Ohio Supreme Court Holds Lease Not Perpetual, Not Subject to Implied Covenants

On January 21, 2016, the Ohio Supreme Court issued an opinion in consolidated actions, including a class action, addressing the interpretation of nearly identical oil and gas leases. This opinion impacts several cases currently pending in Ohio appellate courts.

In State ex rel. Claugus Family Farm, L.P. v. Seventh District Court of Appeals, Nos. 2014-0423 & 2014-1933 [], the Court held that Beck Energy’s Form G&T (83) lease, which required Beck to commence a well on the leased premises within a certain time or pay a delay rental, was not void as against public policy. The Court concluded that the lease was not perpetual as argued by the landowners in the class action because, as set forth in the primary term, it could not be extended beyond 10 years without development of oil and gas.

In addition, the Court held that the lease was not subject to an implied covenant of reasonable development. The Court relied not only on the primary term that required that development commence within 10 years but also on specific language in the lease that disclaimed any implied covenants.

Finally, the Court denied a writ to an absent and unnamed plaintiff in the class action, Claugus Family Farm, that challenged the Seventh District’s order tolling the leases pending appeal. The Court held that Claugus Family Farm had an adequate remedy by moving to intervene and also that the Seventh District did not patently and unambiguously lack jurisdiction to issue the order.

Keywords: energy litigation, oil and gas lease, delay rental, implied covenant, Ohio Supreme Court, primary term

_{Lyle Brown, Karen Kahle, and Amy Smith are with Steptoe & Johnson PLLC.}

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