Seneca Resources Corp. v. S & T Bank

J-S32037-15

2015 PA Super 181

SENECA RESOURCES CORPORATION, : IN THE SUPERIOR COURT OF

: PENNSYLVANIA

Appellee :

:

v. :

:

S & T BANK, TRUSTEE OF THE :

RAYMOND C. HUMPHREY TRUST, :

WILBER L. HUMPHREY INSURANCE :

TRUST B, S & T BANK, CO-TRUSTEE OF :

THE DANYA MARDER SPECIAL NEEDS :

TRUST, JAMES HUMPHREY AND RITA H. :

HUMPHREY, HUSBAND AND WIFE, :

MARY H. MARDER AND KATHLEEN :

SAMANTHA MARDER, :

:

Appellants : No. 2057 WDA 2014

Appeal from the Order entered on December 2, 2014

in the Court of Common Pleas of Jefferson County,

Civil Division, No. 602-2009 C.D.

BEFORE: SHOGAN, OLSON and MUSMANNO, JJ.

OPINION BY MUSMANNO, J.: FILED AUGUST 31, 2015

S & T Bank, Trustee of the Raymond C. Humphrey Trust, Wilber L.

Humphrey Insurance Trust B, S & T Bank, Co-Trustee of the Danya Marder

Special Needs Trust, James Humphrey and Rita H. Humphrey, husband and

wife, Mary H. Marder, and Kathleen Samantha Marder (collectively “the

Appellants”) appeal from the Order granting the Motion for Summary

Judgment filed by Seneca Resources Corporation (“Seneca”). We affirm.

J-S32037-15

On April 17, 1962, Humphrey Industries Inc. (“Humphrey”), the lessor,

and Jefferson County Gas Company (“Jefferson”),1 the lessee, entered into

an oil and gas lease (“Lease”).2 The Lease allowed the lessee to produce,

store, withdraw, or transmit oil and gas from the “leased premises,” which

constituted approximately 25,000 acres situated in Elk and Jefferson

Counties. The Lease had a primary term of 40 years, with a secondary term

to continue as long as oil or gas was stored, produced or withdrawn from

any portion of the leased premises. At the inception of the Lease,

approximately 10,000 acres of the leased premises were undeveloped

(unoperated), and 15,000 acres were developed (operated). The Lease

stated that the lessee would pay royalties on any oil or gas produced from

the operated acreage on the leased premises.3 The Lease outlined a “lump

sum or rental payment” schedule for the unoperated acreage.

The trial court set forth the relevant underlying facts as follows:

By the time Seneca acquired its interest in the Lease, its

predecessor(s) had already drilled more than 300 oil and natural

gas wells, more than 100 of which were still producing, on the

1

The Appellants are successors in interest to Humphrey. Seneca is a

successor in interest to Jefferson.

2

The Lease was entered pursuant to a January 1, 1962 Agreement

(“Agreement”) between Humphrey and Jefferson. At the inception of the

Lease, Humphrey was “operating for gas” on the leased premises. Brief for

Appellants at 34 n.8.

3

The Lease also allows the lessee to make payments to the lessor for any

gas storage on the leased premises. However, the storage of oil or gas on

the leased premises is not at issue in this case. See Brief for Appellants at 8

n.2.

-2-

J-S32037-15

operated acreage. Uncertain of the status of production and

Seneca’s continuing rights as of June 17, 2008, [] counsel for

[the Appellants] drafted a letter inquiring as to the amount of

acreage Seneca was still claiming under [the] Lease. In that

same document, [the Appellants’ counsel] advised Seneca of

[the Appellants’] position that its failure to develop the gas

bearing formations below the Tully limestone formation[4]

constituted a breach of its implied covenant to produce.

When Seneca replied 2 months later, it [stated that it was] the

rightful holder of 11,426 operated acres[,] on which 325 wells

had been drilled, 131 of which were still producing gas, as well

as 3,131 acres of unoperated land. It also claimed to have

drilled 25 new wells between November 2007 and August 27,

2008[,] and announced its intention to drill an additional 15 in

2008, with 15 to 20 to follow in 2009. It further noted that it

had made all requisite rental payments under the [] Lease

through December 2008 – a fact that [the Appellants do] not

dispute; denied that it had breached the implied covenant to

develop; and rejected the position that Pennsylvania imposed an

implied duty for a lessee to develop shallow and deep strata of a

leasehold simultaneously.

In a follow-up letter dated December 18, 2008, [the Appellants]

implicitly disagreed with much of Seneca’s analysis. They

instead took the position that when the primary term of the []

Lease expired …, Seneca became a tenant-at-will subject to

termination with respect to further drilling operations. They also

advised Seneca that the Lease itself only allowed it to hold the

unoperated acreage in exchange for rental payments for 10

years and that [the Appellants were] immediately terminating

[Seneca’s] rights with respect to that acreage, as well.

According to [the Appellants], Seneca’s only remaining rights

under the Lease were for the continued operation of producing

wells and their corresponding acreage.

Approximately 1 week later, [the Appellants] entered into

another gas and oil lease with Open Flow Gas Supply

[Corporation (“Open Flow”)]. On its face, that lease overlapped

with the [] Lease[.]

