Pennsylvania Real Estate Article Published by “The Legal Intelligencer”/May 2014/Harper J. Dimmerman, Esquire

Lessor Beware: Estoppel by Deed in Oil and Gas Leases Comes to Pennsylvania

ALM 2014. Republication without express written consent is unauthorized.

 By: James M. Lammendola and Harper J. Dimmerman

      “Where a party conveys land to which he had no title, or a defective title, and afterwards acquired a good title, that title immediately inures to the benefit of the grantee.” Dixon v. Fuller, 46 A. 553, (Pa. 1900). This legal principle, enunciated by the Pennsylvania Court more than century ago, represents the essence of the doctrine of estoppel by deed. Still alive and well, this same doctrine, was applied in a notable Superior Court decision, Shedden v. Anadarko E&P Company, L.P, 2014 PA Super 53 (filed March 14, 2014). The result was that Anadarko E & P Company (Anadarko) subsequently secured the rights to more acreage that the Shedden’s actually owned at the time the oil and gas lease agreement was executed. This case illustrates the critical need of a grantor to know the exact extent of his or her ownership interest when conveying an ownership or leasehold interest.

       The facts are relatively straightforward. On May 23, 2006, Leo and Sandra L. Shedden (Shedden) leased oil and gas rights to Anadarko. The property is located in Tioga County and the Shedden’s represented the parcel to be 62 acres. The term of the lease was five years, with one option to extend for another five years. The lease stated that “[i]f Lessor owns less than all of the oil and gas rights in the premises, Lessor shall be entitled to only a share of the rentals and royalties equivalent to the proportion of such oil and gas owned by Lessor.” Id. Critically, the also lease contained the following covenant of warranty provision: “Lessor covenants and agrees that . . . Lessor has full title to the premises and to all the oil and gas therein at the time of granting this Lease, and forever warrants title to the leasehold estate hereby conveyed to Lessee, that Lessee shall have exclusive, full and quiet possession of the premises . . .” Id.

     Upon the execution of the contract, Anadarko remitted a bonus payment to the Shedden’s for 62 acres. In short order, the land agent for Anadarko learned that the Shedden’s only had title to 31 acres. An 1894 deed was discovered in the names of Ezra and Emma Baxter that had reserved to them one-half of the subject oil and gas rights. Subsequently, Anadarko sent a reduced bonus payment for 31 instead of 62 acres. Two years later, the Shedden’s moved to quiet title on the Baxter’s reserved interest; the lower court granted the relief on July 20, 2008. On March 31, 2011, Anadarko sent a check representing an extension payment, with the amount calculated based on all 62 acres. The Shedden’s refused to cash the extension payment, contending that it amounted to an overpayment since the 2006 lease was for 31 acres.

          On October 21, 2011, the Shedden’s commenced litigation against Anadarko, in an effort to obtain a declaratory judgment regarding the issue of whether the underlying 2006 lease was restricted to 31 acres. Anadarko eventually moved for summary judgment, arguing estoppel and estoppel by deed. Shedden’s position was that they lacked the ability to lease the entire 62 acres because they did not own 62 acres when the 2006 lease was executed. They also contended that the initial bonus payment (for 31 acres) amended the lease. The trial court granted Anadarko’s summary judgment motion and the instant appeal ensued.

         In considering the parties’ arguments, theCourt focused on the well-settled equitable doctrine of estoppel by deed. As previously noted in Dixon v. Fuller, supra , when a party conveys defective title and subsequently acquires good title, the grantee immediately is possessed of good title. Dixon holds when “one conveys land with a covenant of warranty against all lawful claims and demands, he cannot be allowed to set up against his grantee, or those claiming under him, any title subsequently acquired by him by purchase or otherwise.” The Court also cited Hennebont Co. v. Kroger Co., 289 A.2d 229, 233 (Pa. Super. 1972) which held that “[w]here one leases property which he at such time does not own and afterwards acquires ownership of such property and then attempts to repudiate the lease, he is estopped from denying the lease on the grounds that he did not have the power to lease the property at the time of the lease.”

             In footnote 3, the Court observed that this is the first Pennsylvania appellate court to apply estoppel by deed in an oil and gas lease dispute. While recognizing that pronouncements of sister states are not binding in Pennsylvania, the court noted holdings by the Supreme Courts of Oklahoma, Greenshields v. Superior Oil Co. 233 P. 2d 959 (1951)  and Texas Duhig v Peavy-Moore Lumber Co. 144 S.W. 878 (1940) that recognize estoppel by deed in the context of oil and gas lease disputes.

          Essentially the covenant of warranty in an oil and gas lease has the same legal effect as a warranty in a special or general warranty deed. Consequently, theCourt was not persuaded by the argument that the initial payment based on 31 acres somehow altered the terms of the lease, The provision in the lease which envisaged the possibility of a lesser payment commensurate with a lesser ownership interest had no effect on Anadarko’s rights, given the breadth the warranty.

          As energy giants such as Anadarko continue to explore for natural gas in Pennsylvania’s Marcellus Shale, our courts may continue to examine the jurisprudence other energy producing states. The consequences are great under the application of this doctrine for unsuspecting landowners. Lessors of land with natural gas deposits, or any minerals, would be well-served to closely craft the language of their leases to exclude any after-acquired property. A lease with limiting language similar to that of a quitclaim deed would serve to limit the scope of the lease should a lessor subsequently learn that his ownership interest is greater than he realized.

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Harper J. Dimmerman is an Adjunct Professor at Temple University’s Fox School of Business. His office represents clients in various litigation and real estate law matters and he may be reached via e-email at hdimmerman@llfnow.com or telephone 215-545-0600.

James M. Lammendola is an Assistant Professor at Temple University’s Fox School of Business who was in private practice for twenty years. He may be reached via e-mail at james.lammendola@temple.edu or telephone 215-204-4124.