The Supreme Court of Appeals of West Virginia recently issued a memorandum opinion interpreting a reservation of oil and gas “royalty.” The result of the Court’s holding is consistent with long standing West Virginia case law regarding oil and gas severances.
In Haught Family Tr. v. Williamson, No. 19-0368, 2020 W. Va. LEXIS 248 (Apr. 20, 2020), the Court interpreted a 1907 deed that reserved, “one half of all the royalty of oil (which royalty shall not be less than the usual one-eighth), and one half of the proceeds of all gas which may be produced from said tract of land…” The Court ultimately affirmed the circuit court’s decision, interpreting the 1907 deed as reserving a 1/2 non-participating royalty interest (“NPRI”). In reaching its decision, the Court stated that it relied upon Davis v. Hardman, 148 W. Va. 82 (1963) and Paxton v. Benedum-Trees Oil Co., 80 W. Va. 187 (1917) to ascertain the intent of the parties as expressed in the deed. Citing to Davis, the Court indicated that the 1907 deed’s use of the phrase “when produced” evidenced that the parties intended to limit the interest reserved to instances where oil and gas was actually produced. To construe the 1907 deed as reserving an in place interest would require regarding the words “when produced” as meaningless. The Court further implied that the deed’s use of “when produced” rendered the deed unambiguous.
The Petitioner argued that the circuit court failed to construe the deed as of the time of the deed and reservations’ creation in 1907, and contended that the Court should analyze the deed as the Supreme Court would in 1907. See Syl. Pt. 2, Oresta v. Roman Bros., Inc., 137 W. Va. 633 (1952). However, the Court emphasized that its’ role, as stated in Davis v. Hardman, is to ascertain the intent of the parties as expressed in the deed. The Court further indicated that the reservation in question was similar to the reservation interpreted in Davis, and was executed around the same time as the Davis reservation. As a result, the Court held that the deed in question reserved a 1/2 NPRI.
The reservation in Davis v. Hardman had notable distinctions from the 1907 deed, and the Davis court relied upon this distinct language in its analysis. The deed at issue in Davis reserved, “the oil and gas royalty, when produced, in and under said land, but said second party, his heirs and assigns, to have the right to lease said land for oil and gas purposes and to receive bonuses and carrying rentals,” and was interpreted as reserving an NPRI. In its analysis, the Davis court listed the distinguishing characteristics of NPRIs and in place interests in oil and gas:
(1) Such share of production is not chargeable with any of the costs of discovery and production; (2) the owner has no right to do any act or thing to discover and produce the oil and gas; (3) the owner has no right to grant leases; and (4) the owner has no right to receive bonuses or delay rentals. Conversely, the distinguishing characteristics of an interest in minerals in place are: (1) Such interest is not free of costs of discovery and production; (2) the owner has the right to do any and all acts necessary to discover and produce oil and gas; (3) the owner has the right to grant leases, and (4) the owner has the right to receive bonuses and delay rentals.
The Court indicated that the intent of the parties as expressed in the deed was clear when read in light of these characteristics. The Davis deed specifically conveyed all rights to lease and receive bonuses or “carrying” (delay) rentals. A conveyance of such rights is directly contradictory to an in place reservation. The Davis court relied heavily on these characteristics and the deed’s specific conveyance of leasing and bonus rights in its analysis. Although the Davis court observed that a reservation of oil and gas “when produced” supported an NPRI reservation, its analysis did not focus on this language as implied by the Court in Haught.
The Court in Haught Family Tr. v. Williamson issued only a memorandum opinion due to the lack of novel issues of law. Although the opinion does not identically mirror the analysis in Davis v. Hardman, it remains valid law as to this particular case. The reservation language analyzed in Haught is typical of NPRI reservation language used throughout West Virginia from the 19th century to present. The result of the Court’s holding remains in line with prior West Virginia cases, and generally follows typical interpretation practices of title examiners.
The Pennsylvania Supreme Court recently accepted the appeal of Mitch-Well Energy, Inc. (“Mitch-Well”) in SLT Holdings, LLC v. Mitch-Well Energy, Inc. on the issue of whether Mitch-Well effectively abandoned its leases by failing either to produce oil or gas or pay required minimum rental payments to the landowners. In 2019, the Pennsylvania Superior Court affirmed the trial court’s determination that Mitch-Well abandoned its leases due to the lack of production and payments.
