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Aug. 20—A federal appeals court has upheld a decision that allowed leases between landowners and oil and gas companies to expire following New York's effective state ban on hydraulic fracturing.
The U.S. Court of the Appeals for the Second Circuit ruled that a federal district court's March 31 decision in favor of landowners was correct, affirming the court's opinion that ‘force majeure' provisions in oil and gas leases did not serve to extend the leases' terms.
The case affects leases between more than 30 landowners in Tioga County, N.Y., and three energy companies: Inflection Energy LLC of Denver, Victory Energy Corp. of Austin, Texas, and Megaenergy Inc. of Ithaca, N.Y.
“My clients are very pleased with the decision,” said Robert R. Jones of Coughlin & Gerhart LLP, who represented the landowners. “This should be the end of the case as far as we're concerned.”
The ongoing litigation had made it difficult for landowners to refinance or sell their properties because they were “encumbered by these oil and gas leases,” which expired in 2012 because there had been no oil or gas production for 10 years, Jones told Bloomberg BNA Aug. 20. Now they are finally “out from under these encumbrances.”
The landowners sued in federal court in 2012 after the energy companies tried to extend the leases beyond their initial five-year terms. Landowners maintained their leases had expired. The companies argued that the state's ban on fracking caused drilling delays and triggered “force majeure” provisions in the leases, thus changing the leases' “habendum” clauses and extending the terms of the leases.
Force majeure is a legal term that refers to events that occur outside the control of the parties of a contract, such as an act of God. The habendum clause generally sets the duration of a lease.
The U.S. District Court for the Northern District of New York ruled in favor of the landowners that the leases had expired.
Upon the industry's appeal, the federal court on July 31, 2014, called on the New York State Court of Appeals to decide two questions: whether New York's moratorium on hydraulic fracturing was a force majeure event, and whether the force majeure clause modified that habendum clause to extend the lease's primary terms.
New York's highest court ruled on March 31 that force majeure could not extend the primary term of the lease, while declining to rule on the question of whether fracking constituted a force majeure event. The court said the question had become “academic” given that force majeure did not force an extension of the lease.
The energy companies asked for the New York Court of Appeals to reconsider its decision and were denied.
The Aug. 19 opinion affirmed the district court's decision and reasoning, effectively closing the case.
Thomas S. West of the West Firm PLLC, who represented Inflection Energy, told Bloomberg BNA in a phone call Aug. 20 that the court's decision “was the end of the line” for the case and that the energy companies would not try to take the case to the U.S. Supreme Court.
West said the case centered on “pretty straightforward contract language” and the courts' interpretation about the force majeure provisions was “unique and hard to accept.”
“It just demonstrates that it's hard for the oil and gas industry to get a fair shake in New York,” he said.
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