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Ohio Appeals Court Upholds Lease Provision on Covenants

An appeals court in Ohio upheld a local court's ruling that an operator is not required to fully develop leased property, and disagreed with a landowner's demand that the undeveloped portion be surrendered and subsequently leased to other oil and gas companies.

In a 12-page ruling issued June 12, the Fifth Appellate District Court said an oil or gas lease that stipulates that there are no implied covenants, obligations, verbal representations or promises means an operator is under no requirement to reasonably develop the property.

At issue is an oil and gas lease that Bilbaran Farm Inc. signed with Professional Petroleum Services Inc. on May 12, 2003. The lease covered more than 275 acres in Brown Township, which is in Knox County.

According to court records, the lease did not specify how many wells were to be drilled on the property, but it did contain a provision that said the lease would terminate if the operation for a well had not been started on the property within 12 months. The driller had the option of deferring the start of operations in exchange for rental payments to Bilbaran.

But the lease also stipulated that "no implied covenants or obligations, or verbal representations or promises, have been made or relied upon by lessor or lessee supplementing or modifying this lease or as an inducement thereto." The court said that language ultimately doomed Bilbaran's lawsuit against Bakerwell Inc. and Crescent Oil & Gas LLC, which acquired the interest in the property beginning on Dec. 4, 2007.

"The language of this provision disclaims the implied covenant to reasonably develop the property," Judge Patricia Delaney wrote in explaining the court's decision. "Bilbaran Farm argues the failure to further develop the property is unfair and inequitable...[but] this is waived by the express disclaimer against an implied covenant to develop the property."

Judges John Wise and Craig Baldwin concurred.

Bilbaran filed suit against Bakerwell and Crescent Oil & Gas in Knox County Court of Common Pleas on Aug. 9, 2012, arguing that the three wells drilled on its property targeting the Clinton sandstone were insufficient, and stating that the farm wanted to lease the undeveloped portion of the property to other oil and gas companies. The county court dismissed the case on Oct. 25, 2012.

William Bringman, attorney for the plaintiffs based in Fredericktown, OH, told NGI's Shale Daily on Tuesday that he was unaware the appellate court had made a decision. He did not know if his client would appeal the ruling.

The case is Bilbaran Farm Inc. v. Bakerwell Inc. et al. (No. 12-CA-21).

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