Last year, Susquehanna County landowner Herbert Kilmer sued ElexCo Land Services Inc. and Southwestern Energy Production to invalidate his lease. The reason? He said that by deducting drilling costs from his royalty payments, his payments fell below Pennsylvania’s law that a minimum one-eighth share of royalties are guaranteed to the landowner. A Susquehanna County judge ruled against the landowner and in favor of the energy companies. Other people started filing lawsuits, so the energy companies asked the PA Supreme Court to take up the matter. The Supremes did, and today they also ruled in favor of the energy companies:
Pennsylvania’s high court sided Wednesday with the natural gas industry in a dispute with landowners who had sought to invalidate the leases they signed before the Marcellus Shale rush intensified and drove up land values.
In a 6-0 decision, the Supreme Court upheld a Susquehanna County judge’s ruling that validated lease agreements that subtract drilling costs from the calculation of landowners’ natural gas royalties.
Justice Max Baer, who wrote the court’s decision, noted that the term “royalty” and the method of calculating a one-eighth share is not defined by the state’s Guaranteed Minimum Royalty Act. However, he cited various texts on the industry that say a royalty is paid from the net amount remaining after deduction of certain production and well development costs.*
This case will now force similar pending cases to be settled or dismissed. Landowners beware: (1) There is no such thing as a “standard” contract, and (2) Always have an attorney review a lease agreement first.
*BND.com (Mar 24) – Pa. justices side with gas industry over landowner