In Heasley v. KSM Energy, Inc. the Pennsylvania Superior Court recently affirmed a trial court’s decision reiterating the distinction between those flat-rate royalty oil and gas leases which are dependent on production of oil or gas, and leases in which actual production is not necessary to maintain the lease. The Superior Court found that a flat-rate royalty lease that has definite durational language (“twenty years . . . and as long thereafter as oil or gas . . . is produced therefrom . . .”) cannot be maintained beyond the stated duration solely by the payment of a flat-rate royalty. The Superior Court distinguished Heasley from the Pennsylvania Supreme Court’s decision in T.W. Phillips Gas and Oil Co. v. Komar, where the express language of the lease did not contain definite durational language, and allowed for the payment of a flat-rate royalty regardless of whether oil or gas was actually produced.

What happened in Heasley?

Heasley involved two 1942 leases granting KSM the right to use the property for oil and gas exploration, pipelines, and other activities related to the exploration. The language of both leases read that “[i]t is agreed that this lease shall remain in full force for the term of twenty years from this date, and as long thereafter as oil or gas, either of them, is produced therefrom by the party of the second part, his heirs, executors, administrators, successors, or assigns.” The lessor (Mr. Heasley) brought an action against KSM seeking a determination that both leases terminated from lack of production.

KSM admitted that neither oil nor gas was being produced pursuant to the leases. However, KSM argued that (1) the leases continued so long as quarterly royalties were paid, and (2) Heasley’s acceptance of the royalty checks estopped him from claiming that the leases were terminated. Heasley disagreed, claiming that actual production was required to maintain the leases.