Pennsylvania Federal Court Rules Extension Payment to Old Lessor Extends Lease
In Danko Holdings, L.P. v. Exco Res. Pa., No. 4:14-CV-274, 2014 U.S. Dist. LEXIS 137104 (M.D. Pa. Sept. 29, 2014), the Federal District Court for the Middle District of Pennsylvania ruled against a lessor who claimed that a payment to extend a lease’s primary term was not properly paid and that the lease had terminated. The extension payment had been tendered to the original lessor, who had sold the property, unbeknownst to the lessee. The lease contained a “change of ownership” provision requiring that lessor notify lessee of any change in ownership of the leased property.
The issue was a matter of first impression for Pennsylvania courts. Relying on cases from other jurisdictions, the court concluded that “change of ownership” provisions impose conditions precedent to a lessee’s obligation to pay rentals to a new owner of leased land, that such provisions are “usually strictly construed with the result that there must be a literal rather than a mere substantial compliance with the provisions for giving notice of change of ownership,” and that constructive notice “is generally not sufficient to obviate the language of a change of ownership provision that specifically requires a lessor to provide documentation.” Noting that the defendant’s predecessor in interest was not supplied with any documentation evidencing the transfer of ownership of the subject tract of land, the court found that “the plain language of the change of ownership clause applies” and the predecessor’s timely extension payment was sufficient to extend the lease.
It is encouraging to see the Middle District predict that Pennsylvania law on this issue will be consistent with mainstream U.S. oil and gas law. This decision also demonstrates the importance of carefully drafting oil and gas leases, and the importance that both parties comply with the terms agreed upon.