The Ohio Supreme Court has ruled that a standard oil and gas lease form commonly used by producers in the state is valid and does not violate the rights of landowners, upholding state law that dates to the 19th century in a win for the industry.
In a unanimous decision, the justices affirmed the Seventh District Court of Appeals’ decision and concluded that lease forms labeled G&T (83), which are used by companies throughout the state, are not no-term, perpetual leases that lock up land indefinitely, ruling in favor of legacy driller Beck Energy Corp. The company, along with its partner XTO Energy Inc., had been fighting two groups of landowners over the leases, which were signed to explore for oil and gas in southern and eastern Ohio.
Had the high court voided the leases, it could have released hundreds of landowners from undeveloped lease agreements and would have cast doubt on similarly worded agreements that have been used for decades in the state.
“Ohio’s prior oil and gas law stretching back to the 19th century was being challenged,” Beck’s attorneys said after the Supreme Court ruled in their favor. “The validity of almost every oil and gas lease in Ohio was on the line. These decisions impact virtually every oil and gas producer who owns lease rights and/or is drilling in Ohio.”
At issue was whether the Beck leases contained proper primary and secondary clauses that required it to drill for oil and gas within the first 10 years of the lease and control land only after production has occurred. In September 2011, a group of landowners filed a lawsuit in Monroe County Common Pleas Court against Beck claiming they signed lease forms that allowed the company to control their land indefinitely without drilling and paying royalties if the company paid a few hundred dollars per year in rentals for the property. Beck argued those leases followed decades of precedent under Ohio law that allowed it to drill within 10 years of the lease and remain on the land as long as the company continued operations.
The following year, the lower court ruled for the landowners and declared the leases void as a violation of public policy against leases that have no end date. The landowners also had filed for class-action certification, alleging an estimated 700 people throughout the state had signed with Beck. The trial court granted class action and Beck appealed to the Seventh District Court of Appeals (see Shale Daily, Feb. 28, 2013)
The group was designated under Ohio law as one that did not require notification or a right to opt-out as is typical in class action cases. The Seventh District reversed the lower court’s ruling last year, declaring the leases valid again and granted an order freezing the leases until the case could be resolved by the Ohio Supreme Court on appeal by the landowners (see Shale Daily, Oct. 2, 2014).
The appeals court said Beck’s leases are not perpetual because they contain a primary term of 10 years within which to commence drilling. A secondary term also included in the lease provides for its indefinite duration after the 10-year period and “operates to extend the lessee’s rights under the lease.”
A family farm had also filed a request with the Supreme Court to prevent its lease from being frozen. The farm said it should have been notified of the class action and should not have been involuntarily included in it. The high court consolidated the farm’s complaint with the case against Beck. In a 5-2 decision last week, the court dismissed the farm’s complaint, concluding that it had an adequate remedy by way of intervention in the broader litigation against Beck. The court also found that the Seventh District had jurisdiction to freeze the leases until the matter was resolved.
The Supreme Court found that, among other things, the G&T (83) leases were not a violation of public policy. The justices said delay rental payments are limited to the primary term of a lease. They found that “capable of being produced” refers to whether a well, and not undeveloped land, is capable of producing and ruled that a lease’s dry hole provision only applies if drilling has occurred.
The Ohio Oil and Gas Association and six other oil and gas companies operating in the state had filed amicus briefs supporting Beck and the appeals court’s decision (see Shale Daily, Dec. 15, 2015).
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