When Is Failure to Pay Delay Rentals Enough To Break A Lease?

oil rig in the middle of a farm fieldMany Oil and Gas leases are “paid up,” which means that the leasing company does not have to pay regular delay rental payments to hold the lease.  However, in Pennsylvania, there are still some leases that require the leasing company to make “delay rental payments.”  These are typically annual payments that are made until the first well is drilled.  When an operator is obligated to make delay rental payments, what happens if the leasing company fails to make one of those payments?

The Pennsylvania Superior Court recently looked at this issue in Dewing v. Abarta Oil & Gas Co., et al., No. 268 MDA 2015, (Pa. Super. Ct. 2015).  In 2001, the Dewings entered a lease with an Oil and Gas company that required a delay rental of $5.00 per acre per year until a well was drilled.  In April of 2010, the Dewings gave the operator notice that the delay rental had not been paid.  The Dewings’ attorney notified the operator that the lease was being terminated because the delay rental had not been paid.  The operator then sent a check for the delay rental.  The Dewings filed a lawsuit to determine whether the lease could be terminated.

The Superior Court determined that the lease could not be terminated.  The court reviewed a forfeiture provision in the lease and determined that the operator’s failure to pay the delay rental did not “rise to the necessary level of materiality allowing for the grant of forfeiture by the court.”  The court relied on a federal appellate case where it was also found that a failure to pay a delay rental was not material.  Linder v. SWEPI, 549 Fed. APP’x. 104 (3d Cir. 2013) (In that case, the court found no materiality because the delay in payment of the rental was brief and because the contract did not have a “time-is-of-the-essence” provision.)

In addition, the Dewing court rejected an argument that the operator abandoned the lease.  The court determined that the contractors continued to work on the property until the Dewings requested them to cease work.

The Dewing case leaves open the possibility that an untimely delay rental could result in lease termination.  This can depend on what exactly the lease says, and how quickly the operator responds to a communication from the Lessor.

 

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Trent A. Echard

Trent A. Echard

Trent A. Echard is an attorney at Strassburger McKenna Gutnick & Gefsky in Pittsburgh, PA. He is a shareholder and the co-chair of the firm’s Oil and Gas Practice Group. Trent handles all types of Oil and Gas matters for landowners and businesses.

If you would like to contact Trent, he can be reached at techard@smgglaw.com or at (412) 281-5423.

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