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Ohio Appeals Court Rules on Oil and Gas Lease Issues

The Fifth District Court of Appeals issued a ruling addressing several issues concerning the interpretation of oil and gas leases. The lessee of several oil and gas leases created a 145-acre drilling unit utilizing a small portion of one of the leases. The lessor of the lease claimed that this violated the implied covenant of reasonable development. The court analyzed the oil and gas lease and enforced a provision that generally waived any implied covenants under the lease. The decision noted that Ohio courts have consistently enforced express provisions in leases that disclaim implied covenants. The court also held that the “reasonable prudent operator” standard applies to a claim of bad faith inclusion of the portion of the leasehold in the unit. As applied to the lessee the inclusion of the small portion of the leasehold in the unit was necessary to comply with set-back requirements imposed by the State and therefore a prudent operator would include the leasehold acreage in the unit.

The court also held that the lessors’ acceptance of royalty payments did not preclude them from asserting claims that the lessee had breached the lease in other respects.