Third Circuit Affirms That Brief Delay in Rental Payment Does Not Amount to Material Breach of Oil and Gas Lease

On November 18, 2013, in a non-precedential decision, Linder v. SWEPI, LP, 2013 U.S. App. LEXIS 23196 (3d Cir. Nov. 18, 2013), the Third Circuit Court of Appeals affirmed a district court’s decision that the lessee did not surrender non-unitized acreage and that the oil and gas lease did not terminate as a result of a brief delay of a rental payment.

During the primary term of the lease, the lessee unitized 137 of the 338 leasehold acres. The lease apparently did not have a Pugh clause that permitted the non-unitized acreage to be released at the end of the primary term.  Instead, the lease provided that if the unitized acreage was less than 50 percent of the total leasehold acreage, delay rentals would continue to be due on the non-unitized acreage.

The lessor argued that at the end of the primary term the unitization of less than 50 percent of the leasehold acreage resulted in two leasehold parcels.  The Court rejected the argument, finding that the lease continued in its entirety as a result of the productive activity on the parcel and that the lease required a rental payment to be paid for the non-unitized acreage.  The lessor also argued that the late payment of this rental terminated the lease.  The Court disagreed and found that the lease did not include a “time-is-of-the-essence” clause and thus a brief delay in payment did not result in a material breach that would terminate the lease.

Justin G. Weber, Esq.

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