By Keith Hall
LSU Law School

In Douglas Equipment Inc. v. EQT Production Co., 2023 WL 5239153 (Pa. Super.), the “Holts and Lee” defendants own an approximately 321-acre tract (the “Property”) in Greene County, Pennsylvania. A predecessor-in-title to Holts and Lee granted an oil and gas lease (the “Douglas Lease”) covering the Property to Douglas Equipment in 1994. The habendum clause in the Douglas Lease provided that the Lease would last for a primary term of one-year and as long thereafter as there was production in paying quantities from the Property. The Douglas Lease also provided that, subsequent to the primary term, the lessee could shut-in wells and keep the Lease alive without production for up to three years by paying shut-in royalties.

At the time the Douglas Lease was executed, one well already existed on the property. The owner of this well transferred ownership of the well to Douglas, which produced oil or gas from the well until October 2008. After Douglas ceased producing hydrocarbons from the well, Douglas began paying delay rentals. Douglas paid those for three years and continued paying delay rentals thereafter.

While the Douglas Lease was still in effect, the then-owners of the Property sold the land to Holts and Lee by deed in 1999. The conveyance deed contained five exceptions—two relating to veins of coal, two relating to small plots of land that were withheld from the sale, and a final exception as to “all rights, title, and interest” in the Douglas Lease. In addition to conveying surface rights to Holts and Lee, the deed expressly conveyed “reversions” to Holts and Lee.

In 2016, Holts and Lee granted an oil and gas lease covering the Property to EQT Production Company. Later in 2016, Douglas assigned certain of its rights under the Douglas Lease to other persons. Douglas and its assignees then filed suit against EQT, Holts, Lee, and others, in the Court of Common Pleas of Greene County. Douglas and its assignees asserted that the Douglas Lease was still in effect and that EQT’s lease was  invalid. EQT and the other defendants asserted that the Douglas Lease had terminated and EQT’s lease was valid. Both sides filed motions for summary judgment. The court denied the motions filed by Douglas and its assignees and granted the motions for summary judgment filed by EQT and the other defendants. Douglas and its assignees appealed.

In resolving the appeal, the Superior Court of Pennsylvania reviewed the nature of an oil and gas lease under Pennsylvania law. The appellate court noted that oil and gas leases are not governed by landlord-tenant law, and that oil and gas leases convey an interest in property. Until production is established, the lessee has an inchoate right. But if the lessee establishes production in paying quantities, the inchoate interest vests into a fee simple determinable interest. The interest is “determinable” because it will automatically terminate upon the occurrence of a certain event—typically, the lack of production in paying quantities at the end of the primary term, or any time thereafter, in circumstances under which no savings clause keeps the lease alive. At the time the lease is granted, the lessor retains a possibility of reverter. This means that, if and when the lease terminates, exploration and production rights revert from the lessee to the lessor.

In this case, the Douglas Lease provided an inchoate right to Douglas. That right vested and became a fee simple determinable when Douglas acquired ownership of the existing oil and gas well on the property and began production from the well.

The Douglas Lease expired by its own terms three years after production ceased because, under the terms of the Lease, three years was the limit on the time that the lessee could keep the lease alive without production through the payment of delay rentals.

Douglas and its assignees argued that a tenancy-at-will arose when the lease terminated. The appellate court acknowledged that, if an oil and gas lease terminates, and the lessor and lessee do not agree to extend the lease or to terminate the lease, but the lessee retains possession of the leased premises, a tenancy-at-will can arise. But the appellate court explained that a tenancy-at-will can be terminated by either the lessor or the lessee. Here, provided that the possibility of reverter had been transferred to Holts and Lee when they purchased the Property, their grant of an oil and gas lease to EQT constituted a termination of the tenancy-at-will of Douglas.

Douglas and its assignees argued that the possibility of reverter had not been conveyed to Holts and Lee when they purchased the Property, but the appellate court disagreed. The court noted that the deed to Holts and Lee had expressly provided that “reversions” were being conveyed to them. Further, under Pennsylvania law, a conveyance of land is presumed to include a conveyance of all ownership interests not expressly excepted or reserved. The deed conveying the Property to Holts and Lee did not include a general exception of oil and gas rights. Instead, the only oil and gas rights excepted from the conveyance were the sellers’ rights in the Douglas Lease. Thus, the possibility of reverter was conveyed, and when the Douglas Lease expired by its own terms, the oil and gas rights in the Property reverted to Holts and Lee. For this reason, their lease to EQT was valid.