- Federal Courts Issue Significant Rulings Affecting Lease Extensions, Surface Uses for Natural Gas Production in West Virginia
- October 3, 2013
- Law Firm: Dinsmore & Shohl LLP - Charleston Office
Federal courts have issued two notable rulings recently that may have implications for other pending disputes in West Virginia, and could affect future lease negotiations between natural gas owners and producers. These decisions are just two of the latest in a series of rulings issued in this area over the last several years, as various challenges to gas leases and production-related activities wind their way through the federal and state court systems.
In the first, the U.S. District Court for the Northern District of West Virginia (Judge Frederick Stamp) issued a Memorandum Opinion and Order that dismissed a complaint that sought to assert a class action against Chesapeake Appalachia, LLC (“Chesapeake”) for undertaking activities pursuant to a lease that Chesapeake had allegedly not properly renewed. Vaunie K. Brown, on behalf of herself and others similarly situated v. Chesapeake Appalachia, LLC, Civil Action No. 5:12cv071, N.D.W.Va., August 21, 2013, Memorandum Opinion and Order (Dkt. No. 52). The Court’s ruling focused upon a single sentence in a mineral lease between the parties: “Upon expiration of this lease and within sixty (60) days thereinafter, Lessor grants to Lessee an option to extend or renew under similar terms a like lease.” Relying on the long-standing principle that the plain language of an unambiguous contract must be applied rather than interpreted, the Court found that this provision plainly granted Cheseapeake the unilateral right to extend the lease by filing an appropriate notice and making an additional bonus payment to the Lessor.
In doing so, the Court rejected Plaintiffs’ arguments that the provision merely granted a right to negotiate a renewed or extended lease; that the ‘renewal’ and the ‘extension’ of a lease are the same thing; and that, as interpreted by Chesapeake, the lease provision violated the rule against perpetuities. As to the rule against perpetuities, the Court noted that West Virginia jurisprudence indicates that where a lease does not contain explicit language providing otherwise, a general right to extend or renew a lease grants the lessee a right to a single renewal or extension - so there is no chance this provision would operate for an indefinite period.
Plaintiffs filed a Notice of Appeal from the district court’s judgment in Brown on September 19, 2013. In order to make the case ripe for appeal and avoid the need for interim proceedings, the parties reached an agreement to suspend the expiration of the (extended) primary term of the subject lease pending the outcome of the matter. The named plaintiffs also agreed to drop their class action claim, without prejudice to the opportunity for another member of the class to seek to file such a suit.
In the second decision, the U.S. Court of Appeals for the Fourth Circuit affirmed an earlier ruling by District Judge Stamp that had granted summary judgment in favor of Chesapeake regarding trespass claims asserted by certain gas lessors. Whiteman v. Chesapeake Appalachia, LLC, No. 12-1790, 4th Circuit Court of Appeals, Sept. 4, 2013. Plaintiffs had argued that Chesapeake’s use of surface pits for the disposal of drilling waste was unauthorized by their lease. The lease in question included somewhat standard language, granting to the lessee the “necessary rights and privileges appertaining to” the conveyed mineral interests. In exercising those rights, Chesapeake had drilled three gas wells and constructed surface pits adjacent to each for the disposal of flow-back water, produced water, and various formation cuttings, all pursuant to permits issued by the West Virginia Department of Environmental Protection (“WVDEP”). Chesapeake’s use of the surface prevented Plaintiffs from growing hay on 10 out of 101 acres of their land in which Chesapeake holds the mineral rights, although Plaintiffs conceded that their monetary damages were “trivial.”
Applying State property law, the Fourth Circuit in Whiteman recognized that a mineral estate owner may enter upon and use a surface estate owner’s land “in such manner and with such means as would be fairly necessary” to enjoy the mineral estate. Citing West Virginia caselaw dating back to 1909, the Court noted that determining what is “fairly” or “reasonably” necessary generally requires a case-by-case determination, and it concluded that the district court’s evaluation of the evidence in this case was correct.
The fact that the WVDEP had issued permits allowing the use of surface pits for waste disposal was not determinative of the issue, but the Court of Appeals held that it was a proper factor for the district court to consider in “informing itself” of the practices of the oil and gas industry in West Virginia. In addition, that Chesapeake had transitioned to a “closed-loop” system for waste disposal at its Texas facilities two or three years earlier did not establish that it was feasible in this case. The open pit system was still the “common and ordinary method of disposal” in West Virginia at the time the wells were drilled on the Plaintiffs’ property.
The Court also affirmed that the undisputed evidence supported judgment in favor of Chesapeake on the question of whether its activities caused a “substantial burden” on the surface. Under the 1980 decision of the West Virginia Supreme Court of Appeals in Buffalo Mining Co. v. Martin, when a mineral owner’s activities cause a “substantial burden” - that it, where the gas producer’s activity “virtually destroys” the surface or is “totally incompatible with the rights of the surface owner” - then the gas lessee must show that its actions are authorized by an “explicit deed provision.” Because the waste pits involved in this case did not rise to that level, no such deed or lease provision was required.