Natural Gas Exploration Not Allowed In the Suburbs
Corporate & Business Law on December 12, 2011
An oil and gas company was enthusiastic enough about the prospects for finding and bringing up natural gas on a particular piece of property that in addition to securing a lease from the property owner for exploration and drilling, it agreed to pay him a signing bonus of nearly $100,000. As you read this, you are likely to be picturing a scene from the Great Plains or a prairie in Texas, but think again. The property subject to the lease was in a residential subdivision in the northeast, complete with an array of typical restrictive covenants and a property owners association (POA) eager to enforce them.
To be accurate, the parcels in the subdivision were on the large side, ranging from 2 to 100 acres, and the leased parcel was about 66 acres. Still, it is a head-scratcher to comprehend how the company, which by all accounts was sophisticated and even knew about the restrictive covenants from the outset, thought it could actually turn part of a leafy subdivision into a site for extracting natural gas. The company’s explanation was that the restrictive covenants were loosely worded enough to allow for natural gas exploration. That explanation carried no weight with the trial court, which ruled in favor of the POA that the lot could not be used for that activity.
It is true that restrictive covenants generally must be construed most strictly against those seeking to enforce them. But that principle does not allow the plain language in a document to be ignored. One of the subdivision covenants said that properties in the subdivision could be used only for single-family homes or for agricultural and/or recreational use. No oil or gas exploration was contemplated in that covenant.
The other relevant covenant stated that there could be no commercial fishing enterprises, boat-launching facilities, or any other commercial uses. The oil and gas company apparently had pinned its hopes on a court’s reading these covenants as prohibiting only fishing and boat-launching activities on the 70-acre lake in the subdivision, but the clear language about “any other commercial uses” would have to have been ignored to get that result. The court declined to do so.
To add insult to injury, the court also refused to allow the oil and gas company to recover the large signing bonus that it had paid to the subdivision resident. The bonus had been paid under the lease, which described the bonus as nonrefundable. And the lot owner, who also knew about the restrictive covenants, had included a disclaimer in the lease about what uses were restricted on his property. The bonus was subject to the company’s “approval of title,” and there was no dispute that a company representative responsible for approving leases had been aware of the covenants but forged ahead anyway.
In the end, the POA won in having the covenants enforced, and the lot owner was an even bigger winner, getting a handsome sum essentially for nothing, as his lot was not subjected to natural gas exploration. As for the oil and gas company, it learned an expensive lesson: If you are hoping to make your fortune with a gusher in suburbia, learn all you can about applicable restrictive covenants, heed them, and go elsewhere.