On March 14, 2014, the Superior Court of Pennsylvania ruled in favor of an oil and gas exploration company, applying the doctrine of estoppel by deed to prevent a landowner from partially repudiating an existing oil and gas lease. This decision is significant for oil and gas lessees as it stands for the proposition that oil and gas leases will remain valid in their original form despite the later discovery of clouds on the lessor’s title requiring legal action to resolve.
The dispute arose in relation to a 2006 agreement between Leo and Sandra L. Sheddon and Anadarko E&P Co., LP. Under the lease agreement, the Sheddons agreed to lease 62 acres to Anadarko for oil and gas exploration for a primary term of 5 years. The lease also gave Anadarko the option to extend the term of the lease upon additional bonus payment by Anadarko.
After executing the lease, Anadarko performed customary due diligence to confirm the Sheddon’s ownership of the leased oil and gas estate. Anadarko’s investigation revealed an 1894 reservation of one-half (1/2) interest in the oil and gas estate underlying the Sheddon’s 62 acre tract, creating a cloud on title as to that interest. Based on its discovery, Anadarko only issued an original bonus payment to the Sheddons for one-half of the leased premises, or 31 acres.
In 2008, the Sheddons filed suit to quiet title as to the 1894 one-half (1/2) oil and gas reservation. The Sheddons prevailed, vesting them with ownership in the entire 62 acre oil and gas estate.
In 2011, Anadarko exercised its extension option. Pursuant to the extension provision, Anadarko issued payment to the Sheddons in the amount of $70 per acre as to the entire 62 acre tract. However, the Sheddons believed that Anadarko had forfeited the right to extend the lease as to the entire 62 acre tract and could only extend the lease as to 31 acres. The Sheddons sued to repudiate the lease agreement as to 31 acres. In April of 2013, the Court of Common Pleas of Tioga County, Pennsylvania, disagreed with the Sheddon’s position and entered summary judgment in favor of Anadarko.
On appeal, the Superior Court of Pennsylvania affirmed the lower court’s decision. In reaching its decision the Court specifically relied on the lease’s covenant of warranty provision. Under that provision, the Sheddons guaranteed that they “ha[d] full title to the premises and to all the oil and gas therein at the time of granting [the] lease.” Further, the Court noted that both the lease and the Memorandum of Lease (which had been recorded in lieu of the lease to provide notice to outside parties) reflected that the leasehold estate was comprised of 62 acres, whether actually more or less [emphasis added]. The Court held that the subsequently acquired 31 acres of oil and gas were covered by the original agreement and the Sheddons were barred under the doctrine of estoppel by deed from repudiating any portion of the lease.