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Can an Oil and Gas Lease be Rejected in Bankruptcy?

Posted By Cliff Tuttle | October 24, 2011

No. 740

Babst Calland, a Pittsburgh law firm with a substantial energy law practice, has posed a great question on their blog.  Can a landowner reject an oil and gas lease as an executory contract under Section 365 of the Bankruptcy Code?

But why would a landowner want to do so?  At the present time, owners of properties that have a traditional gas lease with a shallow well are unable to lease the Marcellus Shale gas. This is because these leases traditionally involved “all of the oil and gas”, even though no one contemplated a Marcellus well would be drilled at the time the lease was entered.  If the lease could be rejected in Bankruptcy Court, or so the thinking goes, then the landowner would be free to contract for the richer bonuses and royalties that have become the hallmark of Marcellus leases.

In Pennsylvania, however, there is a problem with this strategy. An oil and gas lease is considered to be a conveyance of the oil and gas estate, subject to the reversion of whatever remains when the lease is terminated. However, no court has weighed in on the question yet.  It is also conceivable that the answer could be different in other states where the Pennsylvania Rule that the mineral estate may be severed by lease from the fee is not  followed.

Marcellus Shale has been a game changer in the marketplace and it promises to to be one in the law as well.  

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CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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