Notice-And-Cure Provision in An Oil And Gas Lease
February 20, 2020
Can a Landowner or Royalty Owner Be Precluded From Filing Suit to Terminate an Oil and Gas Lease or For Breach of an Oil and Gas Lease Where There Is a Failure to Comply with a Notice-And-Cure Provision Contained in The Lease?
It is not unusual for an oil and gas lease to contain a notice-and-cure provision. The purpose of such a provision is to prevent litigation unless the terms of the notice-and-cure provision are complied with. Ordinarily, such a provision requires that if there is a default under the oil and gas lease, the lessor must notify the lessee of the default in writing, specifying the default and giving the lessee an opportunity to cure during a set period of time, as set forth in the lease, before litigation can be commenced in order to terminate the oil and gas lease or sue for breach of contract. If there is a notice-and-cure provision in the landowner’s or royalty owner’s oil and gas lease, care must be taken to ensure compliance with such a provision; otherwise, if the provision is not complied with, an action brought by a landowner or royalty owner may be dismissed.
An example of a notice and cure provision would be the following:
This lease shall not be terminated in whole or in part, nor Lessee held liable for any failure to perform unless such obligation, covenant or condition remains unsatisfied and unperformed for a period of one year following the express and specific written demand upon Lessee by Lessor for such satisfaction and performance. Neither the service of said notice nor the doing of any acts by Lessee intended to satisfy any of the alleged obligations shall be deemed an admission or presumption that Lessee has failed to perform all of its obligations hereunder. No judicial action may be commenced for forfeiture of this lease or for damages until after said period. Lessee shall be given a reasonable opportunity after judicial ascertainment to prevent forfeiture by discharging its expressed or implied obligation as established by the court.
This notice-and-cure provision was involved in Elbow Energy, LLC v. Equinor USA Onshore Properties, Inc., No. 4:19-CV-00764, 2019 WL 2868927 (M.D. Pa. July 3, 2019).
In Elbow Energy, LLC, Elbow Energy filed a complaint against Equinor alleging that Equinor and Elbow Energy were parties to an oil and gas lease under which Equinor was obligated to pay certain royalties to Elbow Energy. Elbow Energy claimed that Equinor breached the terms of the lease by paying royalties in insufficient sums. Elbow Energy’s two-count complaint sought an accounting as well as damages for breach of contract.
Equinor moved to dismiss the complaint arguing that Elbow Energy had not complied with the notice-and-cure provision of the lease proscribing the commencement of a judicial action for damages until one year after Equinor was notified of and given an opportunity to cure its alleged breach. As indicated above in the notice-and-cure provision, the provision required Elbow Energy to notify Equinor of its purported breach and provide Equinor with an opportunity to cure for a period of one year before commencing a civil action for damages.
Elbow Energy sent a letter to Equinor on July 31, 2018, demanding payment of additional royalties. Under the lease’s notice and cure provision, Equinor would then have until July 31, 2019, to cure its purported deficient performance; however, Elbow Energy commenced its action on March 28, 2019.
Elbow Energy argued that no adjudication actually holding Equinor liable for any breach of its duties under the lease would occur until after July 31, 2019. As such Elbow Energy had complied with the notice-and-cure provision. The court however, in looking at the plain language of the notice-and-cure provision rejected this argument and held that the provision expressly prohibited judicial action from being commenced until one year after Elbow Energy notified Equinor that Equinor was in breach; the provision did not predicate a judicial action’s propriety on the date at which time Equinor may be held liable. The plain meaning of the notice-and-cure provision prohibited the commencement of judicial action until after the one year cure period had expired. Accordingly, Elbow Energy’s action was premature and violated the express terms of the notice-and-cure provision of the lease. Elbow Energy’s filing of its action, before July 31, 2019, violated the lease and the Court dismissed Elbow Energy’s claims. The dismissal, however, was without prejudice to Elbow Energy to reassert its claims at a time that they became appropriate under the lease for judicial intervention.
If a lessor believes that there has been a default under its oil and gas lease, the lessor needs to check its oil and gas lease to determine whether there is a notice-and-cure provision in the lease. If there is, it must be reviewed carefully to ascertain what must be done prior to filing suit for termination or breach of the oil and gas lease. If there is a notice-and-cure provision in the lease, normally, such a provision requires written notice of a breach. This is normally coupled with a cure period. If the breach is not cured within that time, or the lessor believes that it has not been cured within that time, only after the cure period has lapsed can suit be filed.
If you have questions about your oil and gas lease, contact us or call (412) 338-1124.