Ct Rules Fracking Barred by Subdivision Covenants

November 29th, 2011

In Weiden Lake Property Owners Association, Inc. v Jeff A. Klansky and Cabot Oil & Gas Corporation, 2011 N.Y. Misc. LEXIS 4081 (Sup Ct-Sullivan Cty 8/18/11), a New York state court ruled that a property owner was barred from leasing his property for natural gas and exploration because those activities were barred  by  restrictive covenants set forth in the subdivision plat that applied to all property owners within the subdivision.

In this case the Weiden Lake Community Property Owners Association was formed in 1999 for the purpose of overseeing and managing the subdivision and maintaining the Weiden Lake and dam. Each parcel within the community is subject to protective covenants appearing in the subdivision plat as well as in the deeds issued by the original developer.

In 2007, defendant Klansky purchased lot 25. After learning that oil and gas companies were soliciting oil and gas leases from homeowners in the Community, the POA Board passed a Resolution dated May 31, 2008 affirming that the Protective Covenants in the Weiden Lake subdivision prohibited commercial uses of the properties. The Resolution was sent to all property owners on or about June 2, 2008. In July 3008, defendant Klansky entered into a lease that granted defendant Cabot the exclusive right to “explore for, drill for, produce and market oil, gas and other hydrocarbons” from lot 25 for a period of five years. As consideration for entering into the lease, Klansky received a signing bonus of $99,255. Paragraph 13 of the lease addendum provided that Klansky made no representations as to the “permitted use(s) of the subject property and/or the legality of the use(s) contemplated in the annexed Oil and Gas Lease.”

After learning of the lease, the POA filed its action seeking summary judgment that the activities authorized by the lease were prohibited by the restrictive covenants. In particular, the plaintiff argued the lease was prohibited by the following restrictions:

  • Restrictive covenant “b” providing that the premises conveyed shall be used for single family homes, of not less than 1,000 square feet of living space; agricultural and/or recreational use only;
  • Restrictive covenant “o” providing that no commercial fishing enterprise or fee based boat launching facilities or any other commercial uses will be allowed on the premises; and
  • Restrictive covenant “t” providing that the covenants are to run with the land and shall be binding on the developer and its successors and assigns.

In response, both Klansky and Cabot argued that covenant (b) pertained solely to the requirement for one single family home per lot and that covenant (o) should be read strictly as only prohibiting commercial fishing and boating uses. Moreover, Klansky asserted that the purpose of the POA was to protect the assets of the corporation, which were the lake, and dam and that since his property was between 1 ½ to 2 miles from Weiden Lake, the activity contemplated by the lease would not impact the lake or the dam.

The court ruled that the relevant covenants restrict all parcels in the subdivision regardless of proximity to the lake or the dam. Regarding covenant (b), the court said the language unambiguously restricted the use of the parcels in the Community to single family residential, agricultural or recreational use.

Cabot had also asserted that at the time of executing the lease, it was not aware of the Resolution. However, the court said that knowledge of the Resolution was immaterial because the Resolution merely reiterated the restriction on commercial use of the property set forth in the recorded plat and referenced in the Klansky deed. In addition, the court said there was sufficient evidence that Cabot was aware that the POA considered drilling for gas to be a violation of the protective covenants prior to entering into the lease. Accordingly, the court ruled that the POA was entitled to summary judgment declaring that the uses set forth in the lease between Klansky and Cabot were prohibited by the Restrictive Covenants.

The court then turned to the cross-claims filed by the defendants. Cabot asserted two cross-claims against Klansky seeking rescission of the lease and return of the $99,255 signing bonus. On the first cross-claim, sought rescission of the lease and return of the signing bonus if he court prohibit the lease, the lease should be declared void for lack of consideration or mistake of law. However, the court said there was evidence clearly demonstrating 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 Covenants and the POA’s position. Therefore, the court held that Cabot was not entitled to rescission of the lease under a mistake of law.

Cabot’s second cross-claim alleged fraud in the inducement for Klansky’s alleged failure to disclose the POA Board Resolution prior to entering into the lease. However, the court found that there was sufficient evidence that Cabot knew the POA Board considered the covenants to prohibit the commercial uses of oil and gas exploration and that the lease addendum contained the disclaimer that Klansky made no representations as to the “permitted use(s) of the subject property and/or the legality of the use(s) contemplated in the annexed Oil and Gas Lease.” Accordingly, the court denied Cabot’s cross-claims and ordered that the defendants were permanently enjoined from engaging in any of the activities contemplated by the lease.

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