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