Specify lease terms when drafting contracts

If a company suspends work during a contract dispute, it’s not necessarily entitled to extend the contract term to make up for the missed time.

In a recent court case, a landowner signed a five-year lease with a gas drilling company. Halfway through the lease, the landowner filed a lawsuit challenging the validity of the lease. He claimed the company fraudulently induced him to sign the lease by saying he couldn’t get a higher payment from any other company, but he later discovered that other landowners received higher payments.

While the lawsuit was pending, the company stopped work on the drilling site.

The company filed a counterclaim to “toll” the term of the contract, which would stop the clock on the five-year term until the case was decided. If the court upheld the lease, the company could add the length of time during which it suspended work to the end of the lease term.

The trial court said the lease was valid but refused to grant the term extension. The company appealed to the Pennsylvania Supreme Court, arguing that landowners’ meritless lawsuits to seek higher royalties rob drilling companies of their lease rights.

The Supreme Court ruled against the company, noting that the extension didn’t apply because the landowner didn’t breach the contract by filing a lawsuit. It was the company’s choice not to work on the site while the case was pending. Thus, the court upheld the original lease term.

The court reminded the company that it could have avoided the situation by writing a tolling provision into its contract.

Any company drafting a contract to do business for a specified length of time should consider including a tolling provision to stop the clock if a lawsuit or other factor delays work. — Frank Kosir, Meyer Unkovic & Scott, fk@muslaw.com.