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Base Lease v. Top Lease. Which Controls?

By Paul R. Yagelski, Esquire

In EQT Production Company v. Antero Resources Corp., 851 S.E. 2d 94 (W.Va. 2020), the Supreme Court of Appeals of West Virginia dealt with the issue as to whether a top lease had priority over a base lease and a subsequently recorded amendment.

Larry W. Lemasters and Linda J. Lemasters (the “Lemasters”) own 100% of the oil and gas within and underlying a certain tract of land containing 15.25 acres in Ellsworth District, Tyler County, West Virginia (the “Property”).  On December 13, 2011, the Lemasters executed and entered into an oil and gas lease with PetroEdge Energy, LLC, which covered the Property.   EQT was assigned the Base Lease through mesne, or intermediate conveyances (hereinafter the “EQT Base Lease” or “Base Lease”).

A Memorandum of the Base Lease (“Base Lease Memorandum”) was recorded on January 12, 2012.  It provided that the primary term of the Base Lease commenced on December 13, 2011, and terminated five years thereafter, on December 13, 2016, unless oil and gas were produced or capable of being produced on the Property during the primary term of the Base Lease, or EQT was otherwise operating on the Property in search of oil and gas in the primary term.  It was undisputed that EQT did not commence operations to produce oil and gas during the primary term.  Significantly, the terms of the Base Lease did not grant EQT an express right of first refusal, right of renewal, or automatic option to extend its primary term, and therefore the Base Lease Memorandum did not operate to provide notice of any such right.

In 2016, prior to the expiration of the primary term of the Base Lease, the Lemasters executed and entered into a written oil and gas lease with Antero (hereinafter the “Antero Top Lease” or “Top Lease”).  This Lease was dated June 24, 2016, but made effective December 14, 2016, immediately upon the expiration of the primary term of the EQT Base Lease.  The Antero Top Lease covered the Property for a primary term of five years from the effective date.  In consideration for the Lemasters’ execution of the Top Lease, Antero paid them in two separate installments.  The initial installment was for 5% of the total consideration for the Top Lease, or the amount of $2,478.13, which sum was paid at the time of the signing and which the parties agreed was sufficient consideration to form a binding contract.  The second installment was for the remaining 95% of the total consideration, or the amount of $47,048.38, which was subsequently mailed to the Lemasters within fifteen business days of the effective date of the Top Lease.

A Memorandum of the Antero Top Lease (“Top Lease Memorandum”) was recorded on August 30, 2016.  The Top Lease Memorandum provided, in pertinent part that:

Lessor [the Lemasters} covenants and agrees that, as of the date Lessor executes this Lease, Lessor has not agreed to extend, amend, modify or renew the Existing Lease [the Base Lease], or to take any action which would result in such extension, amendment, modification, or renewal of the Existing Lease, and Lessor further covenants and agrees that Lessor shall not enter into any such agreement or take any such action at any time after the date Lessor executes this Lease. (Emphasis added).

The Top Lease also provided:

Lessor and Lessee [Antero] acknowledge that the lands described in this [Top} Lease are presently subject to Oil and Gas Lease dated December 13, 2011 and set to expire on December 13, 2016 . . . (the “Existing Lease”).  This [Top] Lease is granted on Lessor’s revisionary interest in the leased premises and is hereby vested in interest, but, as subject to Existing Lease, the interest covered by this [Top] Lease shall vest in possession upon the termination of the Existing Lease.

Notwithstanding the express terms of the Antero Top Lease and the recorded Top Lease Memorandum, the Lemasters and EQT entered into an Amendment and Ratification of Oil and Gas Lease (the “Base Lease Amendment”), dated September 24, 2016, and recorded December 12, 2016.  In the Base Lease Amendment, the Lemasters and EQT agreed, inter alia, to extend the primary term of the Base Lease for an additional five years.

On March 16, 2017, Antero filed an Amended Complaint against EQT and the Lemasters in circuit court, asserting, inter alia, a declaratory judgment claim in which Antero asked the circuit court to declare that: (1) the Base Lease Amendment was ineffective and invalid as to Antero; (2) the Antero Top Lease was the only valid lease affecting the Property; and (3) the Base Lease Amendment was invalid or, in the alternative, subordinate to the Antero Top Lease.

On March 28, 2017, EQT served its answer to the amended complaint and counterclaim in which it asserted a declaratory judgment claim count asking the circuit court to declare that the Base Lease, as amended, was the only lease in effect regarding the Property and that the Antero Top Lease was subject to the Base Lease and Base Lease Amendment.