The leases, executed in 1985, cover two tracts in Warren County, Pennsylvania, and contain provisions requiring Mitch-Well to drill a certain number of wells on the parcels and make yearly minimum payments to the lessors. The leases also contain a provision stating that the leases will continue for so long as Mitch-Well determines that oil and gas can be produced in paying quantities. From 1996 through 2013, wells drilled under the leases failed to produce in paying quantities and Mitch-Well neglected to make the minimum payments are required by the leases, prompting the landowners to seek judicial determination that Mitch-Well abandoned the leases.
On appeal, the Supreme Court will consider Mitch-Well’s argument that in its good faith determination, the wells were productive even though the trial court failed to take testimony on this issue. The Supreme Court asked Mitch-Well and the landowners to address Aye v. Philadelphia Co. and Jacobs v. CNG Transmission Corp., indicating that the Court may consider whether the leases survive both the automatic termination due to the non-payment of royalties and whether Mitch-Well abandoned the leases during the 16 years of non-production. This is an opportunity for the Court to provide additional clarity on Pennsylvania law relating to cessation of production and lease abandonment and termination.
Tags: Cessation of Production
, Land and Leasing
, Lease Abandonment
, Lease Termination
, Marcellus Shale
, Natural gas
, Oil and gas drilling
, Payment of Royalties
, Shale gas
On Friday, March 9, 2018, Governor Jim Justice signed West Virginia Senate HB 4268, known as the “Cotenancy Modernization and Majority Protection Act” into law, effective July 1, 2018. As discussed in our post from last week, the passage of this legislation is the culmination of years of negotiations and compromise between West Virginia elected officials, the industry, landowners and mineral owners. The bill is designed to streamline the oil and gas leasing process and facilitate further development without unnecessary delay, by carving out an exception to the West Virginia statute governing waste between certain co-tenants (individuals that all own undivided interests in the same tract of land).
Under the existing law (W. Va. Code § 37-7-2) development of oil and gas from a tract of land without the consent of all the owners, or co-tenants, of the same will result in waste, with any party committing such waste being subject to their operations being enjoined and/or treble damages. The new law states that development of oil and gas under certain conditions will not constitute waste. The bill states that any tract held by seven or more co-tenants can be developed upon the consent of 75% of such co-tenants. However, the proposed operator must make reasonable efforts to negotiate leases with all of the oil and gas owners before they can find protection under the proposed new law.
Non-consenting co-tenants can either accept royalties equal to the highest percentage royalties paid to one of the consenting parties, proportionally reduced to their respective fractional interest, or elect to participate in the development and bear equal development and other costs with the lessee. Unknown or unlocatable owners will be limited to receiving royalties equal to the highest percentage royalties paid to one of the consenting parties. The statute also allows surface owners to reclaim the oil and gas title held by any unknown or unlocatable owners after seven years.
The bill strikes a delicate balance between all stakeholders by protecting land and minerals owners while updating the law for the horizontal drilling era.
Today, the West Virginia Senate passed HB 4268, popularly known as the “co-tenancy” bill. Formally titled as the Co-tenancy Modernization and Majority Protection Act, the bill was designed to streamline the oil and gas leasing process and facilitate further development without unnecessary delay. The bill passed the House of Delegates on February 15, 2018.
If accepted by the governor, HB 4268 would carve out an exception to the West Virginia statute governing waste between certain co-tenants (individuals that all own an undivided interests in the same tract of land). Under the existing law (W. Va. Code § 37-7-2) development of oil and gas from a tract of land without the consent of all the owners, or co-tenants, of the same will result in waste, with any party committing such waste being subject to their operations being enjoined and/or treble damages. The new law states that development of oil and gas under certain conditions will not constitute waste.
