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August 30, 2016 Articles

After-Acquired Title in Oil and Gas Leases and Estoppel by Deed

The Pennsylvania Supreme Court applied estoppel by deed to an oil and gas lease where the owners had record notice of a reservation of mineral rights.

By Ryan van Steenis – August 30, 2016

The Pennsylvania Supreme Court, in Shedden v. Anadarko E. & P. Co., L.P., 136 A.3d 485 (Pa. 2016), unanimously affirmed a trial court’s grant of summary judgment in favor of Anadarko for the transfer of oil and gas rights to an entire 62-acre parcel of land. The plaintiffs lost under a doctrine called estoppel by deed.

In July 1990, the Sheddens purchased 62 acres of unimproved land from Colgate University. Colgate had previously purchased the property from Viola Beck, and public records show Beck paid $0 for the property, indicating she likely inherited it. Before Beck owned it, the Baxters owned the property. In 1894, in a properly recorded deed, the Baxters reserved one-half of the oil and gas rights in the property. So, when the Sheddens purchased the property, one-half of the oil and gas rights remained with the Baxters (or their estate) and the other half remained with the Sheddens. But the Sheddens were unaware that the Baxters had previously reserved one-half of the oil and gas rights.

In May 2006, the Sheddens entered into a five-year lease with Anadarko for the oil and gas rights to the property. Because the Sheddens mistakenly believed they owned 100 percent of the rights, they expressly warranted title in all of the oil and gas rights to Anadarko. In return, Anadarko agreed to pay the Sheddens a bonus payment of $80 per acre on the full 62 acres. But when Anadarko discovered the Baxters’ reservation of one-half of the oil and gas rights, it agreed to pay an $80 bonus on only 31 acres, because the Sheddens owned only one-half of the oil and gas rights on the 62 acres.

In 2008, the Sheddens filed a motion to quiet title on the Baxters’ reservation of one-half interest in the oil and gas rights. The trial court granted that motion, extinguishing the Baxters’ reservation. Thus, as of 2008, the Sheddens actually owned all of the oil and gas rights in the property they thought they owned in 2006 when they warranted the same to Anadarko.

In March 2011, under the terms of the lease, Anadarko extended its term for the entire 62 acres. The Sheddens then filed an action seeking a declaration that the lease pertained only to oil and gas on 31 acres of the property. Essentially, the trial court was tasked with determining what oil and gas rights the Sheddens actually conveyed in the 2006 lease in light of their express warranty of the oil and gas rights in the property. The Sheddens could not have conveyed the Baxters’ reserved interest in 2006, because they did not own it until 2008, at which time the warranty of title in the lease with Anadarko became accurate for the first time. But the terms of the lease showed that the Sheddens intended to convey all oil and gas rights in the property, even though they owned only one-half of those rights.

The trial court granted summary judgment to Anadarko under the estoppel by deed doctrine, which states:

[W]here one conveys with a general warranty land which he does not own at the time, but afterwards acquires the ownership of it, the principle of estoppel is that such acquisition inures to the benefit of the grantee, because the grantor is estopped to deny, against the terms of his warranty, that he had the title in question.

Id. at 490. In other words, the Sheddens purportedly conveyed to Anadarko in 2006 a property right they did not own (the Baxters’ reserved oil and gas rights) until 2008, when they acquired title to the Baxters’ reserved rights. But when Anadarko renewed the lease for an additional term in 2011, the Sheddens could not assert they did not own the Baxters’ oil and gas rights.

The Pennsylvania Supreme Court affirmed the trial court’s grant of summary judgment in favor of Anadarko, concluding that the Sheddens’ after-acquired interest in the Baxters’ reserved oil and gas rights inured to Anadarko’s benefit under the terms of the lease and that the Sheddens’ express warranty estopped them from arguing otherwise. The Supreme Court also analyzed whether the intermediate appellate court correctly affirmed the trial court’s order considering that the Sheddens initially received a bonus payment for one-half of the agreed upon sum, i.e., for 31 acres and not 62. The Supreme Court concluded that this did not defeat Anadarko’s summary judgment because, consistent with the terms of the lease, it effectively halved the bonus payment to the Sheddens in proportion to the oil and gas rights they actually owned, i.e., from $80 to $40 for 62 acres. The Supreme Court also held that Anadarko did not need to prove detrimental reliance, distinguishing estoppel by deed from equitable estoppel: “In contrast, the doctrine of estoppel by deed precludes one who conveys an interest in land that he does not own, but subsequently acquires the title thereto, from denying the validity of the first conveyance.” Id. at 492.

In states like Pennsylvania, mineral rights are frequently reserved, generally owned on a fractional basis by a number of parties, and conveyed by ambiguous deeds decades before a contemplated transaction like that between the Sheddens and Anadarko. Estoppel by deed (1) upholds the integrity of the terms of recorded documents, giving express effect to their terms and removing any subjective intent the parties may have had in relation to those documents; and (2) provides an effective method to resolve disputes between competing conveyances and claims on historical deeds. Estoppel by deed provides a powerful remedy to lessees, which in the context of leases for mineral rights would generally mean the more powerful or sophisticated party in the exchange.

The Sheddens could have taken a number of steps to avoid the application of estoppel by deed. First, a deed search and investigation of the parcel in the local county clerk’s office would have revealed the Baxters’ reserved oil and gas rights. If the Sheddens had undertaken such an investigation and discovered the Baxters’ existing reservation of rights in the recorded deed, any lease they entered into with Anadarko could have be made subject to a quiet title action related to that reservation. Second, the Sheddens could have made their representations and warranties conditional until Anadarko’s landman finished its investigation into the chain of title. Finally, the Sheddens could have modified the lease to reflect the Baxters’ reservation after Anadarko learned of it. As the Supreme Court noted, had the parties modified the lease, the estoppel by deed doctrine would have been moot. But unmodified, the court had no option but to rule in favor of Anadarko under estoppel by deed.

Keywords: energy litigation, oil and gas, mineral lease, estoppel by deed, reservation of rights, bonus payment, deed search, Pennsylvania, Anadarko, landman

Ryan van Steenis is with Ajamie LLP in Houston, Texas.

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