As the saying goes, “cats have nine lives”.  It seems that oil and gas leases can compete with cats in that department.  The Northern District of West Virginia ruled on a Tyler County case (.pdf) a few days ago, saying that a lease needs a forfeiture clause or it will continue to exist, even if the Lessee doesn’t keep up it’s end of the bargain.  Anyone trying to negotiate a West Virginia oil and gas lease for yourself should make sure the lease includes a forfeiture clause.

The case, Cunningham Energy v. Ridgetop Capital, involved two corporations, about 190 acres of land, and a lease that required development within a specific time frame.  The Lessee was supposed to drill two wells within two years and more wells if those were successful.  The Lessee filed permits and did some preliminary site work, but didn’t drill any wells within the two year limit.

The companies went to court over it, arguing a number of points.  The one that people should be most interested in is regarding breach of contract and forfeiture.  The Court held that the Lessee had breached the contract or, in other words, that the Lessee had not met the requirements of one or more terms of the lease.

Since the Lessee had breached the contract, the Lessor argued that the Lease should no longer be valid, and the Lessor should be free to enter in to a new lease with another company.

The Court disagreed.  It stated that a breach of contract in an oil and gas lease did not automatically forfeit the lease.  It stated that the usual remedy for a breach of any contract is money damages.  It stated that in order for the lease to be automatically forfeit, there would have to be a clause in the lease stating that forfeiture was the correct remedy, and doing so in some detail.

The Court went on to award damages in the amount of several million dollars, which represented the back royalty amounts that would have been paid, and which would have to be paid back if wells were drilled and royalties paid in the future.

This means when you, West Virginia mineral rights owners, are negotiating a lease, make sure there’s a forfeiture clause in your favor.  If not, understand that you will only be able to get money damages in a breach of contract situation.  I suspect either one will make most people happy.  It’s just a bit jarring to expect that you will be able to get rid of a bad Lessee when they mess up, and then have the Court tell you otherwise.