Superior Court Breathes New Life Into Guaranteed Minimum Royalty Act
Second, the panel suggested that when reviewing a royalty clause under the GMRA, the reviewing court must look beyond the literal text of the clause and assess whether the effect of entire lease will result in a royalty being less than 12.5 percent. The Southwestern Energy court warned that "a lease that contains a clause, which, when read alone, facially provides the lessor with at least the minimum royalty is nonetheless noncompliant with the GMRA, if, when read as a whole, it fails to guarantee that minimum royalty."
This language implies a different approach than espoused by the Supreme Court in Kilmer. Under this new test, a royalty clause that provides for a 12.5 percent royalty but nonetheless authorizes the deduction of certain post-production costs may violate the GMRA because when read as a whole, the lease fails to guarantee the minimum statutory royalty of 12.5 percent.
When read in conjunction with the court's emphasis on the term net royalty, the Southwestern Energy decision could represent a significant change in Pennsylvania oil and gas jurisprudence. Both statements may reflect an emerging judicial preference toward re-establishing, and perhaps expanding, the protective sphere of the GMRA.
Such a preference, however, is at odds with Kilmer. As such, both landowners and gas drillers alike should carefully monitor the aftermath of Southwestern Energy, as well as the ongoing political debate in Harrisburg. Only time will tell if Southwestern Energy was the beginning of a new and dramatic judicial trend or simply a bump in the road.
Robert J. Burnett is a director at the Pittsburgh law firm of Houston Harbaugh and serves as the chair of the firm's oil and gas practice group.