPI for a primary term of five years. The leases stated “[i]n consideration of the bonus consideration paid, the receipt of which is hereby acknowledged,…Lessor does hereby grant…to Lessee,…the lands hereafter described for the purpose of exploring for, developing, producing and marketing oil, gas or their related substances.” The addenda included a payment provision stating that “[i]in consideration for the attached paid-up Oil and Gas Lease, Lessee hereby agrees to pay Lessor [$4,000.00] per net mineral acre. Payment shall be due within ninety (90) banking days of the Lessor presenting the Bank Draft to the financial institution of his/her/their choosing. All payment obligations are subject to title verification by Lessee.” SWEPI presented bank drafts to the plaintiffs, who presented them to their respective banks. Prior to 90 days thereafter, SWEPI decided to surrender the leases, due to a geohazard running through the leased premises and the presence of competitor leases covering neighboring lands. Upon surrender of the leases, SWEPI cancelled the bank drafts.

The plaintiffs brought suit for breach of contract, claiming that the obligation to pay the bonuses accrued immediately upon the parties executing the leases, and that the surrender did not extinguish SWEPI’s payment obligation. SWEPI countered with several arguments, all of which were rejected by the Court. First, SWEPI argued that the leases were ineffective, because the payment of the bonus was the sole consideration for the lease, without which the leases never went into effect. SWEPI also argued that the leases were subject to a condition precedent to formation and were ineffective unless and until SWEPI verified plaintiffs’ title to the property. The Court found that the language of the leases indicated that the actual consideration was the exchange of a bargained-for promise, not the immediate exchange of the value thereof. Similarly, the title verification condition operated as a condition precedent to the obligation to pay, not to the formation of the contracts. Therefore, the leases were valid and enforceable, despite the lack of bonus payment.

Next, the Court considered the two interpretations of the lease provisions presented by each party and determined that the plaintiffs’ interpretation was the more reasonable one. SWEPI argued that the contract terms allowed it to dishonor the bank drafts for any reason, or for no reason, until the expiration of the 90-day banking period. SWEPI presented language of industry standards, quoting Williams & Meyers’ Oil & Gas Law, which said that the use of a bank draft which will not become effective for a period of time subject to approval of title was often used by lessees to void a lease if they decided that conditions were no longer desirable. However, the Court found that the industry standards, including Williams & Meyers’, always provided that the precise language of the lease controlled and did not support an across-the-board provision that the use of a bank draft allows a lessee to void a lease for any reason until the expiration of a certain time period. The Court further stated that the language of the SWEPI leases consisted of an unequivocal agreement by SWEPI to pay the bonus and further provided a description of the time and manner in which it must do so. Therefore, the language did not provide SWEPI with the opportunity to avoid payment but instead bound SWEPI to pay, subject only to the condition of title verification. SWEPI was unable to present any meaningful evidence that it decided to surrender the leases due to a problem with plaintiffs’ title. On the contrary, plaintiffs presented sufficient evidence that they had good title to the leased premises. The Court further rejected the argument that the factors of geohazards and competitor activity on neighboring lands were part of the consideration of “title verification.” Those considerations were encompassed under the realm of a title “examination,” but not “title verification,” according to the plain meaning of such terms.

For those reasons, the Court held that SWEPI breached its obligation under the valid oil and gas leases and it was required to pay the bonus to the plaintiffs.