Upon final passage of the bill, any tract held by seven or more co-tenants can be developed upon the consent of 75% of such co-tenants. However, the proposed operator must make reasonable efforts to negotiate leases with all of the oil and gas owners before they can find protection under the proposed new law. Non-consenting co-tenants can either accept royalties equal to 12.5% of the oil or gas produced, proportionally reduced to their respective fractional interest, or elect to participate in the development and bear equal development and other costs with the lessee. Unknown or unlocatable owners will be limited to receiving the 12.5% royalty. The statute also allows surface owners to reclaim the oil and gas title held by any unknown or unlocatable owners after seven years.
Governor Justice of West Virginia said earlier this week that he would veto the co-tenancy bill if it found his desk, but has purportedly changed his mind. The bill must obtain the concurrence of the West Virginia House of Delegates before being sent to the Governor’s desk.
On October 30, Governor Tom Wolf signed House Bill 74, which amended the Pennsylvania Fiscal Code. The 90-page bill included Section 1610-E, entitled “Temporary Cessation of Oil and Gas Wells,” which codified certain rights of oil and gas lessors and lessees to extend leases during periods of temporary cessation of production. This article explores how traditional savings clauses found in leases and existing legal precedent may be impacted by Section 1610-E, and provides an analysis of potential challenges arising out of the application of this new law. Click here to read this article from the January issue of The PIOGA Press.
The Supreme Court of Ohio recently ruled in Alford v. Collins-McGregor Operating Company, Slip Opinion No. 2018-Ohio-8, that Ohio does not recognize an implied covenant to further explore, separate and apart from the implied covenant of reasonable development. Under Ohio law, the implied covenant of reasonable development requires a lessee to drill and operate such number of wells as would be reasonably necessary to develop the leasehold premises in a proven formation. While other jurisdictions recognize a separate implied covenant of further exploration, which requires a lessee to additionally explore potentially productive formations that are yet to be proven, the Supreme Court of Ohio refused to impose such requirement on lessees.
The Alford oil and gas lease was held by production and did not disclaim the application of any implied covenants. The lessee drilled one shallow well pursuant to the lease, which had produced in paying quantities ever since. The lessee never drilled any additional wells or sought production from any additional depths. Because the lessee declined to explore deeper depths, the Plaintiff landowners alleged that the lessee breached the implied covenant of reasonable development and the implied covenant to explore further, and sought a partial forfeiture of the lease as to deeper formations.
Affirming the Fourth Appellate District’s decision, the Ohio Supreme Court held that the implied covenant of reasonable development sufficiently protects the landowner’s interest in the exploration of deep formations. The court discussed that the implied covenant of reasonable development requires the lessee to act as a reasonably prudent operator would in developing an oil and gas lease. It requires the lessee to take into account the interests of both the lessor and lessee and to consider all of the circumstances relevant to the exploration and development of the land, including the associated risks, costs and profit. Conversely, the court observed that the implied covenant of further exploration only focuses on a small subset of factors relevant to the overall development of a lease, namely the lessor’s interest in obtaining additional compensation, and ignores the profit motive of a reasonably prudent operator.
The court held that the comprehensive scope of the implied covenant of reasonable development subsumes the implied covenant to further explore. The implied covenant of reasonable development is well suited to address the landowner’s interests in the further exploration of deeper formations because it takes into consideration all of the factors relevant to the exploration and development of a leased property. The court noted that it would be “unhelpful at best” to recognize a separate implied covenant to explore further, but expressed no opinion whether a prudent operator has a duty to develop deep rights under the implied covenant of reasonable development.
On June 1, 2017, the Ohio Supreme Court ruled that a provision in an oil and gas lease requiring the lessee to pay a minimum rental/royalty does not automatically invoke a termination provision in an unrelated delay rental clause and is not void as against public policy.
In Bohlen v. Anadarko E&P Onshore, L.L.C., Slip Opinion No. 2017-Ohio-4025, the Ohio Supreme Court was asked to determine whether a lessor can terminate an oil and gas lease if the lessee fails to pay minimum rental/royalty payments. In Bohlen, the oil and gas lease contained a primary term of one year along with standard secondary term language. The lease allowed the lessee to pay a delay rental for the privilege of deferring the commencement of a well. If this delay rental was not paid, then the lease would terminate. The Addendum attached to the lease stipulated that if royalty payments due to the lessor under the lease were less than $5,500, then lessee would pay any shortfall between the royalty payments and the $5,500. This minimum rental/royalty clause did not contain a termination provision. Lessee drilled two wells during the primary term of the lease but ultimately failed to pay yearly royalty amounts equal to or greater than $5,500. Lessors argued that the failure to pay a minimum rental/royalty triggered the termination clause found within the delay rental provision.
