Professional, Practical Legal Advice Since 1931 Chardon Law Office 440.285.2242
Cleveland Law Office 216.255.5431

RECENT COURT DECISIONS REGARDING OIL AND GAS LEASES AND THE OHIO DORMANT MINERAL ACT

Posted On: | Author: | |

In our June 25, 2015 blog we discussed the important decision that had just been rendered by the Ohio Supreme Court interpreting R.C. § 5301.56, the Dormant Mineral Act   (“DMA”).  In Dodd v. Croskey, 2015-Ohio-2362, the Court held that if a claim to preserve is filed by the mineral interest holder in the 20 years preceding, or within 60 days after, the surface owner’s service of a notice of intent to cause abandonment, this filing is sufficient to prevent the mineral interest from being deemed abandoned under the DMA.  We also noted that the Court had accepted for review a number of additional cases involving the DMA. Based on the Court’s decision in Dodd, we predicted that the Court would favor preservation of the rights of severed mineral interest holders and oil and gas lessees.

Since our last blog, the Ohio Supreme Court has decided three more DMA cases and accepted several additional DMA cases for review. On November 5, 2015, the Court issued its decision in Chesapeake Exploration LLC v. Kenneth Buell, 2015-Ohio-4551.  The Court held that recording an oil and gas lease is a title transaction that prevents the severed mineral rights from being deemed abandoned under the DMA.  The Court also held that the unrecorded expiration of an oil and gas lease did not qualify as a title transaction, and so did not preserve the rights of a severed mineral interest holder.

On January 21, 2016, the Supreme Court decided two consolidated cases, Hupp v. Beck Energy (now known as Hustack v. Beck Energy) and State ex rel. Claugus Family Farm v. Seventh District Court of Appeals, 2016-Ohio-178.  Both cases involved leases entered into with Beck Energy. Beck Energy had utilized a similar lease in approximately 700 oil and gas leases in Monroe County, one of the more active counties for shale drilling and, in the past, for shallow well drilling.  The plaintiff landowners were attempting to terminate Beck Energy’s leases, arguing that the leases were void as perpetual leases.  The landowners also contended that the leases contained implied covenants to develop the land for drilling and because Beck Energy had not started drilling on most of the leased properties, these leases had lapsed.  The Court upheld the leases, finding that they clearly delineated a ten year primary term during which development had to occur to avoid expiration.  Perhaps more importantly for the future of lease litigation, the Court held that the delay rental clause of the lease only applies during the primary term of the lease, which is ordinarily a term of months or years. The Court stated that the secondary term cannot be extended by paying delay rentals, which would be equivalent to shut-in rentals had a well been drilled.

The Court also found that there was no implied covenant to reasonably develop the land since the leases required development during the ten year primary term and specifically disclaimed all implied covenants.  The Court ignored the Monroe County trial court’s determination that language in the lease providing for litigation of express and implied covenants negated the disclaimer of implied covenants.

Interestingly, the Court denied the argument of Beck Energy that the leases should be tolled during the pendency of the Ohio Supreme Court litigation.  The Court noted that they found the leases to be valid, but did not explain why tolling would not be appropriate.  Presumably the Court expected that Beck Energy, after it received a favorable decision from the Court of Appeals, would have actively developed some of the leases while the case was pending in the Supreme Court.

Decisions on the DMA by the Supreme Court are pending in several other cases. Corban v. Chesapeake Exploration LLC and Walker v. Shondrick-Nau were argued in May and June, 2015, respectively.  Eight other cases have been stayed pending the results in Corban and Walker.  A few cases were stayed pending a decision in Eisenbarth v. Reusser, argued in November, 2015.  That case should decide if there is a rolling or fixed 20 year look back period under the 1989 DMA and whether the act is prospective in nature.

The Eisenbarth, Corban and Walker cases should resolve most of the remaining DMA issues that are litigated in Ohio.  In Corban the Court should determine whether the 2006 version or the 1989 version of the DMA applies to claims that are asserted after 2006, but that rely on the 1989 version in asserting that severed mineral rights automatically revested in the surface owner prior to the 2006 amendments without any further action being taken by the surface owner.  If the 1989 DMA still applies, Eisenbarth will determine the critical dates to analyze if the severed interest was deemed abandoned.  Corban will also decide whether the payment of a delay rental during the primary term of an oil and gas lease is a title transaction extending a severed mineral interest holder’s rights under the DMA.

In Walker, there are six propositions of law, the most important of which is whether the 2006 version of the DMA is the only law to be applied after its June 30, 2006 effective date, or whether the parties first must determine whether the 1989 version or the 2006 version of the DMA applies after June 30, 2006, in determining if a legal abandonment took place.  Likewise, the Court has been asked to determine if a property owner must take some affirmative action to merge the mineral rights with the surface interest prior to the adoption of the 2006 DMA and if not, whether the 2006 DMA is the only law to apply.

The all-important look back question should also be decided in Walker.  If the 1989 DMA remains applicable after adoption of the 2006 DMA, when is the 20 year look back period calculated on the date a lawsuit is filed or is there a one-time fixed look back three years after the 1989 version went into effect?  This is different than the Eisenbarth assignment of error.

Three other points have been raised, one of which may not be decided but will be discussed in more detail here when the Walker decision is rendered by the Supreme Court.

On a side note, in September 2015 the Ohio Oil and Gas Commission issued an order addressing unitization under R.C. § 1509.28.  The Commission upheld a 200% interest charge on the reluctant landowner regarding capital expenditures, and did not grant a signing bonus made available to other parties in the pool.  This decision is not favorable to landowners.  There may be more on this issue as future orders are litigated in the Tenth District.