Shale Energy Law Blog
In part of affirming the trial court’s order, the Superior Court indicated that one of the major factors involved in a determination of whether a party is indispensable in a lease context is whether the lease is severable. In this case, the court held the lease was severable based on the intent of the parties to the lease, which was determined by the language of the lease and the subsequent conduct of the successors in interest to the original lessee. The lease specifically provided the lessee the “right to subdivide and release the premises.” Additionally, successors in interest to the original lessee divided the leasehold interest into depths that lie above and below the Onondaga formation, which supports that the lease was severable. The Superior Court distinguished this case from precedent set forth in Seneca Res. Corp. v. S & T Bank, 122 A.3d 374., that an operator was not required to be actively drilling undeveloped portions in order to maintain the leasehold on the bases that: (1) the leased acreage in this case consisted of a number of distinct parcels rather than one tract; (ii) the language of the subject lease provided the lessee the right to “subdivide and release” the property; and (iii) the successors in interest to the original lessee of the subject lease subdivided the leasehold into two or more formations rather than operating under the lease as a whole. Based on these factors, the court held that the lease was severable. Additionally, the Superior Court affirmed the trial court’s finding that the lease had expired as to the subject property because the predecessors in interest to the appellant operator failed to produce oil and gas in paying quantities on the subject property and had breached the implied obligation to explore and develop the property “with reasonable diligence.” Accordingly, the court held that the lease was null, void, and of no force and effect pertaining to the subject property.