In Bohlen, the Court reasoned that the delay rental clause and the minimum annual-rental/royalty clause were two distinct clauses. Therefore, since the minimum rental/royalty clause did not contain termination language, the failure to pay the minimum royalty would not trigger the termination of the lease. It was of no consequence that the lease contained termination language in the delay rental clause since the two clauses at issue were to be read separately. Whether the lessee needed to compensate the lessor for underpayment was not at issue in the case.
Additionally, since the lease at issue contained a primary term, it did not violate public policy for being an indefinite lease.
On May 26, 2017, in a suit styled Leggett v EQT Production Company, the West Virginia Supreme Court of Appeals issued majority and concurring (links to PDFs) opinions finding 4-1 that the use of the language “at the wellhead” in the Flat Rate Royalty Statute allows the use of the “net back” method to calculate royalties, and that the Estate of Tawney v. Columbia Natural Resources, L.L.C. case does not apply or control. Leggett was certified to the West Virginia Supreme Court of Appeals to determine whether the holding in Tawney, which did not allow post-production expense deductions when calculating royalty, applied when royalties are paid on old, flat rate leases converted to a 1/8 royalty by application of West Virginia’s “Flat Rate Royalty Statute.” The statute provides that royalties are to be paid “at the wellhead.” Tawney held that “at the wellhead” language in a lease was ambiguous, and deductions could not be taken unless expressly authorized in the lease in detail as to the type and method of calculation. After initially deciding Tawney applied and refusing to allow deductions under the Flat Rate Royalty Statute, the Leggett majority (with a change in composition post-election) reconsidered the case and reversed itself. The Court held that the rules of contract construction used to decide Tawney did not apply when interpreting a statute. More importantly, the Court seems to be signaling that it is willing to reconsider and possibly reverse Tawney, which could subsequently impact royalty calculations for West Virginia production.
The Court of Appeals of Ohio, Seventh Appellate District, recently held that (i) heirs had standing to challenge a surface owners’ notice of abandonment under the Dormant Mineral Act (DMA), and (ii) an affidavit of preservation constitutes a valid claim to preserve mineral interests, regardless of whether the affidavit specifies a savings event. In M&H P’ship v. Hines, 2017-Ohio-923, the appellant surface owner asserted that the heirs were not holders of the mineral interest, and therefore, had no standing to challenge the notice of abandonment. The surface owner also asserted that the claim and affidavit filed by the heirs in response to the notice of abandonment did not identify any savings events that occurred in the 20-year period preceding the notice of abandonment, and therefore, the heirs did not properly preserve their interest. The Court found both assertions to be meritless.
With regard to the standing issue, the Court held that the broad definition of “Holder” under the DMA includes heirs of the original record owner of the mineral. Holder means the record holder of a mineral interest, and any person who derives the person’s rights from, or has a common source with, the record holder and whose claim does not indicate, expressly or by clear implication, that it is adverse to the interest of the record holder. In this case, the heirs derive their rights from or have a common source with grandparents, who were the original record owner of the mineral interest. Therefore, the court found that the definition of holder in the DMA is broad and includes the heirs.
As for the affidavit of preservation issue, the Court relied on the reasoning in Dodd v. Croskey, 2015-Ohio-2362, to hold that heirs’ affidavit of preservation constituted a valid claim to preserve their interest under the DMA. Nothing in the DMA states that a claim to preserve must refer to a saving event that occurred within the preceding 20 years. Additionally, the notice procedures do not require that the claim to preserve be itself filed in the 20 years preceding notice by the surface owner. Instead, the statute plainly states that such a claim can be filed within 60 days after notice from the surface owner. Accordingly, the plain language of the DMA allows the holder to file a claim to preserve the mineral interest or an affidavit that identifies a saving event that occurred within the 20 years preceding notice. In this case, the heirs filed a document titled Affidavit Preserving Minerals, which identified the heirs as the current owners of the mineral interest and stated that the heirs did not intend to abandon their rights in the mineral interest, but intend to preserve their rights. The Court held that this affidavit constituted a valid claim to preserve under the DMA and that no savings event needed to be specified therein.
