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.
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The Ohio Supreme Court accepted the appeal of the owners of a severed royalty interest in West v. Bode, Case No. No. 18 MO 0017, 2019-Ohio-4092. The sole issue before the Court is whether the Ohio Dormant Mineral Act supersedes and controls over the Ohio Marketable Title Act for disputes involving severed oil and gas interests. The Seventh District had ruled that both the Ohio Marketable Title Act (MTA) and the Ohio Dormant Mineral Act (DMA) are available to surface owners seeking to reclaim previously severed oil and gas interests; rejecting the royalty owners’ argument that the DMA is the sole remedy for these disputes. The Ohio Supreme Court’s decision should bring clarity to ownership of oil and gas rights in Ohio.
The Ohio Supreme Court accepted mineral owner Timothy Gerrity’s appeal in Gerrity v. Chervenak, a Dormant Mineral Act (“DMA”) case from Ohio’s Fifth District Court of Appeals. The Fifth District upheld the summary judgment granted by the Guernsey County trial court in ruling that the surface owner had successfully served notice by publication under the DMA process and abandoned Gerrity’s interest in the oil and gas. Following a search of the Guernsey County records (the property’s location) and a search of the Cuyahoga County records (location of Gerrity’s predecessor’s last known address), the surface owner served notice by certified mail to Gerrity’s predecessor at an address that the predecessor had not lived at since 1967. Following failure of service as “Vacant – Unable to Forward,” the surface owner published notice in a newspaper as proscribed in the DMA and completed the remainder of the DMA process, thereby acquiring Gerrity’s oil and gas interest. Gerrity’s appeal alleges that the surface owner failed to exercise reasonable diligence in attempting to locate Gerrity by not conducting an online internet search.
The level of diligence required by the surface owner in a DMA process in attempting to locate and serve notice by certified mail on the holders of the mineral interest is now squarely before the Ohio Supreme Court. The Ohio Supreme Court will decide whether a search of the county records where the property is located satisfies the reasonableness standard under the DMA or whether serving notice under the DMA requires a more comprehensive search, such as including the internet.
Since the Ohio Supreme Court’s decision in Corban v. Chesapeake Exploration, L.L.C., et al, 149 Ohio St.3d 512, 2016-Ohio-5796, many have questioned the interplay and availability of the Ohio Marketable Title Act (“MTA”) and the Ohio Dormant Mineral Act (“DMA”) for surface owners claiming previously severed oil and gas interests. The Ohio Seventh District Court of Appeals recently answered many of those questions and illustrated the power of the MTA for surface owners. In Senterra Ltd. v. Winland, Case No. 18 BE 0051 (Ct. App. Oct. 11, 2019), the Seventh District again confirmed that both the MTA and the DMA are available to surface owners claiming ownership of severed oil and gas interests. That court held that the MTA remains available for surface owners even after availing themselves to the DMA process. The court also determined that the reference, “excepting all the oil and gas rights underlying said described premises” is considered a general reference under the Blackstone inquiry due to the reference failing to identify the party reserving the interest.
In addition to expanding on whether a reference is specific or general, the Seventh District’s analysis rendered the date determining marketability under the MTA as irrelevant. That date controls what instrument operates as the root of title, being the most recent instrument of record at least 40 years prior. Because the MTA statute (O.R.C. 5301.47, et. seq.) fails to define which date should be used to determine marketability, courts have previously used the following dates to begin its MTA analysis: (1) trial/summary judgment; (2) summons; or (3) a severed mineral holder filing a notice of preservation. In Senterra, the Seventh District determined that regardless of using the date of summons or the date of the trial court’s determination, a 1971 deed in the chain of title operated as the root of title for a portion of the land at issue. However, in looking at the time period between 1971 and 2011 (the 40-year period required by the MTA), the record indicated an unspecified event occurred on July 14, 2000, which may have preserved the interest for its holder. Therefore, the court looked to the previous deed in the chain of title, being a 1954 deed, and conducted its analysis using this deed as the root of title. In determining that the surface owner had an unbroken chain of title from 1954 through 1994 with the mineral owner failing to preserve their interest during that time, the court held that the 1954 deed qualified as the root of title purporting to create the interest claimed by the surface owner and extinguished the interest of the mineral owner. Therefore, regardless of what initial date is used in determining marketability, a proper analysis will step through each deed in order to determine if a 40-year unbroken chain of title has occurred.
The Senterra decision continues a series of victories for surface owners and establishes the MTA as an invaluable tool to claim severed oil and gas interests. However, it remains to be seen if the case will be reviewed by the Ohio Supreme Court.
