Ohio Supreme Court Confirms Beck Energy Leases Still Valid
I hope to continue to provide our readers with updates as to the status of important cases pending in our highest courts that affect oil and gas and landowners. The Ohio Supreme Court recently issued its ruling on a matter that has been fairly well known to those interested in the Ohio oil and gas leasing scene. SER Claugus Family Farm, L.P. v. Seventh District Court of Appeals, et al. and Hustack et al, v. Beck Energy Corporation, Slip Opinion No. 2016-Ohio-178. Some people have been aware that, for the last several years, litigation and appeals have been ongoing as to the validity of Beck Energy Corporation leases signed in Eastern Ohio as many as eight and nine years ago. At issue was a standard lease form, Form G&T (83), used by Beck for most of its transactions. Upon review of the lease, the Monroe County Court of Common Pleas ruled that the leases, as written were invalid under Ohio public policy because they created leases in perpetuity. The rule against perpetuities is an old rule that developed in England to prevent wealthy landowners from tying up their property forever. It was a means to try and help more people eventually become landowners. In the context of the Form 83 leases at issue in the Beck cases, the trial court determined that the leases allowed Beck to keep their leases active indefinitely simply by paying delay rental fees, without any actual efforts to obtain oil and gas production. The trial court believed that to be against the public policy of the State of Ohio.
On appeal, the 7th Appellate District disagreed and determined that the Form 83 leases actually did provide for a limited term of years during which the oil and gas company could delay its operations by the payment of rentals. The company could not, however, do so forever. Oil and gas leases include a defined “primary term” during which the payment of rents provides the company with the right to hold the property without operations. If no operations have occurred during that primary term, the lease must either be renewed, if the lease allows, or renegotiated. If, however, certain types of operations occur, the lease enters the secondary term. Those types of operations are usually defined in the lease agreement and so long as those types of operations or activities are continuing, then the lease will remain in effect in its “secondary term.”
The Ohio Supreme Court agreed with the 7th Appellate District in the Beck cases. The Court confirmed some longstanding principles of oil and gas law. The Court confirmed that delay rentals alone may only hold a lease active during a primary term and that the language of the granting clause of a lease provides the nature and effect of the legal rights held by the parties. Finally, the Court determined that implied covenants, which generally protect mineral owners during the operation of the lease, have limited effect during the primary term and can actually be waived by lease language agreed to by the parties to the lease. The Supreme Court confirmed that the leases at issue had a 10-year primary term and that the oil and gas company could keep the leases active during that 10-year period by paying the delayed rentals.
This was not an unexpected decision from my perspective. While I hoped that landowners would be able to seek redress for the poor lease terms they were offered, the issues as presented were not that confusing and seemed to be headed towards the decision reached by the Court in this case. Bigger concerns in this case related to the fact that many of the lease terms were actually stayed by the appellate courts during the time this litigation was ongoing. Beck Energy filed Motions asking the Supreme Court to toll all the terms of the Form (83) lease as to all members of the class action, which potentially includes every single Ohioan who signed such a lease with Beck. The Supreme Court, while finding the leases valid, did not enter an order tolling the leases further. Justice Pfieifer concurred with the decision that the leases were still valid, but authored a fairly vigorous dissent on other issues and took the Court to task as well as the original attorneys handling the case for the original Plaintiffs. Non-parties to the original litigation, including the Claugus family, had their rights affected as the class action certification resulted the tolling of all of the Beck leases regardless of whether or not those affected landowners wanted to get out of their leases. Despite the fact that the 7th District determined that the leases were not perpetual, it continued the tolling for both the named and unnamed plaintiffs potentially affected by the case. As a result, many hundreds of Ohio mineral owners were left in the lurch. The end result in these cases is not what many wanted, but it seems to be that the decision was fairly clear under the law.
