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Two Federal Court Shale Lease Decisions Go Chesapeake's Way

Two separate decisions in the U.S. District Court for the Northern District of New York came down mostly on the side of shale play giant Chesapeake Energy Corp. in a year-old dispute over the extension of leases from landowners at below-market prices. Landowners in parts of four counties in New York state's portion of the Marcellus Shale filed lawsuits against the Oklahoma-based shale operator.

Chesapeake maintains that force majeure clauses in lease agreements signed between 1999 and 2005 kicked in once New York state imposed a four-year hold on issuing permits for high-volume hydraulic fracturing (fracking), and thus, it automatically extended those leases for another four years at the original payment rates which were in the neighborhood of $3/acre. Last April 259 plaintiffs representing 150 leases and more than 10,000 acres sued Chesapeake over its move.

Also last April, the same Northern District New York federal court ruled that even if producers are prevented from fracking wells in New York, they may not declare a force majeure and still must pay property owners to hold the leases (see Shale Daily, April 11, 2011).

Nevertheless, U.S. District Judge David Hurd in separate decisions in March ruled that most of the lease disputes need to be resolved by arbitrators, not federal judges. A second ruling based on a lawsuit filed last May, said a small number of leaseholders that do not have arbitration clauses are free to pursue court remedies.

Landowners originally signed the leases with small energy companies in the seven-year period through 2005, and eventually those leases were acquired by units of Chesapeake as the shale boom began to take off. The leases in dispute are mostly in Broome and Tioga counties, with some others in Cortland and Chemung counties.

Since these leases were signed in the pre-Marcellus Shale era, one of the many attorneys representing landowners speculated that not much attention was paid to the details of the agreements. "These were documents that were drafted by the gas and oil companies, and very rarely did a landowner get an attorney and negotiate with them," said Robert Jones, an attorney with Coughlin & Gerhart.

In a March 20 order, Hurd granted Chesapeake's request to put the matter in arbitration, saying "there are valid agreements to arbitrate and the disputes raised fall within the scope of the arbitration clause."

The second Hurd order came March 21 and allowed a relative few of the landowners to continue to see court decisions. For those cases, it will take several months for the court to determine if the leases are valid. The arbitration cases are expected to be resolved quickly, according to some of the attorneys representing the landowners.

In the cases seeking to move through the courts, it could be decided that Chesapeake's lease extensions are invalid, an attorney said. If that were to happen, the result could influence any unresolved arbitration cases.

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