North America Oil and Gas
Superior Court of Pennsylvania Looks Past the
Stated Royalty in an Oil and Gas Lease to Find a
Violation of the Guaranteed Minimum Royalty Act
By statute, Pennsylvania provides that an oil and gas lease is not valid "if it does
not guarantee the lessor at least [a] one-eighth royalty." 58 P.S. § 33 (2013).
This statute is commonly known as the Guaranteed Minimum Royalty Act
("GMRA"). This past week, the Superior Court of Pennsylvania found a violation
of the GMRA in the case of Southwestern Energy Prod. Co. v. Forest Res., LLC.
2013 PA Super 307 (Nov. 27, 2013).
In Southwestern, in connection with the execution of an oil and gas lease in 2002
(the "Lease"), the lessor and lessee also entered into a letter agreement (the
"Letter Agreement"). The Lease provided for a 1/8 royalty, but the Letter
Agreement, as subsequently amended, provided for half of the 1/8 royalty to be
assigned back to the original lessee. Importantly, the Lease and the Letter
Agreement each referenced and incorporated the other. In 2011, in response to
litigation initiated by the lessee, the lessor filed a counterclaim seeking to
invalidate the Lease on grounds that it violated the GMRA.
The lessee in Southwestern argued that the Lease did not violate the GMRA
because it provided for the required 1/8 royalty, and that the "assign back"
provision in the Letter Agreement was not relevant because that agreement was
entirely independent of the Lease. The Superior Court disagreed, stating that the
"unequivocal language" of the agreements required that they be "construed
together to interpret the terms of [the parties'] lease agreement." The Court found
that when the agreements were read together, the 1/8 royalty stated in the Lease
was converted into a 1/16 royalty by the Letter Agreement's "assign back"
provision. Consequently, the Court reversed the lower court's ruling and
remanded the case for proceedings consistent with its opinion.
Interestingly, the court agreed with the lessee that the "GMRA in no way restricts
a lessor from assigning or conveying its royalty in whole or in part independent of
the lease…" (emphasis added). In this particular case, however, the transactions
were so closely tied that the court compared the case to a "trick of drafting
permit(ting) the left hand to remove what the right hand has given."
We note that another Pennsylvania case recently interpreted the GMRA, but in
that case the lessee prevailed. In Kilmer v. Elexco Land Servs., Inc., 990 A.2d
1147 (Pa. 2010), the Pennsylvania Supreme Court held that the GMRA was not
2 Superior Court of Pennsylvania Looks Past the Stated Royalty in an Oil and Gas Lease to Find a Violation of the Guaranteed Minimum Royalty
Act December 2013
violated when the terms of the oil and gas lease allowed for post-production costs
to be deducted from the 1/8 royalty.
As can be seen from the above, although the Guaranteed Minimum Royalty Act is
a relatively straightforward statute, lessees should be aware of its provisions and
judicial application, as the consequence of violating it -- invalidation of the lease --
is severe (even when the lessor apparently consents to the actions that result in
For more information about U.S. oil and gas issues or Baker & McKenzie's
experience with U.S. upstream oil and gas transactions, please contact the
authors or one of the additional contacts listed above or the Baker & McKenzie
attorney you normally consult with.
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