4

Largely, the Marcellus shale is trapped between the Onondaga limestone

beneath the shale, and the Tully limestone on top of the shale.

-3-

J-S32037-15

Trial Court Opinion, 9/11/13, at 3 (citations omitted, footnote added).

In a prior appeal, this Court set forth the ensuing procedural history as

follows:

[Seneca instituted an action against the Appellants and Open

Flow.5] In bringing this lawsuit, Seneca essentially sought a

declaration that it had not breached the [] Lease, that [the

Appellants] had breached the [] Lease, and that Open Flow

intentionally interfered with the [] Lease. It further averred that

the [] Lease remained a valid contract, [] the Open Flow lease

was invalid, [] Seneca retained all the oil and gas rights to the

acreage, and [] Open Flow and [the] Appellants owned no gas

rights in the land. Seneca filed a first and second amended

[C]omplaint. The final [C]omplaint contained eight counts.

The action was voluntarily discontinued as to Open Flow on

February 13, 2012. [The] Appellants filed an [A]nswer, [N]ew

[M]atter, and eight counterclaims against Seneca. Seneca then

moved for partial summary judgment seeking the dismissal of

three of the eight counterclaims filed by [the] Appellants against

Seneca. [The] Appellants responded and filed a [M]otion for

summary judgment. [The Motion] claimed that Seneca breached

an implied duty to develop deep gas horizons under the

acreage[,] and asked the [trial] court to declare that the deep

gas horizons were forfeited from the [] Lease[,] so that any

natural gas below 5,000 feet had reverted to [the] Appellants, as

landowners. On September 11, 2013, the trial court entered an

[O]rder granting Seneca’s [M]otion for partial summary

judgment and dismissing three of [the] Appellants’

counterclaims. In the same order, the trial court denied [the]

Appellants’ [M]otion for summary judgment.

The September 11, 2013 [O]rder was not a final, appealable

order since this action remained pending against [the]

Appellants[,] and [] five counterclaims remained pending against

Seneca. … Recognizing that the [O]rder was not a final order

5

The parties stipulated that the action is limited to the release of 3,131

“unoperated” acres. See Brief for Appellants at 11 n.4; see also Second

Amended Complaint, 4/29/10, at 4 (stating that Seneca’s predecessors

released 7,833 acres of unoperated acreage and that Seneca holds 3,131

acres of unoperated land under the Lease).

-4-

J-S32037-15

that could be appealed immediately, on October 8, 2013, four

weeks after the September 11, 2013 [O]rder was entered, [the]

Appellants filed an [A]pplication for determination of finality

pursuant to Pa.R.A.P. 341(c). The [Application] was granted on

October 15, 2013.

Seneca Resources v. S&T Bank, 104 A.3d 59 (Pa. Super. 2014)

(unpublished memorandum at 3-4) (footnote added, citation omitted).

Subsequently, the Appellants filed a Notice of Appeal of the September

11, 2013 Order. This Court quashed the appeal because the trial court had

failed to act on the Appellants’ Application, pursuant to Rule 341(c), within

thirty days of the entry of its September 11, 2013 Order. See id.

(unpublished memorandum at 4-7). As a result, on December 2, 2014,

upon stipulation of the parties, the trial court entered an Order granting

summary judgment in favor of Seneca and disposing of all outstanding

claims and counterclaims based upon its reasoning in entering the

September 11, 2013 Order.

The Appellants filed a timely Notice of Appeal. The trial court ordered

the Appellants to file a Pennsylvania Rule of Appellate Procedure 1925(b)

concise statement. The Appellants filed a timely Concise Statement.

On appeal, the Appellants raise the following questions for our review:

1. Whether the lower court erred in holding that the [] Lease for

land covering 25,000 acres was not severable as to the

separately-defined “operated” and “unoperated” acreage

under the express terms of the Lease[?]

2. Whether the lower court erred in refusing to apply

Pennsylvania’s well-entrenched doctrine of implied covenant

to fully develop an oil and gas lease merely because the

-5-

J-S32037-15

“operated” portion of the leased property was already under

development at the inception of the Lease[?]

Brief for Appellants at 7.

Our standard of review of a trial court’s grant of summary judgment is

well-settled:

A reviewing court may disturb the order of the trial court only

where it is established that the court committed an error of law

or abused its discretion. As with all questions of law, our review

is plenary.

In evaluating the trial court’s decision to enter summary

judgment, we focus on the legal standard articulated in the

summary judgment rule. Pa.R.C.P. 1035.2. The rule states that

where there is no genuine issue of material fact and the moving

party is entitled to relief as a matter of law, summary judgment

may be entered. Where the non-moving party bears the burden

of proof on an issue, he may not merely rely on his pleadings or

answers in order to survive summary judgment. Failure of a

non-moving party to adduce sufficient evidence on an issue

essential to his case and on which it bears the burden of proof

establishes the entitlement of the moving party to judgment as a

matter of law. Lastly, we will view the record in the light most

favorable to the non-moving party, and all doubts as to the

existence of a genuine issue of material fact must be resolved

against the moving party.

Thompson v. Ginkel, 95 A.3d 900, 904 (Pa. Super. 2014) (citation and

brackets omitted).

