“2 Sign or Not 2 Sign:” Which Statute of Frauds Governs Oil & Gas Leases?

by K&L Gates LLP
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In a recent decision, the Pennsylvania Superior Court resolved an open question of state law regarding which one of two alternative statutes of frauds apply to oil and gas leases, in the process making clear that for an oil and gas lease, only the grantor of the interest must sign.

In Nolt v. T.S. Calkins & Assocs., et al., ---A.3d---, No. 1214 MDA 2013, 2014 PA Super 141 (Pa. Super. Ct. July 7, 2014), the court concluded that the “general” Pennsylvania statute of frauds—rather than the statute of frauds in the Pennsylvania Landlord and Tenant Act—applies to oil and gas leases, such that their validity cannot be challenged solely on the basis that the lessee’s signature is missing.

The “general” statute of frauds in Pennsylvania applies to conveyances of interests in real property and requires that instrument be “signed by the party” granting the interest (i.e., by the grantor or, in the case of an oil and gas lease, the lessor). 33 P.S. § 1.

On the other hand, the Pennsylvania Landlord and Tenant Act requires that a lease of “real property” for a term of three years or more must be signed by “the parties making or creating the same” (i.e., the lessor and the lessee must sign), or the lease is one at-will only (and, thus, potentially terminable by either party at any time). 68 Pa.C.S. § 250.202.

Although oil and gas leases are universally understood to create an arrangement far different from that of a typical landlord and tenant, the commentary to the Landlord Tenant Act suggests that its version of the statute of frauds (as opposed the “general” statute) applies to leases of any “interests in land,” including “the right to extract oil, coal, stone, iron, ore, etc.”

In Nolt, the lessors invoked the statute of frauds in the Landlord and Tenant Act to challenge the validity of their oil and gas lease. They claimed that, although they signed the oil and gas lease, the statute of frauds in the Landlord Tenant Act requires that both the lessor and lessee sign (the lessees had not signed the lease at issue, as is typical of many oil and gas leases.).

The Superior Court rejected the lessors’ claim and concluded that the “general” statute of frauds applies to oil and gas leases. The court reasoned that “an oil and gas lease, despite the use of the term ‘lease,’ actually involves the conveyance of property rights[.]” The Court noted that the law in Pennsylvania “unequivocally establish[es] that rights to oil and gas are to be treated as transfers of estates in property and not leaseholds.” Because the lessor signed the instrument granting the oil and gas rights to the lessee, the lease satisfied the applicable statute of frauds despite the fact that the lessee had not signed it.

At this point, the Superior Court’s decision forecloses the use of the statute of frauds as a basis for challenging the validity of an oil and gas lease as long as the lessor signed it. If the lessors seek appeal of the decision to the Pennsylvania Supreme Court, however, the industry will want to keep careful watch and consider friend of the court involvement on the proceedings, as a contrary result could call into question many thousands of leases in Pennsylvania that contain only the signature of the lessor.

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K&L Gates LLP
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