On September 20, 2013, the Pennsylvania Superior Court affirmed a trial court ruling that a lessor could not declare the lease null and void as a result of the lessee’s failure to make royalty payments to the lessor. The court stated that (a) the lessor could not receive both monetary damages and declaratory relief and (b) the forfeiture clause of the lease applied only to the failure to make delay rental payments or construct a well, and did not apply to royalty payments.
In 1964, Elmer McCausland leased 65 acres of land in Armstrong County, Pennsylvania to members of the Wagner family, who then entered into a gas purchase agreement to sell all of the gas produced on the property to Equitable Gas Co. (“Equitable”). The lease entitled McCausland to a 1/8 royalty on the production of natural gas from the leased property. The lease eventually passed to Elmer’s son, Ronald McCausland. Equitable made all payments to Robert Wagner, who served as agent for all parties with an interest in the lease.
After failing to receive royalty payments for four years, for reasons unclear from the opinion, the Lessor filed a lawsuit against the Wagners to recover money damages. Although the parties reached a settlement in 2011 regarding damages, the Lessor later filed a motion for summary judgment requesting that the lease be declared null and void, arguing that the lease’s forfeiture clause applied to the missed royalty payments. The trial court denied the motion on the basis that the Lessor could not receive both money damages and declaratory relief.
The Pennsylvania Superior Court upheld the trial court’s decision on appeal. After noting that the Lessor “essentially deprived himself” of any right to declare forfeiture of the lease by accepting money damages through the settlement, the court concluded that the forfeiture clause did not even apply to royalty payments. The court first analyzed the specific placement of the forfeiture language in the lease at issue and concluded that it did not refer to the payment of royalties, which was discussed several paragraphs before the forfeiture clause. Moreover, the court emphasized that the purpose of a forfeiture clause was to encourage the lessee to develop the leased property. Therefore, the court concluded that forfeiture clauses were meant to apply only to “the failure to complete a well or to pay delay rentals” during the initial lease term and not to the failure to pay production royalties.
The full text of the opinion in McCausland v. Wagner is available here.
For more information, please contact Nick Presley and Felicia Imbrogno, both associates in our Charleston, West Virginia Office.