On March 17, 2017, the Superior Court of Pennsylvania affirmed a trial court’s 2015 order that severed and terminated a portion of an oil and gas lease. The subject lease covered 240 acres located in Venango County, Pennsylvania, which was subsequently subdivided. Additionally, the leasehold interest was divided into depths that lie above and below the Onondaga formation and were held by different operators. On appeal, the appellant operator argued that the trial court lacked jurisdiction over the controversy because the plaintiffs failed to join all the indispensable parties. This action was originally brought by property owners who acquired 32 acres of the 240 acre tract.
In part of affirming the trial court’s order, the Superior Court indicated that one of the major factors involved in a determination of whether a party is indispensable in a lease context is whether the lease is severable. In this case, the court held the lease was severable based on the intent of the parties to the lease, which was determined by the language of the lease and the subsequent conduct of the successors in interest to the original lessee. The lease specifically provided the lessee the “right to subdivide and release the premises.” Additionally, successors in interest to the original lessee divided the leasehold interest into depths that lie above and below the Onondaga formation, which supports that the lease was severable. The Superior Court distinguished this case from precedent set forth in Seneca Res. Corp. v. S & T Bank, 122 A.3d 374., that an operator was not required to be actively drilling undeveloped portions in order to maintain the leasehold on the bases that: (1) the leased acreage in this case consisted of a number of distinct parcels rather than one tract; (ii) the language of the subject lease provided the lessee the right to “subdivide and release” the property; and (iii) the successors in interest to the original lessee of the subject lease subdivided the leasehold into two or more formations rather than operating under the lease as a whole. Based on these factors, the court held that the lease was severable. Additionally, the Superior Court affirmed the trial court’s finding that the lease had expired as to the subject property because the predecessors in interest to the appellant operator failed to produce oil and gas in paying quantities on the subject property and had breached the implied obligation to explore and develop the property “with reasonable diligence.” Accordingly, the court held that the lease was null, void, and of no force and effect pertaining to the subject property.
On March 10, 2017, Senate Bill 576 (SB 576) was introduced in the West Virginia Senate to take the place of SB 244, which addressed the oil and natural gas industry’s effort to efficiently develop production of natural resources. Similar to SB 244, SB 576’s stated purpose is “to encourage the efficient and economic development of oil and gas resources[;]” however, it contains a number of provisions that differ from SB 244.
If signed into law, SB 576 would create a new code section, W. Va. Code §37B-1-1, et seq., titled the “Cotenancy and Lease Integration Act,” which, like SB 244, contains both “co-tenancy” and “lease integration” provisions.
SB 576 declares in proposed §37B-1-2 that West Virginia public policy includes both “the maximum recovery of oil and gas” and the “protect[ion] and enforce[ment of] the clear provision of contracts lawfully made.” This section also states that West Virginia public policy is to “safeguard, protect and enforce” both “the rights of surface owners” and “the correlative rights of operators and royalty owners in a pool of oil and gas to the end that each such operator and royalty owner may obtain his or her just and equitable share of production from that pool of oil and gas[.]”
Proposed section §37B-1-4 allows oil and gas production on a piece of property when “two thirds of the ownership interest in the oil and gas mineral property consent to a lawful use [i.e., production] of the mineral property[.]” By contrast, SB 244 only required that a “majority” of ownership interests agree to a “lawful use.”
In addition, SB 576 (like SB 244) states that payment of royalties will be on a pro rata basis, with payments for a mineral owner who cannot be located reserved by the producer. Unlike SB 244, however, SB 576 would specifically allow surface owners to use W. Va. § 55-12A-1, et seq. (the unknown and missing landowners statute), to lay claim to the interests of the absent or missing owners. Finally, and importantly, SB 576 would require that a mineral interest owner who opposes oil or natural gas development be paid royalties (1) “free of post-production expenses” and (2) “equal to his or her fractional share of the average royalty of his or her consenting cotenants[,]” but “in no event may the royalty be less than his or her fractional share of one-eight [12.5%].”
