Extension of Implied Marketing Covenant and Post-Production Cost Allocation to In-Kind Oil and Gas Leases

Introduction

In Francis Kaess v. BB Land, LLC (No. 23-522), the Supreme Court of West Virginia considered two certified questions concerning “in-kind” oil and gas leases: (1) whether a lessee owes an implied duty to market the lessor’s share when that share is not physically delivered, and (2) whether post-production costs can be deducted from an in-kind royalty absent explicit contractual language. Justice Trump, concurring, agreed with the majority’s “yes” answers but wrote separately to explain his reasoning at length. The parties, Francis Kaess (lessor) and BB Land, LLC (lessee/producer), dispute how the lessee must handle lessor royalties and expenses under an in-kind lease.

Summary of the Judgment

Justice Trump’s concurrence establishes two key principles:

Implied Duty to Market: Even under an in-kind royalty clause, if the lessor does not physically take possession of the product, the lessee has an implied covenant to market the lessor’s share, unless the lease expressly states otherwise.
Post-Production Cost Allocation: The default rule requiring the lessee to bear exploration, production, marketing, and transportation costs (as articulated in Wellman and Estate of Tawney) applies equally to in-kind leases. Any deviation—i.e., deduction of post-production expenses from the lessor’s royalty—must be spelled out with particularity in the lease.

Analysis

Precedents Cited

Wellman v. Energy Resources, Inc. (210 W. Va. 200, 557 S.E.2d 254 (2001)): Recognized an implied covenant to market under proceeds leases; Syllabus Point 4 laid down the default rule on post-production cost allocation.
Estate of Tawney v. Columbia Natural Res., LLC (219 W. Va. 266, 633 S.E.2d 22 (2006)): Reaffirmed Wellman and adopted Syllabus Point 10 requiring express lease language to allocate post-production costs.
SWN Production Co. v. Kellam (247 W. Va. 78, 875 S.E.2d 216 (2022)): Most recent reaffirmation of Wellman and Tawney.
Daniel M. McClure, Developments in Oil and Gas Class Action Litigation (2001): Definitions and treatise-level discussion of “in-kind” royalties.
Byron C. Keeling, Fundamentals of Oil and Gas Royalty Calculation (54 St. Mary’s L.J. 705 (2023)): Outlined options for handling royalties when lessor does not take in-kind delivery.
U.S. Constitution, Art. I, §10 and W. Va. Constitution, art. III, §4: Prohibitions on impairing the obligation of contracts, grounding the freedom to contract.

Legal Reasoning

Justice Trump’s analysis rests on two pillars:

Implied Covenant Based on Lease Silence: Courts have long held that unless a lease negates the duty, a lessee must market produced hydrocarbons. The key distinction for in-kind leases is whether the lessor actually takes physical possession. If the lessor does not, the lessee must market the product on the lessor’s behalf under an implied covenant.
Default Contractual Interpretation: When leases are silent about cost allocation, courts apply default rules derived from the implied marketing covenant. Under Wellman and Tawney, lessees bear all post-production expenses unless the lease contains precise language specifying which costs the lessor will share and how those costs are calculated.

He emphasizes the constitutional protection of contractual freedom, noting that courts do not rewrite leases but interpret them. Default rules apply only where express terms are absent.

Impact

This decision has significant implications:

Drafting Clarity: Parties must include clear, detailed provisions in in-kind leases if they wish to avoid implied marketing duties or to share post-production costs.
Litigation Forecast: Future disputes over in-kind royalties will focus on whether lessors took physical delivery and on the presence (or absence) of explicit cost-allocation clauses.
Industry Practice: Operators and mineral owners may revise standard form leases to address these issues proactively and reduce reliance on default judicial rules.

Complex Concepts Simplified

In-Kind Royalty: A royalty paid by giving the lessor their share of actual hydrocarbons, rather than cash based on sales proceeds.
Implied Covenant to Market: A legal duty, not expressly written into a lease, that obligates the producer to sell the product and remit the lessor’s share.
Post-Production Costs: Expenses incurred after extraction—such as processing, transportation and marketing—that may be deducted from royalties only if the lease authorizes it explicitly.
Certified Questions: Legal queries submitted by a lower court to the state’s highest court seeking authoritative interpretation of state law.

Conclusion

Justice Trump’s concurrence in Francis Kaess v. BB Land reinforces and extends West Virginia’s default rules governing oil and gas leases to in-kind royalty provisions. Absent explicit contractual language, lessees must market the lessor’s share when it is not physically taken, and lessees must bear all post-production expenses. The decision underscores the freedom to contract—urging careful drafting of lease terms—while preserving judicial authority to interpret silent contracts through established default covenants and cost-allocation rules.