Oil and Gas Lease Did Not Terminate for Failure to Pay Minimum Rental/Royalty Payments
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.