SB 576 adds proposed sections §37B-1-5 and -6, which would take the place of the “Joint Development” provision in SB 244. Under proposed §37B-1-5, “[w]here an operator or operators have the right to develop multiple contiguous oil and gas leases, the operator may develop these leases jointly by horizontal drilling unless the development is expressly prohibited by the terms of a lease or agreement.” Importantly, an operator may only disturb the surface of property subject to this provision if it “has a surface use agreement” with the owner(s) of the property that will be disturbed. As with SB 244, under proposed §37B-1-6, royalty payments are based upon “production [that] shall be allocated to each lease in the proportion that the net acreage of each lease bears to the total net acreage of the jointly developed tracts.” As with dissenting owners under proposed §37B-1-4, however, “[i]n the absence of specific agreement to the contrary or where deductions are authorized by statute, the royalty for all royalty owners of the jointly developed acreage who do not have leases containing express pooling and unitization clauses shall not be reduced for post-production expenses incurred by the operator.” This provision, however, is not “intended to impact royalties due for wells drilled prior to the effective date of this chapter.”
While SB 576 keeps the basic goals of SB 244 – development without the approval of all mineral interest owners and development of contiguous property through horizontal drilling – it contains a number of provisions designed to mollify the concerns of surface owner organizations and other property rights groups. The “co-tenancy” provision now requires a 2/3 majority of mineral ownership interests to permit development, and royalty payments to dissenting owners must not take post-production costs into account. The “lease integration” provisions explicitly allow horizontal drilling of contiguous tracts that are each subject to production leases (provided horizontal drilling is not expressly prohibited), but if a production lease does not explicitly permit pooling or unitization, then royalty payments to the owners under that lease cannot be deducted for post-production costs. Important to surface owners is the requirement that a surface use agreement be in place before the surface of any property is disturbed by joint development.
Babst Calland will follow SB 576 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.
On January 17, 2017, the Superior Court of Pennsylvania vacated a trial court’s order denying class certification of two classes of lessors to oil and gas leases covering property in Clearfield County, Pennsylvania in Cardinale v. R.E. Gas Dev., 2017 PA Super 13. The case involved two classes of plaintiffs because two similar class action complaints were consolidated. These cases involved whether the lessees were required to tender paid-up bonuses when the lessee untimely rejected an oil and gas lease based upon title, surface or geology within a specified due diligence period. The trial court previously rejected the class certification that would have combined these two classes because common questions of law or fact did not predominate over individual questions with respect to the breach of contract claim, stating “[t]o fully resolve the case, the finder of fact would have to analyze each individual property and the circumstances surrounding the Defendants’ refusal to pay the bonus to determine if the Defendants breached each contract, or if the Defendants simply did not approve of the surface, title or geology of each parcel of land.”
On appeal, the Superior Court indicated that the critical inquiry for the certifying court is whether the material facts and issues of law are substantially the same for all class members. The court further provided that the existence of distinguishing individual acts is not fatal to class certification and that it is Pennsylvania’s policy to favor certification of class actions. Because the court identified six fundamental questions that are common to all class members, it found that the trial court erroneously denied class certification. Accordingly, the court vacated the trial court’s order and remanded so that the trial court may utilize its discretion and determine whether class certification is proper in this case, including whether the class definition is overly broad insofar as it may include individuals whose leases were rejected in a timely fashion.
On Tuesday, the Supreme Court of the United States denied certiorari in Walker v. Shondrick-Nau, Exr. (Slip Opinion No. 2016-Ohio-5793). As more fully explained in our Blog post discussing Walker, in September the Ohio Supreme Court held that, if a surface owner failed to quiet title under the 1989 version of the Ohio Dormant Mineral Act (the “ODMA”) prior to the enactment of the 2006 version of the ODMA, then the 1989 version is unavailable and the surface owner can only pursue a claim to abandon mineral interests under the 2006 version of the ODMA. Walker subsequently appealed this decision to the Supreme Court of the United States. In denying certiorari, the U. S. Supreme Court refused to hear the case meaning that the decision of the Ohio Supreme Court will stand as the law in Ohio.
