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Ohio Judge: Landowners May Accept Better Leases

An Ohio judge has ruled that landowners who signed oil and natural gas leases with Chesapeake Exploration LLC have the right to accept better offers from competitors, as long as the original lease is in the primary term, drilling hasn't started and Chesapeake fails to match the offer.

The ruling by Court of Common Pleas Judge Richard Markus in two similar, but separate, cases in Carroll and Columbiana counties affects more than 100 landowners in both counties who signed three- to five-year leases with Chesapeake from 2008 to 2010.

"It's an important and favorable decision," said Lee Plakas, plaintiffs' attorney and managing partner of the Canton, OH-based law firm Tzangas Plakas Mannos Ltd. "Many farmers and other landowners entered into these leases with the understanding that if they received a better offer, they would have the right to submit that better offer and have it matched or be released from their lease."

In his ruling on Nov. 15, Markus said Paragraph 14 of the lease agreement gives landowners the right "to accept a competitor's offer that the developer-lessee [Chesapeake] declines to match only during the primary term and not during any extension of the primary term. The developer-lessee has that right of first refusal for a competitor's offer during the primary term, and for one year after all its other rights have expired..."

According to court records, 33 landowners filed suit against Chesapeake in Columbiana County on March 7 (Koonce et al v. Chesapeake Exploration LLC et al, No. 2012 CV 136). Fifteen days later, another 75 landowners sued Chesapeake in Carroll County (Coniglio et al v. Chesapeake Exploration et al, No. 2012 CVH 27102).

Plakas said landowners in both cases had signed leases with Chesapeake, which paid a signing bonus of between $5 and $50 per acre. Today, he said, signing bonuses in the emerging Utica Shale typically fetch $4,500-5,550 per acre, he said. In some instances signing bonuses paid $6,000, and in one case, $8,000/acre, he noted.

"If there's no drilling, then landowners should have the right to get a third-party offer from someone that is more interested, rather than just having their land tied up," Plakas said. "Under Chesapeake's argument, this land could be tied up for an 11-year period. That's contrary to the purpose of the efficient and effective use of natural resources and oil and gas resources."

According to Plakas, Chesapeake's position is that Paragraph 14 doesn't give landowners any rights to receive third-party offers; they must wait until the lease and all of Chesapeake's other rights have expired. He said the company believes Paragraph 14 "just allows them to monitor what activity and what interests there are in certain properties so they know what's going on. They would be better off with a satellite or an eye in the sky."

Plakas believes both sides will appeal to Ohio's Seventh District Court of Appeals in Youngstown. "As long as there are appeals going on, the landowners are going to appeal and say they believe they have the right -- at any time prior to the commencement of actual drilling operations, at any time during the initial primary term or any extension of the primary term -- to entertain and accept third-party offers."

Chesapeake holds nearly one million acres of leasehold in the Utica Shale but is trying to sell 337,481 acres to shore up its balance sheet (see NGI, Oct. 22). Four years ago, the company was the first major producer to unlock the unconventional potential of the Utica, a nearly spent conventional oil play.

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