In their first claim, the Appellants contend that the trial court erred in

concluding that the Lease was entire and not severable. Brief for Appellants

at 19-20, 28. The Appellants argue that the Lease is severable as to the

operated and unoperated acreage because its express terms separately

define the duration of the Lease and the separate consideration for the

-6-

J-S32037-15

respective acreage. Id. at 19, 28. The Appellants point out that the

consideration for the operated acreage “is in the form of royalties, that

continue for a 40-year primary term, and as long thereafter as production

continues.” Id. at 19 (emphasis omitted). The Appellants assert “that the

lessors had the right to terminate the Lease as to unoperated acres after the

stated term expired and the acreage was not converted into royalty-based

production acres.” Id. The Appellants further assert that because the

consideration for the unoperated acreage is in the form of delay rental

payments at a scheduled rate, this portion of the Lease becomes a tenancy

at will at the expiration of the primary term. Id. at 19, 26, 27. The

Appellants claim that the trial court’s reliance on Jacobs v. CNG

Transmission Corp., 332 F. Supp. 2d 759 (W.D. Pa. 2004), in determining

that the Lease was not severable, is misplaced. Brief for Appellants at 20-

23, 28. The Appellants argue that unlike Jacobs, where one part of the

lease could satisfy performance of the other part, the payment of royalties

for the operated acreage is not sufficient to hold the Lease beyond the

primary term for the unoperated acreage. Id. at 22. The Appellants

maintain that Seneca’s obligations and considerations, i.e., the requirement

to both pay royalties for operated acreage and delay rentals to hold

unoperated acreage, rendered the unoperated acreage severable. Id.

The Appellants further contend that the trial court made numerous

conclusions in determining that the Lease is not severable, which are not

-7-

J-S32037-15

supported by the plain wording of the Lease. Id. at 23-28. Specifically, the

Appellants claim that contrary to the trial court’s finding that the Lease failed

to differentiate the types of consideration for operated and unoperated

acreages, the Lease clearly delineates different consideration for 10,000

unoperated acres and 15,000 operated acres. Id. at 23-24. The Appellants

further argue that while the trial court weighed the Lease’s description of the

leased premises as “25,000 acres more or less,” the terms of the Lease

defined the premises to include “15,000 acres of operated acreage and

10,000 acres of unoperated acreage.” Id. at 25. The Appellants maintain

that the habendum clause only applied to the operated acreage, and the

unoperated acreage became a tenancy at will at the expiration of the

primary term. Id. at 26-27. The Appellants claim that any clarifying

language sought by the trial court was unnecessary because of the parties’

intent to separate the terms and consideration for unoperated and operated

acreage. Id. at 27-28.

“[A] lease is in the nature of a contract and is controlled by principles

of contract law.” T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d 261,

267 (Pa. 2012). “To show a breach of contract, a party must establish: (1)

the existence of a contract, including its essential terms, (2) a breach of a

duty imposed by the contract, and (3) resultant damages.” McCausland v.

Wagner, 78 A.3d 1093, 1101 (Pa. Super. 2013) (citation and quotation

marks omitted). “When performance of a duty under a contract is due, any

-8-

J-S32037-15

nonperformance is a breach.” Id.; see also Jedlicka, 42 A.3d at 267

(stating that “a party seeking to terminate a lease bears the burden of

proof.”). “If a breach constitutes a material failure of performance, the non-

breaching party is relieved from any obligation to perform; thus, a party who

has materially breached a contract may not insist upon performance of the

contract by the non-breaching party.” McCausland, 78 A.3d at 1101.

Conversely, if a party breaches a contract, but still substantially performs its

obligations, the breach is nonmaterial and the breaching party retains the

right to enforce the contract. Id.

The interpretation of any contract is a question of law and

this Court’s scope of review is plenary. Moreover, we need not

defer to the conclusions of the trial court and are free to draw

our own inferences. In interpreting a contract, the ultimate goal

is to ascertain and give effect to the intent of the parties as

reasonably manifested by the language of their written

agreement. When construing agreements involving clear and

unambiguous terms, this Court need only examine the writing

itself to give effect to the parties’ understanding. This Court

must construe the contract only as written and may not modify

the plain meaning under the guise of interpretation.

Humberston v. Chevron U.S.A., Inc., 75 A.3d 504, 509–10 (Pa. Super.

2013) (quotation marks and citations omitted). Further, “[i]t is fundamental

that one part of a contract cannot be so interpreted as to annul another

part[,] and that writings which comprise an agreement must be interpreted

as a whole.” Southwestern Energy Prod. Co. v. Forest Res., LLC, 83

A.3d 177, 187 (Pa. Super. 2013) (citation omitted).

Our Supreme Court has recognized that

-9-

J-S32037-15

the traditional oil and gas “lease” is far from the simplest of

property concepts. … Generally, however, the title conveyed in

an oil and gas lease is inchoate, and is initially for the purpose of

exploration and development.