In Lutz et al. v. Chesapeake Appalachia, L.L.C., Slip Opinion No. 2016-Ohio-7549, the Ohio Supreme Court declined to answer the certified question submitted by the U.S. District Court for the Northern District of Ohio as to whether Ohio follows the “at the well rule” or some version of the “marketable product” rule to calculate royalty payments made under an oil and gas lease. The “at the well rule” permits the lessee to deduct post-production costs from royalty payments made to the lessor. Conversely, the “marketable product” rule places limits on the lessee’s ability to deduct post-production costs under certain circumstances. Rather than adopting a blanket rule, the Court stated that the payment of royalties under a lease will be controlled by the specific language in the lease agreement. If an oil and gas lease is silent on the right to deduct post-production costs, it appears unlikely that Ohio courts will allow such deductions. The Court emphasized that leases should be viewed as contracts and the traditional rules for interpreting contractual terms should be used to determine the allocation of post-production costs under an oil and gas lease.
Today, the Ohio Supreme Court issued three written opinions interpreting the Ohio Dormant Mineral Act (O.R.C. §5301.56) (the “ODMA”) and decided 10 related cases based upon its decisions set forth in the written opinions. Notably, in Corban v. Chesapeake Exploration L.L.C., (Slip Opinion No. 2016-Ohio-5796), the Supreme Court held that the 1989 version of the ODMA (the “1989 Act”) did not automatically abandon oil, gas and mineral rights in favor of the surface owner. Instead, the Supreme Court interpreted the statute to require the surface owner to seek a judicial decree that the mineral rights were abandoned. The Court focused on the statutory phrase “shall be deemed abandoned and vested in the owner of the surface” in determining that the legislature intended the 1989 Act to serve as a method of terminating abandoned mineral rights through a quiet title action rather than automatically transferring the mineral interests to the surface owner by operation of law. Additionally, the Court held that payment of delay rentals under a lease does not constitute a “title transaction” under Ohio law since the payment of delay rentals are not filed or recorded in the country recorder’s office.
In Walker v. Shondrick-Nau, Exr., (Slip Opinion No 2016-Ohio-5793), the Ohio Supreme Court built upon its decision in Corban and held that, if a surface owner failed to quiet title under the 1989 Act prior to the enactment of the 2006 version of the ODMA (the “2006 Act”), then the 1989 Act is unavailable and the surface owner can only pursue a claim to abandon mineral interests under the 2006 Act.
Finally, in Albanese, Exr. v. Batman et al., (Slip Opinion No. 2016-Ohio-5814), the Ohio Supreme Court followed the rationale of Corban regarding the necessity of filing an action to quiet title under the 1989 Act prior to the enactment of the 2006 Act. The Court further held that under the 2006 Act mineral rights cannot be deemed abandoned if the owner of the minerals had not been served notice of the abandonment pursuant to the 2006 Act. The notice requirement is mandatory under the 2006 Act.
Citing to the above cases, the Supreme Court decided 10 additional cases consistent with the three written opinions. The 10 cases are listed below:
Carney et al. v. Shockley et al., (Slip Opinion No. 2016-Ohio-5824)
Dahlgren et al. v. Brown Farm Prop. L.L.C., et al., (Slip Opinion No. 2016-Ohio-5818)
Eisenbarth et al. v. Reusser et al., (Slip Opinion No. 2016-Ohio-5819)
Farnsworth et al. v. Burkhart et al., (Slip Opinion No. 2016-Ohio-5816)
Swartz v. Householder et al., (Slip Opinion No. 2016-Ohio-5817)
Shannon et al. v. Householder et al., (Slip Opinion No. 2016-Ohio-5817)
Taylor et al. v. Crosby et al., (Slip Opinion No. 2016-Ohio-5820)
Thompson et al. v. Custer et al., (Slip Opinion No. 2016-Ohio-5823)
Tribett v. Shepherd et al., (Slip Opinion No. 2016-Ohio-5821)
Wendt et al. v. Dickerson et al., (Slip Opinion No. 2016-Ohio-5822)