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Sixth Circuit reverses ruling that oil and gas leases terminated following initial five-year primary term

12.29.14 written by

In Kelich v. Hess and Griffith v. Hess, two related cases consolidated upon appeal, the Sixth Circuit Court of Appeals reversed decisions from two district court judges finding the subject oil and gas leases to have expired by their own terms. At issue in both cases was the interplay between the annual delay rental provision and the primary term; specifically, whether the delay rental provision permitted the lessee to make delay rental provisions in the optional five-year extension of the primary term and if such payments were permitted under the lease, whether the lessee must make a delay rental payment in order to delay drilling during the sixth year of the lease in addition to the extension payment.

The Sixth Circuit found the lessee may continue to delay drilling during the second five-year period of the primary term by making annual delay rental payments and found that a delay rental payment was to be paid at the end of the fifth year (to delay the drilling during the sixth year) in addition to the amount lessee must pay in order to extend the primary term of the lease for a second five-year period (in this instance, equal to the original signing bonus). In its analysis of the apparent failure of the lessee to tender a delay-rental at the end of the fifth year of the primary term, the Sixth Circuit found such failure to be insufficient to terminate the lease, however stating “this apparent ‘error in paying’ cannot result in ‘forfeiture’ until [the lessee] receives notice and has an opportunity to correct the error,” based on the 30-day savings clause included in the subject lease. 

In a separate opinion, concurring in part, dissenting in part, Judge White agreed with the majority’s reversal of the district court’s ruling, however, she asserted the majority opinion was broader than necessary given the procedural history of the two cases. Judge White wrote that she believes “that the majority has ruled on the meaning of the contract provisions prematurely,” and further believes “the majority also gives more life to the notice provision than the parties may have intended.” 

Given the holdings in the above case, it is encouraged that those with interests in oil and gas leases carefully examine any and all delay rental or additional bonus payments tendered to ensure the same comports with the terms of the oil and gas lease and the Sixth Circuit’s holdings. 

Kelich, et al., v. Hess Corporation, et al., 2:13-cv-00140, 2014 WL 7331014 (Dec. 23, 2014)

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

If you have any questions concerning this client alert, please contact Attorney Gregory W. Watts at 330-497-0700.