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“Precious Little” Extends Operator’s Lease

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On August 13, 2013, the Honorable Judge Brann, sitting in the Middle District of Pennsylvania, issued a memorandum opinion granting Summary Judgment in favor of Lessee-Defendants Chief Exploration & Development, LLC, et al. (“Chief”). The dispute arose when the Lessor-Plaintiffs asserted that that their leases with Chief had expired at the end of the respective primary terms. Ultimately, the court sided with Chief because it agreed that its physical activity, behind-the-scenes efforts and good faith intent to drill constituted “commencing operations” sufficient to perpetuate the lease beyond its primary term.

The habendum clause in the Lease provided for a five-year primary term and a secondary clause that read, in pertinent part: “for as long thereafter as operations are conducted on the Leasehold in search of production of oil, gas or their constituents.” The Lease also contained a “Unitization” clause which afforded the lessee “the right to pool, unitize, or combine all or part of the Leasehold with other lands…at a time before or after drilling to create drilling or production units.”

Prior to the expiration of the Leases’ five-year primary term, Chief executed a pooling and unitization agreement that included the Plaintiffs’ property. It was undisputed that almost immediately following the execution of the unitization agreement, Chief conducted activity on the unit. In fact, Chief had spent seven months prior to the unitization agreement preparing land on the unit for drilling. Plaintiffs alleged, however, that Chief’s activity did not rise to the level of “commencing operations” and therefore the lease terminated upon the end of the primary term.

The court duly noted that several preceding courts “have asked and considered what it takes to ‘commence operations,’ and have overwhelmingly answered: precious little.” It relied on the principle established by the Supreme Court of Pennsylvania in Henderson v. Ferrell, 183 Pa. 547, 38 A. 1018 (1898) that explained “very little should be required of the lessee to satisfy the commencement obligation prior to the expiration of the primary term, so long as he intends to proceed with due diligence.”

Applying that principle to the undisputed facts, the court held that Chief was conducting operations on the Leasehold (via the unit) in search of production of oil, gas, or their constituents at the expiration of the primary term. Further, it held that Chief commenced operations in good faith and with the intention of completing the work diligently. Accordingly, the court granted summary judgment in favor of Chief, finding that the lease continued beyond its primary term.
 

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