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Court: New York Landowners Entitled to Payments Despite Moratorium

Even if producers are prevented from hydraulically fracturing (fracking) wells in New York, they may not declare a force majeure and still must pay property owners to hold the leases, a district court judge has ruled.

The lawsuit was filed last July in U.S. District Court for the Northern District of New York by Coughlin and Gerhart LLP (C&G) on behalf of 146 property owners in Broome County, NY (David Wiser, et al. v. Enervest Operating LLC, Belden & Blake Corp. and Chesapeake Appalachia LLC, No. 3:10-CF-794).

The land in dispute is situated above several geological formations that include the Marcellus, Trenton Black River, Oriskany, Kerkimer and Utica formations, the lawsuit said. Belden & Black (B&B) and Enervest Operating LLC, which is B&B's operating company, were named in the original complaint. Chesapeake Appalachia LLC, a unit of Chesapeake Energy Corp., was later named in the amended complaint.

The plaintiffs in late 1999 and early 2000 entered into "virtually identical" oil and gas leases with B&B to permit exploration and development of their property, according to the lawsuit. Each of the leases was for a primary term of 10 years but was subject to an indefinite extension as reserves were recovered in "paying quantities."

Under the initial term of the leases, B&B was required to pay annual delay rentals in advance in "relatively modest amounts" that were to begin after an initial 90-day period and extending until work to drill a well had begun.

In July 2008, about eight years into most of the lease agreements, then-Gov. David Paterson issued a memorandum that required the state to perform an environmental study of the effects of horizontal drilling into shale formations and high-volume fracking (see Daily GPI, July 28, 2008). Before leaving office late last year Paterson vetoed legislation that would have codified into law the fracking moratorium (see Shale Daily, Dec. 14, 2010).

The leases in dispute have since expired.

The defendants argued that Paterson's memorandum resulted in a de facto moratorium on the use of fracking, and therefore represented a force majeure, as defined under the lease agreements, which allowed the leases to be extended indefinitely.

However, Judge David Peebles, who issued a ruling in late March, wrote that "at its core, the dispute concerns whether the state's position concerning the use of fracking "does in fact constitute a force majeure as contemplated by the parties when entering into their lease agreements -- an issue not yet ripe for disposition."

The plaintiffs requested a determination by the court as to whether the defendants' failure to pay delay rental payments resulted in the leases being automatically terminated. The defendants attempted to make lease payments to the property owners last December, five months after the lawsuit was filed, but the payments were rejected, the judge said.

Peebles sided with the plaintiffs. Paterson's memorandum, he wrote, "seemingly did not prohibit horizontal or vertical drilling for oil and gas utilizing conventional, low-volume hydraulic fracturing, and left open the possibility" for an entity to apply to the New York Department of Conservation for a permit allowing horizontal drilling "in the Marcellus Shale formation after conducting an independent, site-specific environmental impact statement."

The plaintiffs "are entitled to a judgment declaring that the leases in dispute are null and void and no longer in effect."

C&G has filed a second lawsuit in the district court on behalf of the 146 landowners against Chesapeake and Statoil USA, which jointly operate in the Marcellus Shale. C&G is seeking a declaration that the expired leases with Chesapeake and Statoil also are "terminated and void."

A Chesapeake spokesman said the company had taken "reasonable and legal measures" to extend the terms of many of the leases in New York based on the original lease agreements. The extension of the leases is necessary, he said, because of the moratorium, which he said was based on "unfounded concerns."

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