Broome County, NY Landowners Sue Energy Companies that Try to Extend Expired Leases with “Force Majeure” Clause

force majeureMany landowners in the Broome County, NY area who signed gas leases years ago are now receiving letters from the energy companies holding those leases that the landowner is “locked in” to the terms of the lease even though the original term has now expired. Why? The legal term is “force majeure,” which roughly means “due to circumstances beyond our control—the fact that New York State continues to prevent drilling—you have to stick with us for a while longer.” Because this involves contracts and interpretation of the terms of those contracts, it’s now in the hands of lawyers, or heading in that direction.

Case in point: A small group of landowners in the Town of Colesville (Harpursville), NY area filed a federal lawsuit last fall.

[Attorney Robert] Jones…represents the Harpursville and Colesville landowners who filed suit against EnerVest and the Belden & Blake Corp., which had sent force majeure letters to a number of people who signed $3-an-acre leases in 2000. Chesapeake had eventually purchased the leases and moved to intervene on behalf of the defense.

That case will be in federal court in Binghamton in early March, when Jones said he will argue the leases are void because Chesapeake did not make an additional $3-an-acre payment after the initial 10-year term expired.*

Jones’ legal argument will be that in order to invoke the force majeure clause of the contract, Chesapeake should have made another payment to the landowners and did not. Therefore, the lease is now null and void.

The counter argument from Chesapeake is, a contract is a contract, and they are well within their rights to hold people to their word.

Brian Grove, senior director of corporate development for Chesapeake, said the company has “taken reasonable and legal measures to extend the terms of many of our leases in New York state.”

“These measures are based upon the original lease agreements, which can allow for extensions of the original lease term for various reasons,” Grove said in a statement.

“Chesapeake would much rather be drilling wells and creating value for New Yorkers, especially in the Southern Tier where economic development is much needed and for the whole state where clean energy is much needed.

“Regrettably, the current anti-gas environment, fueled by rumor and misinformation, prevents that at this time,” Grove added.*

But lawyer Scott Kurkoski from Binghamton, who represents a number of area landowners, points out:

“Some of these leases are 10 years old and signed at a time when Chesapeake and other companies had no idea they would be drilling in the Marcellus Shale.”*

Many Broome County landowners are now consulting with lawyers about their next moves, and some are banding together to file lawsuits against energy companies to prevent them from extending contracts via force majeure.

This is one of those “wisdom of Solomon” kinds of situations. There are strong arguments on both sides, and ultimately it will come down to what can be proven in the courtroom.

MDN’s opinion: If Chesapeake and other energy companies want to continue to “roll the dice” with New York State and gamble on when (and if!) drilling will begin in the state, they need to share that risk with landowners. Most of the leases signed years ago were for very little money precisely because the energy company did not know or expect to be able to drill in the Marcellus Shale formation—the leases were signed with the expectation of drilling in other layers. Seems to MDN that while you can enforce the letter of the law, this situation violates the spirit of the law. This could have easily been prevented if Chesapeake and others simply recognized that conditions and expectations have changed, and offered a higher renewal price to landowners—give landowners several thousand dollars per acre to renew, and revise the royalty rates up to the level of recent deals. There will be plenty of money to go around if and when drilling begins. So if you want to gamble on NY, pay landowners a reasonable rate.

*Star-Gazette (Feb 16) – Lawyers fighting gas company efforts to extend leases

  • Jim,

    Another key argument on the side of the landowners, which I can’t believe is so rarely invoked or even mentioned: Remember that New York State has not (yet) prevented drilling to sandstone or limestone — vertically or horizontally — in all this time of white knuckles over shale gas.

    Those more conventional sedimentary formations would have been the only targets these natural gas prospectors were seriously contemplating at the time they bought these low-cost leases. Shale gas did not start to motivate lease takers and lease signers until maybe 2007 or 2008.

    So, if the E&P’s weren’t willing or able to get it done in sandstone or limestone within those primary terms, then those leases have expired — just like thousands of leases that have come and gone in all the decades since 1859.

    No hard feelings, but the landowners should be free to remarry — now that they have a better idea what they’re sitting on.

  • Gregg DeBartolo

    Remember, these are leases. Follow the New York Property Laws.

  • Well said Andy. Not a lot I can add except Amen!

  • Precambrianbrock

    There seems to be even less justification for invoking Force Majeure than Andy points out. At least as I understand it, technically NYS had not banned high volume fracing in the shales until Paterson issued Executive Order #41 last December 13th. Previously there was an informal(?) moratorium on GEIS for such wells, but any company was free to apply for a site-specific EIS — not that I know of any company that ever did. Therefore while drilling shales was impractical, it was not impossible and therefore Force Majeure does not apply. DEC uses the same rational to claim that they have not banned drilling in the watersheds of the NYC reservoirs (that any company could apply for a EIS), so the state should have to support the landowner’s rights. EO #41 will be in force only until the final SGEIS is issued, probably this summer. Therefore at most drillers could claim a six month extension of the primary lease term. Now I’m a geologist, not a lawyer, so I could be wrong about this.