Ohio’s Seventh District Court of Appeals recently ruled that Ohio’s Marketable Title Act (the “MTA”) does not conflict with the Dormant Mineral Act (“DMA”), and that both statutes can be utilized by a surface owner to claim ownership of severed minerals. W. v. Bode, 2019-Ohio-4092 (Ct. App.). The Monroe County trial court found that the DMA irreconcilably conflicted with the MTA and that the surface owners were limited to the process set forth in the DMA to claim ownership of a severed royalty interest. However, the Seventh District reversed and determined that, although the DMA provides a separate procedure, both the MTA and the DMA are available to surface owners attempting to claim ownership of a severed mineral interest.
In addition to Bode, the Seventh District issued two opinions clarifying earlier 2019 decisions pertaining to the MTA. Hickman v. Consolidation Coal Co., 2019-Ohio-4077 (Ct. App.) and Miller v. Mellot, 2019-Ohio-4084 (Ct. App.). In its previous decisions, the Seventh District held that if the surface owner’s root of title contained any reference to an oil and gas exception/reservation, the surface owner was precluded from claiming the mineral interest had been extinguished under the MTA. In Hickman and Miller, the Seventh District clarified that it reached that conclusion solely due to the void in the post-severance/pre-root deed history contained in the record in these cases. Because the records were silent as to the interest owned by the grantors in the root of title deeds, the court could not ascertain that the exception/reservation contained therein operated as a reference instead of an original severance. The Seventh District confirmed that the Blackstone analysis1 applies where the root of title contains a reference to a prior reference.
Enacted in 1961, the MTA operates to extinguish interests after 40 years unless a statutory exception applies. While originally excluding minerals from its application, a 1973 amendment caused the MTA to apply to all minerals except coal. In 1989, the Ohio legislature amended the MTA to include the DMA, which provides a method to have severed minerals “deemed abandoned” after 20 years absent a savings event. Therefore, the DMA provides a method, including service of notice on the holders, of declaring a mineral interest abandoned after only 20 years and the MTA results in an automatic extinguishment of an interest after 40 years. The availability of these coextensive alternatives depends on the time passed and the nature of the chain of title for both the surface and minerals. In holding that both the DMA and MTA apply to minerals, the Seventh District provided greater flexibility to surface owners and operators seeking to develop oil and gas in Ohio.
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1 (1) Is there an interest described within the chain of title? (2) If so, is the reference to that interest a “general reference”? (3) If the answers to the first two questions are “yes,” does the general reference contain a specific identification of a recorded title transaction?
On June 5, 2019, the West Virginia Supreme Court issued its opinion in EQT Production Company v. Crowder affirming a decision of the circuit court of Doddridge County, holding that a surface tract cannot be used to produce minerals from neighboring lands in the absence of an agreement with a surface owner, even if the mineral owners/lessees agreed to pooling and unitization. Please read more about this decision in this Alert.
Ohio’s Sixth District Court of Appeals recently ruled that Ohio’s Marketable Title Act (the “MTA”) extinguished restrictive covenants on a parcel located in a residential subdivision due to a gap in excess of 40 years without being identified in the parcel’s chain of title. David v. Paulsen, No. OT-18-032, 2019 Ohio App. LEXIS 2229 (Ct. App. May 31, 2019). The MTA allows an owner to establish marketable title, being title free from reasonable doubt of litigation, by relying on a record chain of title to extinguish interests and claims existing prior to the root of title unless an exception applies. The root of title is the most recent instrument of record at least 40 years prior to the time marketability is being determined. While not immediately impacting the oil and gas industry, at the heart of the dispute in Paulsen was when marketability is determined under the MTA, which may affect future oil and gas ownership claims under the MTA.
The Appellants, members of a subdivision seeking to enforce the restrictive covenant against the landowner Appellees’ building of a shed, argued that the date of the 2009 deed where the landowners took title to the lot should be used to determine marketability. If so, the root of title would be a 1964 deed which predated the restrictions of the subdivision. Therefore, the MTA would not extinguish the restrictions, as they would post-date the root of title. The landowners countered with the argument that the date the members of the subdivision filed their summary-judgment motion, being the date most recent in time, should be the date the court uses to determine marketability.
Finding fault with both positions, the court instead determined marketability when the members of the subdivision sought to enforce their purportedly-superior right, being the date they filed their complaint. Thus, the court found that a July 3, 1973 deed, being the first deed of record 40 years prior to the filing of the complaint, operated as the root of title for the land in dispute. The court concluded that the MTA extinguished the restrictions because the restrictions existed prior to the root of title and were not stated or identified in the July 3, 1973 deed or specifically referenced in any of the documents of the chain of title in the 40 years following the root of title.
