Ohio Supreme Court: Form Oil and Gas Lease Not Void as Against Public Policy

January 29, 2016

Earlier this week, in an unsurprising but nevertheless meaningful decision, the Ohio Supreme Court unanimously ruled that the standard form oil and gas lease at issue was not “perpetual,” and thus was not void as against public policy. Although the Supreme Court’s sound reasoning assures Ohio oil and gas lessees that the validity of their leases was never truly in question, a decision to the contrary would have had catastrophic implications.

State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals , 2016-Ohio-178, involved a popular form oil and gas lease known as a “Form G&T (83) lease,” which stated:

  1. This lease shall continue in force and the rights granted hereunder be quietly enjoyed by the Lessee for a term of ten years and so much longer thereafter as oil and gas or their constituents are produced or are capable of being produced on the premises in paying quantities, in the judgment of the Lessee, or as the premises shall be operated by the Lessee in the search for oil or gas and as provided in paragraph 7 following.
  2. This lease, however, shall become null and void and all rights of either party hereunder shall cease and terminate unless, within ____ months from the date hereof, a well shall be commenced on the premises, or unless the Lessee shall thereafter pay a delay rental of ____ Dollars each year, payments to be made quarterly until the commencement of a well. A well shall be deemed commenced when preparations for drilling have been commenced.

The particular lease in question required defendant-lessee Beck Energy to commence a well on the leased premises within twelve months or pay $1 to $5 an acre per year in delay rentals.

The landowner plaintiffs argued that the lease was void as against public policy, contending that it was “perpetual” in nature given that it failed to state that development must commence during the primary term. Thus, plaintiffs argued, Beck could have indefinitely extended the lease beyond the initial ten-year term even without developing the property, by subjectively determining that oil or gas could be produced in paying quantities and continuing to pay delay rentals. Plaintiffs further argued that their lease was subject to implied covenants, and that Beck had breached the implied covenant to develop.

The Monroe County Court of Common Pleas granted summary judgment in favor of the landowners, who then moved to certify a class of up to 715 affected individuals, which was also granted. Beck appealed both decisions to the Seventh District Court of Appeals, and moved the trial court to toll the class’s lease terms. Although the Seventh District affirmed class certification, it overruled the trial court’s decision regarding the validity of the lease and the existence of implied covenants. The trial court declined to toll the leases of all class members except the named plaintiffs, which, following another Beck Energy appeal, the Seventh District altered, tolling them all from the date Beck first moved for the same. Plaintiffs appealed.

The Supreme Court of Ohio affirmed the Seventh’s District’s decision regarding the lease.

The Supreme Court held that delay rentals could be paid only during a lease’s primary term, and thus could be paid only for up to ten years under the lease at issue. Thus, the lease could not be extended indefinitely through the payment of delay rentals alone. Nor could the phrases “capable of being produced” and “in the judgment of Lessee” serve to extend the lease indefinitely, absent production, because those phrases specifically related to actual production from a well and not merely the possibility thereof. Accordingly, the Court held that the Form G&T (83) lease is not perpetual because it cannot be extended beyond its ten-year primary term without development of oil or gas, and is not void as against public policy as a result. Further, because the lease requires that development commence within ten years, and contains specific language disclaiming implied covenants, the Supreme Court agreed that no implied covenant to develop exists thereunder.

Notably, the Court also denied Beck Energy’s motions to toll the terms of the leases. Thus, as we have previously advised in the context of Pennsylvania oil and gas leases, lessees may wish to include explicit tolling provisions in their leases.

As noted, this decision was not unexpected, but is nonetheless added reassurance to parties to Ohio oil and gas leases, reaffirming that Ohio oil and gas leases will be construed according to their terms and consistent with well-settled industry norms.