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Delay Rental Payments

By Paul R. Yagelski, Esquire

Can the Primary Term of an Oil and Gas Lease Be Extended by Delay Rental Payments? Is Hite V. Falcon Partners Still Viable?

In Hite v. Falcon Partners, 13 A.3d 942 (Pa. Super. 2011), the Superior Court held that delay rental payments alone do not extend the primary term of an oil and gas lease if drilling has not yet commenced.  Such an arrangement would be inconsistent with established rulings grounded in public policy that a lessee should not be able to postpone development indefinitely by payment of delay rentals.  Id. at 948 (citing Jacobs v. CNG Transmissions Corp., 332 F. Supp. 2d 759, 790 (Pa. E.D. 2004)).  Recently, the Superior Court in Wilson v. Snyder Brothers Inc., 232 A.3d 872 (Pa. Super. 2020) decided a case where delay rental payments were paid beyond the primary term of an oil and gas lease and the primary term was extended.   As such, is Hite still good law?

In June 2003, Donald and Shirley Wilson entered into two agreements with Snyder Brothers, Inc. (“Snyder”) to lease land in Armstrong County, Pennsylvania.  The first lease involved a 253 acre tract (“DS Wilson Lease 1”) and the second lease involved a 140 acre tract (DS Wilson Lease 2”).  James and Marie Wilson entered into a similar agreement to lease an 80 acre tract with Snyder in July 2003 (“JM Wilson Lease”).  These leases permitted Snyder to enter into the Wilsons’ respective properties, engage in drilling operations, and extract oil and natural gas.  The agreements provided in identical language that Snyder would have the right to (a) drill within 180 days of the date the lease terms began (the primary term); and (b) extend the lease period by making annual delay rental payments if drilling did not begin during the primary term:

Lessee has the right to enter upon the Property to drill for oil and gas at any time within 180 days . . .  from the date hereof and as long thereafter as oil or gas or either of them is produced from the Property or as operations continue for the production of oil or gas, or as Lessee shall continue to pay Lessors $3.00 per acre per year as delayed rentals, or until all oil and gas has been removed from the Property, whichever shall last occur.

Snyder did not begin drilling operations on any of the subject properties until 2010 or after the primary terms had elapsed.  Accordingly, between 2003 and 2010, Snyder timely paid the Wilsons annual delay rental payments.  The Wilsons accepted those payments and did not dispute the validity of their respective leases throughout that period.  Had the Wilsons wanted to dispute the validity of their leases the notice and cure provisions in their agreements required them to alert Snyder of the alleged breach within 60 days from the date of its occurrence.

In May 2010, Snyder obtained a permit to drill a vertical well on the property subject to the DS Wilson Lease 1.  Weeks later, Donald and Shirley Wilson entered into an amended agreement with Snyder, which provided in pertinent part that all terms of the original DW Wilson Lease 1 were ratified:

Ratification.  Lessors hereby ratify the Lease as being in full force and effect and not in breach, and that the said Lease will remain in full force and effect in accordance with its terms as amended by this Oil and Gas Lease Amendment Agreement.

The original terms of the DS Wilson Lease 2 were never amended or affected by the amendments to the DS Wilson Lease 1.  James and Marie Wilson also entered into a substantially similar amended agreement at around the same time, which ratified all the terms of the original JM Wilson Lease from 2003 and stipulated that Snyder was not in breach.

In 2010, Snyder began drilling a vertical well (“Well”) on the property governed by the amended DS Wilson Lease 1.  Soon after those operations began in July 2010, Snyder reworded a Unit Operation Designation to “unitize” the Well, including the properties subject to the amended agreements between Snyder and the Wilsons.

In 2012, Snyder assigned to Winfield Resources, LLC (“Winfield”) its amended lease agreements with the Wilsons.  Simultaneously, through its managing member (Snyder), Winfield assigned 64% of those agreements to PennEnergy Resources, LLC (“PennEnergy”).  Winfield also cross-assigned some of its interests to PennEnergy, resulting in Winfield and PennEnergy retaining a 19.93% and 80.07% interest in the Wilson Lease Agreements, respectively.  Snyder continued to extract gas from the Well and pay royalties.

In 2017, PennEnergy requested Donald and Shirley Wilson to ratify and amend their previously amended agreement from 2010.  They declined the proposed amendment and ratification because they believed that all their previous lease agreements had terminated.

In 2017, the Wilsons demanded that PennEnergy and Snyder/Winfield vacate their properties and cease producing gas from the Well.  In 2018, the Wilsons repeated those demands.  Nevertheless, the Well remained in operation.  Snyder continued to pay monthly royalties for gas produced from the Well.  Since 2017, the Wilsons refused to accept royalty payments for gas produced from the Well.

The Wilsons filed suit alleging in an amended complaint that none of the leases were valid.  The Wilsons sought declaratory judgments that the original DS Wilson 1 Lease and the original JM Wilson Lease had terminated because drilling operations did not commence until 2010, years after the primary term of 180 days had elapsed.

Snyder/Winfield and PennEnergy filed several preliminary objections to the Wilsons’ Amended Complaint, one of which was a demurrer to the Wilsons’ declaratory judgment claims, which asserted that the original leases did not terminate from 2003 to 2010 because:

  • The Wilsons accepted delay rental payments in all of the intervening years;
  • The Wilsons ratified the leases in 2010, and accepted the royalty payments after drilling had commenced; and
  • The Wilsons never gave the required notice that they considered the leases to be void or terminated.

Finding that the Wilsons had failed to allege facts showing that their original leases had terminated, the trial court dismissed the Wilsons’ request for declaratory judgments to that effect.  The Wilsons timely appealed.

On appeal, the Wilsons contended that the trial court erred in holding that the DS 1 Wilson Lease and the JM Wilson Lease remained in effect from 2003 to 2010.  The key facts were undisputed.  In 2003, the Wilsons agreed to allow Snyder to drill for oil and gas on their property.  For seven years, they accepted annual delay rental payments, which purported to extend the leases under their agreements’ terms.  Crucially, in 2010, the Wilsons ratified their original leases, stipulating to those agreements “being in full force and effect.”

In making their argument that their original leases nevertheless terminated after the primary terms elapsed, the Wilsons relied on Hite where the Superior Court held that delay rental payments alone do not extend the primary term of an oil and gas lease if drilling has not yet commenced.  The Superior Court disagreed with the Wilsons and in so doing, it distinguished Hite.

Unlike the lessors in Hite, the Wilsons ratified their original leases beyond the primary term and did not seek to void their amended leases until years after drilling had already begun.  As a purely contractual matter, the Wilsons waived any claim that they may have had to dispute the validity of the subject leases based on non-production from 2003 until the 2010 ratification in their amended agreements.  Those circumstances materially distinguished the case from Hite because in Hite, drilling had not begun as of the date the suit was filed, and there was no ratification of the original lease beyond the primary term.  Accordingly, the Superior Court found that the trial court properly ruled as a matter of law that the Wilsons’ original leases remained in effect from the time they were entered into until the day of their ratification in the amended agreements.

Hite is still viable law.  Delay rental payments alone do not extend the primary term of an oil and gas lease if drilling has not commenced.  Under Wilson, however, if a lessor allows a lessee to drill for oil and gas on the lessor’s property, accepts after the end of the primary term annual delay rental payments that purport to extend the lease under the lease agreement’s terms, and ratifies the original lease, the oil and gas lease agreement remains in effect.  It should be noted, however, that if delay rental payments are made and accepted after the primary term has ended and there is a ratification of the lease, based on Wilson, an argument can be made that any breach of the lease has been waived by the lessor and the lease extended beyond its primary term.

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