If development during the agreed upon primary term is

unsuccessful, no estate vests in the lessee. If, however, oil or

gas is produced, a fee simple determinable is created in the

lessee, and the lessee’s right to extract the oil or gas becomes

vested. A fee simple determinable is an estate in fee that

automatically reverts to the grantor upon the occurrence of a

specific event. The interest held by the grantor after such a

conveyance is termed a possibility of reverter. Such a fee is a

fee simple, because it may last forever in the grantee and his

heirs and assigns, the duration depending upon the concurrence

of collateral circumstances which qualify and debase the purity of

the grant.

Within the oil and gas industry, oil and gas leases generally

contain several key provisions, including the granting clause,

which initially conveys to the lessee the right to drill for and

produce oil or gas from the property; the habendum clause,

which is used to fix the ultimate duration of the lease; the

royalty clause; and the terms of surrender.

***

Typically … the habendum clause in an oil and gas lease provides

that a lease will remain in effect for as long as oil or gas is

produced “in paying quantities.” Traditionally, use of the term

“in paying quantities” in a habendum clause of an oil or gas

lease was regarded as for the benefit of the lessee, as a lessee

would not want to be obligated to pay rent for premises which

have ceased to be productive, or for which the operating

expenses exceed the income.

Jedlicka, 42 A.3d at 267-68 (citations, brackets, and some quotation marks

omitted).

Additionally, in conjunction with the leasing and habendum clauses,

“leases also began to incorporate ‘delayed rental’ clauses, which relieved the

- 10 -

J-S32037-15

lessee of the obligation to develop the property immediately upon entering

into an agreement.” Hite v. Falcon Partners, 13 A.3d 942, 946 (Pa.

Super. 2011). The rental “payments are in the nature of liquidated damages

for the lessee’s decision to forego production and are viewed as the

consideration paid to the landowner in lieu of the royalty that would be paid

if production operations were to be undertaken immediately.” Id. at 946-47

(citation omitted). The payment of a delay rental to postpone the

exploration and development of a property and maintain the effectiveness of

the lease is limited to the primary term of the lease. Id. at 947.

In determining whether an oil and gas lease is severable, our Supreme

Court, in Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001),

explained that

there is no bright line rule requiring that a court first find that

the intent of the parties is unclear as to entirety/severability

before it may look to factors such as the conduct of the parties

and the character of the consideration to determine whether an

agreement is entire or severable. The central task is to

ascertain the intent of the parties. That intent may be apparent

from the explicit language of the [lease] … or it may be obvious

from a “construction” of the agreement, including the nature of

the consideration[.6] … In short, principles of construction may

reveal the intent of the parties no less than the actual language

addressing entirety/severability. Thus, … absent express

6

“[T]he character of the consideration may determine the severability of the

contract.” Jacobs, 772 A.2d at 451 (citation omitted). “[I]f the

consideration is single, the contract is entire ... whatever the number or

variety of items embraced ... but, if the consideration is apportioned, either

expressly or by necessary implication ... the contract will generally be held

to be severable....” Id. (citation omitted); see also Jacobs, 332 F. Supp.

2d at 775 (stating that the fact that the parties apportioned the

consideration does not automatically render the agreement severable).

- 11 -

J-S32037-15

language that a [lease] is entire, a court may look to the [lease]

as a whole, including the character of the consideration, to

determine the intent of the parties as to severability and may

also consider the circumstances surrounding the execution of the

[lease], the conduct of the parties, and any other factor

pertinent to ascertaining the parties’ intent. The court need not

make a specific predicate finding of ambiguity before

undertaking the inquiry[;] indeed, if the contract were crystal

clear as to the parties’ intent, severability likely would not be a

contested issue.

Jacobs, 772 A.2d at 452 (footnote added).7

Here, the Lease states the following, in relevant part:

… Lessor does hereby grant, demise, lease and let unto the said

Lessee, its successor or assigns the hereinafter described “leased

7

The Supreme Court of Pennsylvania’s decision in Jacobs, addressing

whether an oil and gas lease is severable, was in response to a Petition for

Certification of Questions of Law from the United States Court of Appeals for

the Third Circuit. See Jacobs, 772 A.2d at 446. The Supreme Court, while

announcing the rule regarding severability, did not analyze the lease at issue

in the Jacobs case. Instead, the United States District Court for the

Western District of Pennsylvania resolved the case. In Jacobs, the oil and

gas lease was a production and storage lease, which had a primary term of

ten years, but could be extended indefinitely by either the production or

storage of gas. Jacobs, 332 F.Supp.2d at 765. Under the lease, the lessor

received consideration that took several forms: (1) royalties from producing

wells; (2) free gas; (3) delay rental when no wells yielding royalties have

been drilled and no payments for storage of gas are due and payable; and

(4) payment for storage privileges. Id. at 766-67. During the primary term

of the lease, the lessee utilized the property to store gas, but did not drill

any oil or gas wells on the property. Id. at 768. As a result, the lessor filed

an action, claiming that the production and storage provisions of the lease

were severable. Id. at 769. The district court concluded that the lease was

not severable because the leasing clause and the habendum clause did not

address distinct contractual undertakings, but rather indicated that the

“production and storage were interrelated components of developing the

leasehold.” Id. at 778. The trial court further found that the lessee’s

obligation to pay delay rentals, royalties, and storage rentals evidenced the

parties’ intent to enter into the lease with the single objective of operating

the premises in a manner designed to achieve the fullest development of

both production and storage rights. Id. at 783.

