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4th Circuit: WV gas lease not terminated because lack of production

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The 4th Circuit Court of Appeals recently affirmed a West Virginia federal court's decision that said a gas company's lease was not terminated because of a lack of natural gas production or missed or late rental payments.

Martha Wellman and Charles Wellman filed the action against Bobcat Oil & Gas Inc. in the U.S. District Court for the Southern District of West Virginia.

According to court documents, Ida May Dean Purdue executed the lease with Chartiers Oil Company in May 1933. This lease allowed Chartiers to extract oil and gas from Purdue's Wayne County mineral estate, documents state.

In this lease, there is a requirement that the lessee would pay the lessor a "flat-rate rental of $75 each three months in advance for the gas from each and every well drilled on said premises … to be paid each three months thereafter while the gas from said well is marketed and used."

The Wellmans bought the rights from Purdue in 1978 and Chartiers sold its right to PIP Petroleum, which later sold these rights to Bobcat.

In their action, the Wellmans allege Bobcat didn't pay certain quarterly rental payments due before 2008 and also say there are late or missed payments due in 2008 and after.

Court documents say the Wellmans stopped cashing rental checks after the fourth quarter of 2007 and the Wellmans say certain rental payments owed after that time are either missing or late.

Also, the Wellmans contend that one quarterly payment is late or missing and that means all the following payments would be at least a quarter late.

The Wellmans said the lease expired on its own terms because Bobcat stopped producing natural gas during certain times.

However, Bobcat cited its check register, saying all rental payments have been paid. Bobcat also says state law mandates a mineral lease providing a flat-rate rental payment instead of production royalties can't be terminated because of a lack of production.  

The federal court said the lease did not expire and it was not breached.

Then came the appeal. The Wellmans said the lease was automatically terminated because Bobcat didn't produce natural gas in paying quantities and didn't give them rental payments in a timely manner, which they say is required in the lease.

Addressing Bobcat's royalty argument, the Wellmans said even though the lease provides a "flat-rate" rental rather than royalties, the lease still requires production.

"Because the lease provides for the payment of a flat-rate rental to the Wellmans, the quantity of production — whether high, low, or zero — is utterly irrelevant for determining whether the secondary term of the lease expired, again assuming the payments are, in fact, made," the 4th Circuit opinion states.

The 4th Circuit released its May 7 unpublished per curiam opinion, which is not binding precedent in the circuit.

"Under the longstanding West Virginia law, the quantity of production is irrelevant to the expiration of the secondary term of a mineral lease that provides for ‘flat-rate' rental payments," the opinion states. "Moreover, the Wellmans' claim that Bobcat forfeited the lease by failing to tender certain rental payments fails on the grounds of ratification and principles of equity."