Energy Industry Update
Action Item: Oil and gas companies with leases in Ohio should review their lease language whenever challenged by a lessor as to lease validity. That language likely will determine the success of any claim.
Ohio oil and gas leases permitting payment of minimum annual rentals (equal in amount to delay-rentals) after a well has been drilled can exist validly in their secondary term, and the failure to make the required rental payment does not operate to terminate the leases. Bohlen v. Anadarko E&P Onshore, L.L.C., 2017 Ohio 4025 (Ohio May 30, 2017). It all comes down to the language of the lease.
The Bohlens, the lessors, sought a forfeiture of their oil and gas when the lessees failed to make required minimum annual rental payments per a requirement in the lease addendum. The lease required that the Bohlens receive at least $5,500 per year in royalties after a well was drilled. Because the lessees failed to pay that minimum amount in at least six years (2008-2013), after drilling at least one well on the leased acreage, the Bohlens claimed the lease was forfeited. The Bohlens also claimed that the lease was void ab initio and against public policy for, allegedly, allowing deferment of production simply by paying delay-rentals.
Both arguments rested on the Bohlens’ interpretation of the lease that the minimum annual rental provision simply was a repeat of the lease’s delay-rental provision. That delay-rental provision provided for delay-rentals during the primary term of $5,500 per year or the lease would become “null and void,” with the rights of parties under the lease terminating. The Supreme Court disagreed with the Bohlens.
Reaffirming that oil and gas leases are interpreted as contracts under Ohio law, the Supreme Court looked to the actual, unambiguous terms of the lease for guidance as to its meaning. Unlike the Bohlens, the Supreme Court did not view the delay-rental clause and the minimum annual royalty provision as duplicates. “Under the plain language of the lease, the lessee must pay a delay-rental for deferring commencement of a well. But [the lessee] did not defer commencement of a well beyond the primary term of the lease, because at least one well was drilled within the first year. Therefore, the lease did not terminate under the delay-rental clause.”
The Court also easily turned aside several cases cited by the Bohlens to support both of their claims (forfeiture and violation of public policy), noting important factual differences in lease language made those cases inapposite. “As we have determined, the Bohlens’ interpretation of the lease and its addendum goes against the plain language of the lease. The addendum language does not modify the delay-rental clause.”
The Court summarized its holdings succinctly:
The plain language of the parties’ oil and gas lease requires the lessee to pay a delay-rental for deferring commencement of a well, otherwise the lease terminates; however, the lessee did not defer commencement of a well beyond the primary term of the lease, because at least one well was drilled within the first year. Therefore, the lease did not terminate under the delay-rental clause. The requirement in the addendum that the lessees pay $5,500 as a minimum annual rental did not invoke the termination provision in the delay-rental clause. … Moreover, the lease in this case does not qualify as a no-term, perpetual lease … .
In short, Ohio law looks to the substance and language of an oil and gas lease to find out what it permits or does not permit. Practitioners should review their lease language often to make sure it says what they think it does. And, as new decisions come out, practitioners should review their leases to see what changes, if any, should be made.
