Cabot Loses Drilling Rights Based on Deed Restriction; Homeowner Retains $99,225 Signing Bonus

On August 25, 2011, a Sullivan County judge enjoined Cabot Oil & Gas Corp. from drilling for natural gas under a residential subdivision, and barred the company from recovering the $99,255 signing bonus it paid to the homeowner for the rights to drill. At issue in the case was the Weiden Lake Community subdivision and homeowner Jeff Klansky’s 66-acre parcel. In July 2008, Klansky granted Cabot exclusive rights to “explore for, drill for, produce and market oil, gas and other hydrocarbons” on the parcel for a period of five years.

The plaintiffs in the case, the Weiden Lake Property Owners Association, sought to prevent the drilling by citing two provisions in a restrictive covenant contained in Klansky’s deed. The first allowed only residential, agricultural, and recreational uses on Klansky’s property, and the second prohibited commercial fishing, fee-based boat launching and “any other commercial uses” on the parcel.

Cabot Oil and Klansky argued that the first use restriction only applied to the type of residences that were permitted on the property and the second restriction referred only to commercial fishing and boating. But Justice James P. Gilpatric held that the “any other commercial uses” meant “all other commercial uses,” including natural gas exploration.

In permanently barring Cabot from “exploring, drilling, producing and marketing oil, and natural gas” from the parcel, Justice Gilpatric reasoned that Cabot was aware of the covenant and of the Property Owners Association’s opposition and therefore should have known that a restrictive covenant would preclude the agreement it reached with the property owner.

“[T]he evidence clearly demonstrates that Cabot, a sophisticated business entity, made a calculated and knowing decision to enter into the lease, approve title and pay the signing bonus with full knowledge” of the protective covenant and the opposition of the property owners’ association, according to Justice Gilpatric. “Therefore, it is not entitled to rescission of the lease under a mistake of law.”

Prior to the court case, Cabot had paid Klansky a $99,255 signing bonus for the rights to drill under the property. Justice Gilpatric ruled that Klansky was not required to return that bonus.

A copy of the full decision, Weiden Lake Property Owners v. Klansky, 3885/09, is available here: http://www.leagle.com/xmlresult.aspx?xmldoc=In%20NYCO%2020110819301.xml&docbase=CsLwAr3-2007-Curr