  • PCR,

    That’s an argument only a lawyer, or a bureaucrat, could love.

    The fact of the matter is — from NY’s original de facto moratorium issued July 23, 2008, running until Ex-Gov. Paterson’s formal moratorium issued Dec. 11, 2010 — NYS was using all its powers of obstruction to deny industry (and shale gas owners) any meaningful right to develop this particular form of a privately owned natural resource.

    Unlike a lot of ordinary innocent people, I think your average judge could probably see through all the smoke and mirrors surrounding the illusory, site-specific environmental impact study option.

    But look how effective it’s been!

    Everybody chose to believe that NYS’s regulatory rewrite was only a *temporary* holdup. But the delays have just kept piling up, and we are now past the 2.5-year mark. This is essentially the same trick as the regulatory entanglement the Delaware River Basin Commission bureaucrats are slowwwwly rolling out in that watershed, right at this very moment.

    How long before the anti-drillers say, “We need more time”? (Or have they said it already?) In the end, the path of least resistance for politicians is always more delay.

    Let me ask instead: How long do landowners have to wait (always temporarily), before they realize they’ve been snookered out of their property rights? While these landowners are so patiently, and so trustingly, waiting, I think they would be better off also getting a legal challenge rolling. After all, what if it takes longer to get reasonable regulations in place, than to get a judge to decide the value of what the State of New York, and the DRBC, have basically already taken away?

  • Anonymous

    Good. But that’s assuming the government action creates FM in a lease, rather than a contract. This argument is in play as we write.

  • Natural Gas is a fuel that will solve so many of our current problems (including putting a dent in global warming), and yet…….The lunitics are running the assilum. Cabot clearly spilt fraq fluid on the surface, yet are oddly being rewarded with less competition…..Our current lawsuit friendly nation, allows anyone to sue, even if they are completly in the wrong (I know a guy in Pa who sued to have his water fixed, when the problem had nothing to do with Natural Gas, etc). You’ve also got the cold fact, that NY has been fairly selfish, it gets fuel (gas and coal), from other states, and pays no environmental cost or risk. The truth is that natural gas fraq-ing, is most environmentaly friendly way to obtain energy, yet, for NY-ers it’s the one that is in their backyard. I graduated and have an engineering degree from 20+ years ago, if you think any of these are new issues you are mistaken. Nothing is new (except perhaps the fraq fluids), irronically, even the discussions are the same. I hate to sound strange, but I think the coal industry might be the biggest source of the resistance for the last 20 years (lol). Chesapeake has leases which should have expired after 10 years, and they are immorally forcing owners to rent to them, etc. It’s unfortunat that our current society does everything based on “$”, as this is truely the best thing since sliced bread, if done correctly, cautiously, etc.

  • 1) unlike tenant-leases, they are presented via the tenant. So, any vague nature is is favor of the land owner.
    2) unlike a tenant-lease, failure to pay does not release the lease (ouch, gotcha….)…You need a release, even if they did not pay for 20 years.
    3) unlike a tenant-lease, the payday comes when other activity starts (drilling, or pipeline). These leases, are implied intent to do other activity – or – end the lease after the primary term.
    4) Like the tenant lease, it’s very difficult to get rid of a bad tenant.
    5) Unlike a tenant-lease, the tenant can get real tangile benefits from prolonging lawsuits, etc. He doesnt have to win, if he can delay any action for a few years.
    6) Unlike a tenant-lease, the landowner is way-undereducated, underrepresented compared to the tenant who wrote and presented the contract.
    7) arbitration can be forced with gas lease disputes…..The tenant can force arbitration, and extend the lawsuit for quite a while. Since each party hires their own arbitrator, the outcome will be lack of an outcome which just delays legal action.

  • The argument of “force majure” is nonsense. Any contract which is not “legal” is therefore, “null-and-void”, via NY law (or so, I thought). You cannot have a “legal” contract for killing, or larceny, etc.
    It is quite clear in these contracts that there is no obligation to drill, therefore, there is no foul.
    It’s also immoral to claim force-majure just because you do not like the current procedure!
    That’s what NY has, (which Pa should have had more of), is procedure. Claiming that the current slow procedure in approving hydrolic fracking is “force-majure”, is as valid as claiming that nuclear implosion not being currently approved for drilling is also a valid force-majure.

  • Gregg DeBartolo

    We were talking FM. But to your points, you can replace “unlike” with “like” in all comments. Many landowners groups have their own form gas lease. Leases can be terminated for failure to pay the consideration; retail lease rent can be based entirely on “activity” only, too (rent based on a percentage of sales); Arbitration can be removed from a lease. My point was these are mineral rights leases not contracts; thus, FM from contract law is a different kettle of fish.

  • Once again Andy hits the nail squarely on the head. Bottom line is, the longer NY goes on without drilling, the more likely it will never happen. If NY does not allow it soon (this year)–landowners should unite and sue to gain the right to allow drilling to start. I’m all for safety and “doing it right” but frankly, this has gone on long enough. It’s time to start drilling in NY.

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  • Anonymous

    Would you sell your daughter for a good price?