A Pennsylvania district court recently held that a gas and oil lease was extended beyond the primary term where the lessee had commenced construction of a well and thereafter began drilling with due diligence, regardless of the fact that no well was actually completed or in production at the time the primary term expired. Good Will Hunting Club, Inc. v. Range Resources–Appalachia, LLC, No. 4:11-CV-1152, 2013 WL 2297170 (M.D. Pa. May 24, 2013).
The lease at issue in Good Will was, as the Court noted, ambiguous and had conflicting provisions regarding expiration. In one section the lease contained a standard hold-by-production clause. However, a later section provided that the lease could be held so long as the lessee “commence[d]” a well within the primary term and drilled the well “with due diligence.” To resolve this facial ambiguity, the Court looked to the intent of the parties at the time of drafting. In doing so, the Court imputed to the Good Will Hunting Club the knowledge of its leasing agent.
Critical to the Court’s analysis was the fact that Good Will Hunting Club had retained a “leasing agent” who was a self-proclaimed “expert on oil and gas contracts.” The leasing agent had negotiated the terms of the lease between the Good Will Hunting Club and the lessee, and at no time during the negotiations did the Club inquire about the conflicting lease terms. Based on this fact, the Court held that the Club was bound by the knowledge and intent of its leasing agent. The Court then concluded that the leasing agent had “manifested an objective intention that the lease could be extended by commencing a well within the primary term and thereafter drilling with due diligence.”
Ultimately, the Court found in favor of lessee, holding that it had taken action constituting the commencement of a well within the primary term and, therefore, had satisfied the requirement for extending the lease. The activity identified by the Court as constituting “commencement” included staking a drill site, obtaining several permits and easements, clearing timber, constructing roads to the well site, and beginning construction of the pad site. This ruling highlights that lessees and lessors must carefully review lease terms and provides guidance as to the activities that will qualify as “commencing a well.”