- 12 -

J-S32037-15

premises,” for the sole and only purpose of drilling and operating

for oil and gas, of storing gas in any formations underneath the

surface, and withdrawing therefrom gas originally produced from

other lands, and of laying such pipe lines and building such

tanks, stations and structures thereon, and drilling any water

well or wells as may be necessary to produce, store, withdraw

and transmit such oil and gas covering 25,000 acres more or

less, situate in Elk and Jefferson Counties, Pennsylvania.

Said “leased premises” total 25,000 acres more or less in

Jefferson and Elk Counties, Pennsylvania, and include all oil and

gas lands owned by Lessor in said Counties[.]

***

This lease shall be for a term of forty (40) years and as long

thereafter as oil or gas or either of them is stored in, produced

or withdrawn from all or any portion of said leased premises by

the Lessee, its successors or assigns, subject to payments and

cancellation as hereinafter set forth.

IN CONSIDERATION OF THE PREMISES[,] the Parties hereto

agree as follows:

1. Lessee agrees to deliver to the credit of the Lessor, its

successors or assigns free of cost in the pipe line to which it may

connect its wells, the equal one-eighth (1/8th) part of all oil

produced and saved from the leased premises.

2. That 10,000 acres more or less of the leased 25,000 acres are

not presently under development (unoperated) and that 15,000

acres of the leased 25,000 acres are developed (operated) and

the unoperated and operated acreage shall be subject to the

terms and conditions hereinafter set forth as to each. …

However, should any of the unoperated acreage become

productive at any future date, the terms and conditions relating

to the operated acreage will become applicable.

3. Lessee agrees to pay Lessor annually in advance for the

10,000 acres (unoperated) as follows:

a. Year Lump Sum or Rental Payment

1962 $10,000

1963 9,000.00 or $1.00 per acre, whichever is greater

- 13 -

J-S32037-15

1964 8,000.00 or $1.00 per acre, whichever is greater

1965 7,000.00 or $1.00 per acre, whichever is greater

1966 6,000.00 or $1.00 per acre, whichever is greater

1967 5,000.00 or $1.00 per acre, whichever is greater

1968 4,000.00 or $1.00 per acre, whichever is greater

1969 3,000.00 or $1.00 per acre, whichever is greater

1970 2,000.00 or $1.00 per acre, whichever is greater

1971 1,000.00 or $1.00 per acre, whichever is greater

1972 $1.00 per acre

***

5. It is understood and agreed between the Parties hereto that

Lessee shall have the right to define or designate any part or

parts of the leased land (25,000 acres more or less) as a gas

storage area or areas; and in that event, in lieu of the payment

called for in paragraphs 3 and 4 hereof, payment for said gas

storage area shall be made annually in advance, at the rate of

$200.00 per well or $2.00 per acre, whichever is greater in said

defined area.

Lease, 4/17/62, at 1, 2-3, 4-5.

The language of the Lease does not expressly state that it is entire.

Thus, consonant with Jacobs, we must consider whether the unoperated

acreage terms were severable from the operated acreage terms by

examining the Lease’s language, the character of the consideration, the

circumstances surrounding the lease’s execution, conduct of the parties, and

any discernible intent of the original contracting parties that could be derived

from the Lease. See Jacobs, 772 A.2d at 452.

According to the Lease, the parties explicitly agreed that the “leased

premises” encompass 25,000 acres for a primary term of 40 years and a

secondary term that would continue indefinitely in its entirety as long as oil

or gas was produced or withdrawn from any portion of the leased premises.

- 14 -

J-S32037-15

Neither the leasing clause nor the habendum clause makes any distinction

between operated and unoperated acreage in specifying the leased

premises. Further, there is no indication in these clauses suggesting that

the Lease could be extended beyond the expiration of the primary term as to

the operated acreage, while expire as to the unoperated acreage for failing

to produce or withdraw gas. Thus, the clear and unambiguous language of

the Lease grants Seneca a fee simple determinable of the entire leasehold,

so long as the lessee stores, produces, or withdraws oil or gas from any

portion of the 25,000 acres. See Jedlicka, 42 A.3d at 267; see also

Sabella v. Appalachian Dev. Corp., 103 A.3d 83, 103 (Pa. Super. 2014)

(stating that “an oil and gas lease, upon vestiture arising from successful

discovery and production of oil, conveys a potentially indefinite fee simple

determinable.”).

While the Lease provides separate consideration for the unoperated

and operated acreage, the character of the lessee’s duties of payment does

not support the Appellants’ argument that the Lease is to be construed as

severable. The Lease provides that the lessor is entitled to royalties earned

from the production on the operated acreage of the leased premises. Lease,

- 15 -

J-S32037-15

4/17/62, at 2.8 Further, the Lease provided for monetary compensation with

respect to the “unoperated” acreage to provide the lessor with revenue over

this land for a period of ten years. See Trial Court Opinion, 9/11/13, at 6

(stating that “the lessor would not realize any revenue from the unoperated

acreage without instituting a payment scheme unrelated to production or

storage.”). Although the Lease does not expressly state that consideration

for the unoperated acreage should continue after 1972, the parties do not

dispute that Seneca paid the consideration until December 2008, six years

after the end of the 40-year term. See, e.g., Brief for Appellee at 23; Brief

for Appellant at 11, 44. Importantly, the Lease permits conversion of the

unoperated acreage to operated acreage by commencing production at any

time, and does not limit conversion to either the 10-year term (1972) or the

40-year term (2002). See Lease, 4/17/62, at 3 (stating that “should any of

the unoperated acreage become productive at any future date, the terms

and conditions relating to the operated acreage will become applicable.”)

