Middle District of Pennsylvania holds lessor is bound by change of ownership provision, lessee properly extended lease

In a case of first impression in Pennsylvania, Judge Matthew Brann of the United States District Court for the Middle District of Pennsylvania held that an extension payment made by a predecessor-in-interest of the lessee to a predecessor-in-interest of the lessor was sufficient to extend the lease, where the lessee did not have notice of the change in ownership as required by the lease.

In Danko Holdings, LP v. EXCO Resources (PA), LLC, the lease at issue provided that the lessee was not bound by a change in ownership “until furnished with such documentation as Lessee may reasonably require.”  The original parties to the lease made several assignments of interest, but neither the lessors nor their successors provided the lessee or its successors with notice of the change in ownership.  The plaintiff, Danko, was a successor of the lessor.  Danko sought a declaration that the lease had expired by its own terms because the predecessor of defendant EXCO made the extension payment to the original lessors who, at the time of the payment, had already assigned their interest.
Judge Brann held that because EXCO and its predecessors had not been provided with notice of the change in ownership, the payment made to the original lessors was sufficient to extend the lease under the change in ownership provision.  As the issue was novel under Pennsylvania law, Judge Brann relied on authority from other state and federal courts, as well as prominent oil and gas treatises, to conclude that change of ownership clauses are valid features of oil and gas leases and are strictly construed.  Moreover, Judge Brann held that constructive or actual notice of the change in ownership will not obviate a change of ownership clause.  The plain language of the lease required Danko or its predecessors to provide documentation of the change in ownership.

Judge Brann's opinion.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Michael Gaetani (michael.gaetani@nortonrosefulbright.com or 724 416 0400) from Norton Rose Fulbright's Energy Practice Group.