Update – Private Transfer Fee Covenants

In Fall of 2010 we published a short article concerning private transfer fee covenants (a covenant attached to real property that require a fee to paid to a third party upon each re-ale of the property).  A bill was introduced last fall before the Pennsylvania legislature (SB 1481), which would prohibit such private transfer fees as being against public policy however; did not pass the House before the end of the session.  We will keep you posted if the bill is reintroduced this year.

Oil and Gas Leases – certain delayed rentals clause held to be unenforceable by PA Superior Court.  

The Court found in favor of the property owner/plaintiffs in Hite, et al v. Falcon Partners, et al, 2011 Pa. Super. 2 (2011), in connection with a dispute over an oil and gas delayed rental provision.  In the Hite case the oil and gas lease at issue had a primary term of one year with a delayed rentals clause that provided for payments of $2 per acre per year for an indefinite period.  The gas lessee never commenced development or drilling at the site for a 5 year period after the oil and gas lease was signed.  After 5 years the property owners were approached by parties offering good financial incentives in return for the oil and gas lease rights to the property.  The owners sent the original lessee an option to match the offers they were receiving, and then when they received no response sent confirmation to the lessee that the original lease was terminated.

The lessee attempted to enforce its lease under the $2 per acre per year delayed rentals clause, which read, “Lessee has the right to enter upon the Property to drill for oil and gas any time within 1 year from the date hereof and as long thereafter as oil or gas…is produced from the Property, or as operations continue for the production of oil or gas, or as Lessee shall continue to pay Lessors $2 per acre as delayed rentals, or until all oil and gas has been removed from the Property, whichever shall last occur.”  In finding for the property owner, the Court noted that ‘royalty 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,” citing Jacobs v. CNG Transmission Corp, 332 F. Supp. 2d 759, 781 (WD Pa. 2004), and that a lease will not be construed to create a perpetual term unless the intention is expressed in clear and unequivocal terms.  In addition to the lack of clarity as to a definitive term, the Court noted the long-established rulings grounded in policy considerations that, under ‘no term’ leases, a lessee could not postpone development indefinitely by a payment of delay rentals.   In its opinion the Court recited that historically, customary delayed rentals clauses were not effective unless development had a least commenced during the primary term.  The delay clauses were intended to enable the lessee thereafter to complete is removal of the minerals or gas from the site, not to create a perpetual or indefinite inchoate right.  The Court stated that “if the lessee desired to enjoy the benefit of a longer period of permitted inaction, it should have drafted the leases to include a longer primary term.”

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Alfred Maiello

Alfred C. Maiello is the founding member of MBM and has represented area school districts as solicitor for 50 years. He counsels school districts and educational institutions on leading developments in school law and guiding them through their day-to-day and long-term challenges.