(emphasis added). Moreover, the Lease explicitly states that any portion of

the “leased premises” could be designated for storage, and payment for

storage would be in lieu of any royalties or rental payments. See Lease,

4/17/62, at 4-5.

8

The Lease only identifies royalties due to the production of oil; however,

Seneca concedes that it also pays royalties from the production of gas on

the leased premises. See Brief for Appellee at 3 (stating that “[i]n

accordance with the Lease, Seneca timely paid, and continues to pay, the

[Appellants] royalties earned based on the volume of gas produced from the

leased acreage.”).

- 16 -

J-S32037-15

Thus, the fact that consideration provisions include royalties, delay

rentals, and storage rentals, and that unoperated acreage may be converted

to operated acreage at any time, reflect an intent by the parties to enter an

agreement to achieve the fullest development of the entire 25,000 acres of

the leased premises. See Penneco Pipeline Corp. v. Dominion

Transmission, Inc., 2007 WL 1847391, *16 (W.D. Pa. 2007) (stating that

the compensation provisions did not evidence a severable lease where the

“delay rentals, royalties, and storage rentals, are not distinctly allocated to

production or storage rights, but rather, are written in such a way that

payment for one purpose interrelates and impacts on the payment for the

other.”); Jacobs, 332 F.Supp.2d at 783 (concluding that “[t]he provisions of

consideration under the lease are not distinctly allocated to the dual

purposes identified in the leasing clause, but instead are drafted in such a

manner that payment for one purpose interrelates to and impacts on the

payment for the other.”); see also McCausland, 78 A.3d at 1101 (stating

that “[r]oyalty-based leases are to be construed in a manner designed to

promote the full and diligent development of the leasehold for the mutual

benefit of both parties.”) (citation omitted).

Furthermore, with regard to the other Jacobs factors, we note that

the parties had entered into the Agreement four months prior to the Lease.

In the Agreement, the parties identified the total land to be leased as 25,000

acres. Agreement, 1/1/62, at 2 (unnumbered). Additionally, in 1974, the

- 17 -

J-S32037-15

Appellants assigned their rights to certain acreage implicated by the Lease to

Koppers Company, Inc. (“Koppers”).9 Assignment, 6/3/74, at 1

(unnumbered). In the Assignment, the Appellants clearly stated that the

conveyance was subject to the rights provided to Jefferson under the Lease.

Id. Importantly, the Appellants stated that under the Lease, they “leased

unto [Jefferson] 25,000 acres of land for the exploration and development of

oil and gas under the terms and conditions therein set forth[.]” Id. These

documents evidence that the Appellants understood that the “leased

premises” includes 25,000 acres, not separate and severable operated and

unoperated acreages.10

Based upon the foregoing, we conclude the Lease is entire, and that

the operable and unoperable acreages are not severable.

9

Seneca claims that certain parcels assigned to Koppers were designated by

the Lease as unoperated acreage. See Brief for Appellee at 24.

10

In their Statement of the Case, the Appellants cite to a 1990 lease they

entered into with Empire Exploration, Inc. (“Empire”). Brief for Appellants at

12-13. Purportedly, this lease covered 594 acres of unoperated acreage

listed in the Lease, and expired in December 2008, with no drilling of the

land. Id.; see also Brief for Appellee at 25. The Appellants claim that the

1990 lease confirmed that the title to the unoperated portion of the Lease

reverted to the lessor. Brief for Appellants at 13. However, the Appellants

did not raise the 1990 lease with Empire in their Argument section, or argue

that this lease supports the proposition that the Lease is severable. See

Pa.R.A.P. 2117(b) (stating that “[t]he statement of the case shall not

contain any argument.”); see also Pa.R.A.P. 2119(a). In any event, we

note that the Appellants and Empire entered into a “Protective” oil and gas

lease. 1990 Protective Lease, 12/14/90, at 1 (unnumbered). Specifically,

the 1990 lease stated that “no royalties, or rentals to deter commencement

of drilling operations, shall be paid or delivered hereunder until LESSOR’S

interest in the land above described has been finally determined by a court

of competent jurisdiction.” Id. at 4 (unnumbered).

