Legislation that would significantly expand landowner protection in oil and gas leasing transactions was recently approved by the Pennsylvania State Senate. Senator Gene Yaw, the prime sponsor of the legislation, deserves recognition for his efforts to “level the playing field in favor of Pennsylvania landowners” when leasing their land for natural gas development.

The legislation that was passed consists of three bills that each address a separate landowner concern.

Senate Bill 1236

SB 1236 is designed to allow the lessor under an oil and gas lease to inspect the relevant records of the lessee oil and gas company to verify that royalty payments have been properly paid. There is widespread concern among landowners that some gas companies have improperly deducted post-production costs to reduce landowner royalties. However, landowners who have these concerns are faced with the daunting task of verifying exactly how the gas companies have artificially inflated the post-production costs.

Some landowners have had the foresight to include a clause in their lease that allows the lessor to audit the books of the company to check the accuracy of royalty calculations; but absent this lease provision the only recourse available to the lessor may be to file a lawsuit and seek the records in the discovery process.

The purpose of SB 1236 is to allow all Pennsylvanians who have leased their gas rights to check the company records to verify that royalty payments are correct. The bill provides that a landowner may make a written request for inspection of records for any leased property from which the landowner has received royalties in the last three years prior to the request. Within thirty days of receiving the request the lessee must designate a time and place for the inspection and provide supporting documentation of the payment information. A request for information may be made once every twelve months.

The initial iteration of this legislation allowed the lessor to “inspect the records” of the lessee oil and gas company. The final version passed by the Senate changed that verbiage to “inspect the supporting documentation of the lessee” for the relevant payment information. “Supporting documentation” is then defined to consist of invoiced amounts for the services provided, but does not include the composition of the fees charged by an unaffiliated third party.

It appears that this change in the language of the bill may significantly restrict the information that a lessor could access under this law. It’s easy to imagine that a gas company facing a landowner request for information could simply produce invoices that match the deductions as shown on the royalty check stub and then inform the landowner that’s all the lessee is required to provide. Hopefully the Pennsylvania House of Representatives will recognize this deficiency in the bill and add verbiage to expand the scope of the documentation that the landowner can access.

Senate Bill 1237

In many cases the landowners who are receiving royalty payments are realizing a financial benefit that is a totally new experience for them. Even though they may have suddenly seen their royalty payments dramatically reduced by deductions for post-production costs, the money is still more than they have ever had before. Sometimes these landowners are fearful that if they “rock the boat” the gas company may just exclude their land from production entirely. These fears may be fed by company landmen who threaten repercussions if the landowner pushes the gas company too far.

SB 1237 has been drafted to alleviate these fears. The bill provides that no lessee may retaliate by ceasing development or production or take other reprisals against a lessor because the lessor takes a good faith action. “Good faith action” is defined as a claim, demand or complaint intended to secure rights granted under a lease or to determine whether the terms of a lease are being complied with, including, a request for an accounting of any costs, taxes or fees allowed to be deducted from royalty payments, that is made without malice or ulterior motive and which the lessor reasonably believes to be valid and legally correct.

In order to prevail under this act, the lessor must show by a preponderance of the evidence that its action meets the definition of a good faith action and that a retaliatory action was taken by the lessee after it became aware of the good faith action of the lessor.

On the other hand, a gas company can defend against an action by proving by a preponderance of the evidence that the action by the lessee was authorized under the terms of the lease or occurred for legitimate business reasons.

If the court finds in favor of the lessor it may order the lessee to pay reasonable damages and impose a civil fine of up to $1,000 per day for each day of a violation.

Landowners may still be deterred from bringing an action under this section because if a court finds that the lessor has not brought a good faith action it may order the lessor to pay reasonable damages to the lessee. The addition of this section is unfortunate – although a landowner may reasonably believe her action is valid and legally correct, there’s no guarantee that a court will agree.

Senate Bill 1238

One of the issues sometimes faced by landowners who have signed a gas lease is uncertainty as to when an oil and gas lease has terminated. Even if a lease has clearly expired, there is often no notice of record to inform other leasing companies that the old lease is no longer in effect. SB 1238 is intended to provide a solution for this problem.

SB 1238 provides that within thirty days after the expiration, termination or forfeiture of an oil and gas lease the gas company shall record a surrender document in the office where the original lease is recorded. The proposed legislation includes a form to be used by the companies for recording the surrender document.

If a lessor believes a lease has expired but a surrender document has not been timely recorded, SB 1238 includes a form for a notice to be sent to the gas company by certified or registered mail requesting that the surrender document be recorded. If the requested surrender document is not provided for recording within sixty days, the lessor may file suit in the appropriate court to compel surrender of the lease, unless the company has provided a satisfactory reason why the lease should not be surrendered.

If the lessor is successful in the action to compel the surrender, the lessee is required to reimburse the lessor for the costs of the lawsuit including attorney’s fees.

This legislative proposal provides an effective solution for an issue that has proven to be a problem for many landowners who have signed leases for natural gas development.

What’s Next?

This trio of landowner-friendly bills was passed in the Pennsylvania Senate with broad bipartisan support. The bills will now move to the state House of Representatives where it is anticipated that they will also receive broad support. If approved by the state House, the bills will be presented to Governor Corbett for signature.

Despite the shortcoming discussed above, these bills are favorable for landowners and they should be supported by both Pennsylvania landowners and legislators.