Thereafter, the parties filed cross-motions for summary judgment on the declaratory judgment counts.  The circuit court granted Antero partial summary judgment and denied EQT’s cross-motion for summary judgment.  The circuit court determined that under the West Virginia Recording Act (“Recording Act”), W. Va. Code §§ 40-1-8 to-9 (2019), the Base Lease and Base Lease Amendment are subject to the Antero Top Lease, and the Antero Top Lease is the valid existing oil and gas lease covering the Property. On May 23, 2019, the circuit court amended its order, finding that its award of summary judgment in favor of Antero on its declaratory judgment claim was a final order subject to immediate appellate review under Rule 54(b) of the West Virginia Rules of Civil Procedure.

The sole issue raised on appeal was whether the circuit court erred by granting summary judgment in favor of Antero on its declaratory judgment claim, by concluding that the Antero Top Lease takes priority over the EQT Base Lease, as amended. The determining issue was which lease – the Base Lease, the Base Lease Amendment or the Top Lease – is superior or has priority.

The Supreme Court of Appeals of West Virginia noted that the issue of which lease has priority when multiple leases exist on the same property is governed by the Recording Act, W.Va. Code §§ 40-1-8 to-9. W.Va. Code §§ 40-1-8 provides for the recording of a memorandum of lease instead of the actual lease itself.  The significance of the statutory requirement that a memorandum of lease contain certain specific information set forth in the lease including, inter alia, the term of lease, the commencement and termination dates of the lease, and if there is a right of extension or renewal then the specific details for such extension or renewal, is that this type of information provides notice and basic fairness to other potential good faith purchasers or “bona fide purchasers.”

The West Virginia Supreme Court of Appeals also noted that under W. Va. Code §§ 40-1-9, where a real estate contract is unrecorded and purports to convey real estate to a subsequent bona fide purchaser for valuable consideration without notice, it is void.  Accordingly, the West Virginia Supreme Court of Appeals held that where multiple leases, such as an oil and gas base lease and a top lease exist on the same property, the provisions of the West Virginia Recording Act, W.Va. Code § 40-1-8 to-9 (2019), govern which lease has priority.

In the instant case, according to the original terms of the EQT Base Lease, which were duly recorded in the Base Lease Memorandum, the Base Lease expired on December 13, 2016, unless oil and gas was produced on the Property during the primary term of the lease or EQT was otherwise operating on the Property.  It was undisputed that neither of these events occurred; therefore, it was impossible for Antero to have had actual or constructive notice of any right of EQT to extend the Base Lease beyond its primary term because other than the two events described above occurring, no such right existed.

In summary, Antero entered into the Top Lease with the Lemasters on June 24, 2016, prior to the expiration of the term of the EQT Base Lease, and recorded the Top Lease Memorandum on August 30, 2016, in compliance with W.Va. Code § 40-1-8.  According to W.Va. Code § 40-1-9, Antero was a bona fide purchaser under the terms of the Top Lease because it had no notice of the EQT Base Lease extending  beyond its original term of December 13, 2016.  All that Antero knew or could have known from the recorded EQT Base Lease Memorandum was that the EQT Base Lease expired on December 13, 2016.  See Eagle Gas Co. v. Doran & Assoc., Inc., 182 W.Va. 194, 197, 387 S.E. 2d 99, 102 (1989) (“In general a party without actual notice may rely upon record titles in the office of the clerk of the county commission of the county in which the land is located.  W.Va. Code § 40-1-9 [1963].”).  As a matter of fact, EQT did not even seek to extend the primary term of the Base Lease with the Lemasters for another five-year period until after the Antero Top Lease Memorandum was recorded.  As the record reflects, the Base Lease Amendment was dated September 24, 2016, and was not recorded until December 12, 2016.  Because Antero’s Lease Memorandum was recorded before EQT’s Base Lease Amendment, Antero’s Top Lease has priority over EQT’s Base Lease and the Base Lease Amendment.

Based upon a straightforward application of the Recording Act, the Supreme Court of Appeals of West Virginia concluded that the circuit court did not err in declaring that the EQT Base Lease and Base Lease Amendment were subject to Antero’s Top Lease, and Antero’s Top Lease is the valid and existing oil and gas lease covering the Property.

If you have questions about a West Virginia gas lease, contact us online or call (412) 338-1124.