- 18 -

J-S32037-15

In their second claim, the Appellants contend that the trial court erred

in refusing to apply Pennsylvania’s doctrine of implied covenant to fully

develop an oil and gas lease for the 3,131 acres of unoperated land.11 Brief

for Appellants at 29, 38. The Appellants argue that the trial court’s

determination that the operated acres of the leased property were already in

development at the inception of the Lease abrogates the doctrine of implied

covenant to develop the unoperated acreage is erroneous. Id. at 29, 33-34,

38. The Appellants assert that the implied covenant to develop imposes an

obligation on the lessee to develop the entire leased premises, and to hold

otherwise would allow lessees to hold a vast amount of undeveloped land in

perpetuity. Id. at 34, 38. The Appellants claim that Seneca is obligated to

demonstrate that it acted with reasonable diligence to develop the land, and

by failing to do so, must explain and excuse the lack of activity. Id. at 39-

41, 44. The Appellants point out that Seneca has only drilled wells in the

operated acres of the Lease, and has failed to develop the 3,131 acres of

unoperated land, despite the land being commercially viable. Id. at 42-43,

44. The Appellants argue that because the unoperated acreage was

11

Paragraph 10 of the Lease states the following:

All expressed or implied covenants of this lease shall be subject

to all Federal and State laws, executive orders, rules or

regulations, and this lease shall not be terminated in whole or

part, nor Lessee held liable in damages, for failure to comply

therewith if compliance is prevented by, or if such a failure is the

result of, any such law, order, rule or regulation.

Lease, 4/17/62, at 7.

- 19 -

J-S32037-15

commercially viable, and Seneca has failed to explain its failure to develop

the land, the implied covenant to develop has been breached and the

Appellants are entitled to enter into a new oil and gas production agreement

with another party. Id. at 43-45.

In Pennsylvania, “[a]n implied covenant to develop the underground

resources appropriately exists where the only compensation to the

landowner contemplated in the lease is royalty payments resulting from the

extraction of that underground resource.” Jacobs, 772 A.2d at 455; see

also id. at 454 (stating that “[t]he basis for the implied covenant … is a

recognition that the lessor has entered into a bargain expecting to be

compensated for the lease of the land, and principles of fairness dictate that

the lessee be obligated to make diligent efforts to ensure that the lessor

receives the benefit of his bargain.”); Hite, 13 A.3d at 946 (noting that

“[e]ven when such an obligation was not expressed, the courts recognized

an implied covenant to develop the leasehold.”). However, while the implied

covenant to develop doctrine exists, “the specific agreement of the parties

may preclude the application of the doctrine.” Jacobs, 772 A.2d at 455;

see also Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 388 (Pa.

1986) (stating that “[t]he law will not imply a different contract than that

which the parties have expressly adopted. To imply covenants on matters

specifically addressed in the contract itself would violate this doctrine.”). For

example, where “the parties have expressly agreed that the landowner shall

- 20 -

J-S32037-15

be compensated if the lessee does not actively extract the resource, then

the lessee has no implied obligation to engage in extraction activities.”

Jacobs, 772 A.2d at 455; see also id. (stating that “so long as the lessee

continues to pay the landowner for the opportunity to develop and produce

oil or gas, the lessee need not actually drill wells.”) (emphasis added). “At

the point where that compensation ceases due to the expiration of the term

of the lease, or pursuant the terms of the lease itself, the lessee then has an

affirmative obligation either to develop and produce the oil or gas or

terminate the landowner’s contractual obligations.” Id.

Here, the trial court, relying on our Supreme Court’s decision in

Jacobs, found that because a portion of the leased premises was already

developed at the time Seneca acquired the rights to the Lease, the implied

covenant to develop was inapplicable to the property as a whole. See Trial

Court Opinion, 9/11/13, at 7 (stating that “because Seneca assumed the role

of lessee to [the] Lease already developed by its predecessors―activities

attributed to Seneca as successor in interest―the implied covenant to

develop is no longer applicable to the Lease.”). While an implied covenant

to develop oil or gas exists in Pennsylvania, see Jacobs, 772 A.2d at 455,

the fact that lessees enter into a lease where land had already been partially

developed by its predecessors does not alone preclude the obligation to

develop the remainder of the land. See Hill v. Joy, 24 A. 293, 293 (Pa.

1892) (stating that where the lessee operated 90 acres of land, while leaving

- 21 -

J-S32037-15

190 acres of unoperated land, there is an implied covenant on the lessee’s

part to work the mine in a proper manner and with reasonable diligence, so

that the lessor receives the compensation which both parties contemplated

when entering into the lease); see also Delmas Ray Burkett, II

Revocable Trust ex rel. Burkett v. Exco Resources (PA), LLC, 2014 WL

585884, *8 (W.D. Pa. 2014) (interpreting Jacobs and concluding that “when

an oil and gas lease is held by production, this status does not negate

application of the implied covenant of development.”); see generally

Sauder v. MidContinent Petroleum Corp., 292 U.S. 272, 281 (1934)

(holding that the lessee of an oil and gas lease who produced oil on a forty-

acre tract, but abstained from drilling on an adjacent section of land, could

not hold the undeveloped part of the land indefinitely without drilling or

establishing an intention to drill in the future; as a result, the lessor was

equitably entitled to cancel the lease).12 In point of fact, leases where

payments are based on production royalties are to be “construed in a

manner designed to promote the full and diligent development of the

leasehold for the mutual benefit of both parties.” Hite, 13 A.3d at 945

(emphasis added); see also Jacobs, 772 A.2d at 454 (stating that “[t]he

basis for the implied covenant … is a recognition that the lessor has entered

12

We note in Stoddard v. Emery, 18 A. 339, 339 (Pa. 1889), the

Pennsylvania Supreme Court held that where the number of wells to be

drilled is specified by a lease, that number controls and no implied covenant

to develop further can be read into the lease. However, as noted above, the

Lease does not fix the number of wells to be drilled and/or operated. Thus,

Stoddard is inapplicable to the instant case.

