Not So Fast! My Oil and Gas Lease Does What?
Many property owners lose sight of the fact that an oil and gas lease is a two-way contract. There are many legal duties that the landowner owes to the operator. One duty that is typically overlooked is the title warranty, where the landowner guarantees to the operator that the landowner owns and can lease all of the oil and gas rights to the property.
A recent case from the Pennsylvania Supreme Court, Shedden v. Anadarko E&P Co., L.P., demonstrates the pitfalls of a general title warranty. The Sheddens entered into an oil and gas lease with Anadarko for their property. Anadarko subsequently discovered that under an 1894 deed, prior owners retained one-half of the oil and gas rights on the property. The Sheddens brought a lawsuit to acquire the missing one-half interest of the oil and gas rights on the property. A court ordered that the Sheddens owned all of the oil and gas rights. Anadarko subsequently exercised an option to extend the term of the lease and paid the Sheddens the amount owed under the original lease. The Sheddens rejected the payment, contending that the lease covered only one-half of their interest in the tract, and that they were free to lease the other half.
The Pennsylvania Supreme Court ruled for Anadarko, concluding that the lease covered 100% of the oil and gas, including the half-interest obtained by the Sheddens through the litigation after the lease was signed. The lease contained a warranty clause that the Sheddens had “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 Anadarko. The Court explained that where a lease contains such a clause, the after-acquired property is subject to the lease.
A title warranty is often considered to be meaningless boilerplate language that appears in almost all leases. This case demonstrates, however, that this clause has real consequences. Rarely does a landowner truly understand what interest he owns in the minerals under his property. It is common sense that you should not promise something that you cannot deliver. Too often, however, landowners do just that by signing an oil and gas lease with a general warranty. The title warranty is a provision that you can, and should, negotiate in your lease, limiting what title you guaranty.