- 22 -

J-S32037-15

into a bargain expecting to be compensated for the lease of the land, and

principles of fairness dictate that the lessee be obligated to make diligent

efforts to ensure that the lessor receives the benefit of his bargain.”).

Significantly, the Jacobs Court, without limitation to leases where no

production has taken place, maintained that a “defendant cannot hold the

premises and refuse to operate them.” Jacobs, 772 A.2d at 455.

Thus, the fact that the leased premises are under production at the

time of the entry of the Lease does not, in itself, invalidate the implied

covenant to develop. Accordingly, the trial court’s reasoning in granting

summary judgment in favor of Seneca on the implied covenant to develop

claim was erroneous. However, this does not end our discussion, as we

must scrutinize the plain language of the Lease to determine whether it

precludes the application of implied covenant to develop. See Jacobs, 772

A.2d at 455.13

It is undisputed that the Appellants and Seneca were operating under

the habendum clause of the Lease, which provides that the Lease would be

extended, beyond the primary term of 40 years, if “oil or gas or either of

them is stored in, produced or withdrawn from all or any portion of said

leased premises[.]” Lease, 4/17/62, at 2 (emphasis added). As noted

above, the leased premises was comprised of approximately 25,000 acres,

13

It is well-settled that “we may affirm the trial court’s order on any valid

basis.” Plasticert, Inc. v. Westfield Ins. Co., 923 A.2d 489, 492 (Pa.

Super. 2007).

- 23 -

J-S32037-15

including the 3,131 acres at issue here, and did not constitute separate

operated and unoperated acreages. Id. at 1. It is undisputed that Seneca

continues to drill and withdraw gas from a portion of the leased premises.

See Brief for Appellants at 11, 42; Brief for Appellee at 3-4, 29-30, 36; see

also Trial Court Opinion, 9/11/13, at 3.

Thus, as the parties have stipulated that the drilling and operating

requirements under the Lease are satisfied, the Lease will extend for an

indefinite secondary term as long as any portion of the leased premises are

being drilled or operated for the production of oil or gas. See Hutchison,

519 A.2d at 388 (stating that the law does not imply a different contract

than that which the parties have expressly adopted). Indeed, as noted in

the above discussion regarding severability, the Lease makes no mention of

any duty or mandate to drill or operate the unoperated acreage for the

production of gas to continue the Lease as to that acreage in full force and

- 24 -

J-S32037-15

effect.14 See Jacobs, 772 A.2d at 453. Based upon the foregoing, we

conclude that the Lease between the Appellants and Seneca forecloses a

finding of a breach of the implied covenant to develop and produce oil and

gas on the unoperated acreage. See Caldwell v. Kriebel Res. Co., LLC,

72 A.3d 611, 615 (Pa. Super. 2013) (concluding that the implied duty to

develop various strata was inapplicable where the parties were operating

under the habendum clause of their agreement, which provided that the

agreement would be extended “so long as oil or gas was being produced,”

and the drilling activities to date had involved only shallow gas drilling); see

also Exco Resources (PA), LLC, 2014 WL 585884, *7-8 (holding that

implied covenant to develop acreage outside that drained by the current

wells, and the entire premises below 3,500 feet, did not apply where the

parties’ agreement extended for an indefinite secondary term so long as,

14

We note that the Lease required Seneca to pay delay rental payments to

the Appellants on the unoperated acreage for a period of ten years beginning

in 1962. Lease, 4/17/62, at 3. While the Lease does not expressly state

that consideration for the unoperated acreage should continue after 1972,

Seneca continued to pay the Appellants $1.00 per unoperated acre until

December 2008, six years after the end of the 40-year primary term of the

Lease. See Brief for Appellee at 23; Brief for Appellants at 11, 44. The

Appellants’ acceptance of Seneca’s sustained delay rental payments during

the primary term of the Lease established that Seneca did not have an

implied covenant to develop during that time. See Jacobs, 772 A.2d at

455; see also Hite, 13 A.3d at 949 (stating that the mere payment of a

delay rental beyond the end of the primary term of the lease does not

extend the lease for an indefinite term or create a fee simple determinable in

the lessee).

- 25 -

J-S32037-15

inter alia, the premises are being drilled or operated for the production of oil

or gas).15

Based upon the foregoing, we affirm the trial court’s entry of summary

judgment in favor of Seneca.

Order affirmed.

Judgment Entered.

Joseph D. Seletyn, Esq.

Prothonotary

Date: 8/31/2015

15

The Appellants cite to numerous cases to support their argument.

However, upon our review of the Lease, the actions of the parties during the

primary and secondary terms of the Lease, and relevant case law, we deem

the cases cited by the Appellants to be inapposite to the case at bar.

- 26 -