While only binding on courts located within the jurisdiction of the Sixth District in northwest Ohio, Paulsen is the first appellate decision in Ohio to analyze the date that marketability is determined under the MTA. If adopted by other courts of appeal, particularly the Seventh District, Paulsen may render the MTA toothless in reclaiming title to previously severed oil and gas interests. Because the court in Paulsen determined marketability on the filing date of the complaint, a landowner would arguably be required to file a quiet title action to claim severed oil and gas interests under the MTA – an action not contemplated by the statute.
Ohio’s Seventh District Court of Appeals recently issued three separate opinions involving Ohio’s Marketable Title Act (the “MTA”) and Dormant Mineral Act (the “DMA”): Miller v. Mellott, 2019-Ohio-504 (Ct. App.); Soucik v. Gulfport Energy Corp., 2019—Ohio-491 (Ct. App.); and Hickman v. Consolidation Coal Co., 2019-Ohio-492 (Ct. App.). Despite ruling that the severed royalty and/or fee interests were subject to both the MTA and the DMA, the Seventh District held that the mineral/royalty interests had not been abandoned and/or extinguished by either.
In its MTA analysis, the court scrutinized the language of the root of title deed used by the surface owners to establish title to the severed interest. If the surface owner’s root of title contained a reference to an oil and gas reservation, the court found that the surface owner was precluded from claiming the mineral interest had been extinguished under the MTA. The court determined that even a perfunctory exception to oil and gas “as heretofore reserved” barred the surface owner from claiming title to the mineral interest under the MTA. Finding that the severed minerals survived extinguishment under the MTA, the court addressed underlying defects in the surface owner’s DMA procedure.
In denying the surface owners’ claims under the DMA in Miller and Soucik, the court determined that the surface owners failed to satisfy the diligence required by Ohio law in identifying the mineral holders before permitting notice by publication. Even though the margins of the deeds severing the mineral interests contained notations of abandonment, the court permitted examination of the underlying procedure to determine whether abandonment was proper. Surface owners carry the burden to establish that they attempted service by certified mail prior to proceeding to notice by publication. Because the surface owners in Miller and Soucik failed to provide evidence through affidavits or otherwise that they even attempted to serve notice by certified mail, the court found that the surface owners failed to comply with the notice provisions of the DMA. Therefore, the court ruled that the severed mineral interests had not been abandoned under the DMA.
On December 13, 2018, the Ohio Supreme Court in Blackstone v. Moore, 2018-Ohio-4959, affirmed the Seventh District Court of Appeals decision preserving a severed royalty interest from extinguishment under the Marketable Title Act (the “MTA”) because of a specific reference in the surface owners’ chain of title. The MTA allows an owner to rely on a record chain of title to establish ownership and operates to extinguish interests and claims existing prior to the root of title unless an exception applies. The root of title is the most recent instrument of record at least 40 years prior to the time marketability is being determined. In addition to actively preserving their interest from extinguishment through their own actions, an interest may be preserved, even with no action by its owner, if specifically identified in the record chain of title of the individual attempting to extinguish the interest.
The Blackstones (surface owners) claimed that the royalty interest created in 1915 owned by the Moores had been extinguished by operation of law under the MTA. However, the Blackstones’ 1969 root of title referenced the outstanding oil and gas royalty interest by its owner’s name but failed to include a volume/page reference to the instrument that created the interest. The court rejected the Blackstones argument for a bright-line rule requiring the volume and page number, as the legislature did not require this specificity in the statute. Accordingly, the court determined that the Blackstones’ 1969 root of title specifically referenced the Moores’ interest, thereby preserving the Moores’ interest from extinguishment.
Justice DeGenaro, who is leaving the court at the end of 2018, wrote a concurring opinion emphasizing the narrow scope of the holding. She opined that the MTA no longer applies to severed mineral interests following the 1989 enactment of the Dormant Mineral Act (the “DMA”). While the issue of whether the MTA applies to severed mineral interests was not before the court in Blackstone, this issue is currently before the Seventh District Court of Appeals in a separate, unrelated case. The Seventh District had previously applied both the DMA and MTA to the Moores’ severed royalty interest when Blackstone was on appeal before them.
On November 26, 2018, Ohio’s Seventh District Court of Appeals in Sharp v. Miller, 7th Dist. Jefferson No. 17 JE 0022, 2018-Ohio-4740, affirmed the abandonment of oil and gas interests pursuant to the Dormant Mineral Act (O.R.C. §5301.56) (the “DMA”). The issues before the court were: (i) whether the surface owners’ (the Millers) service of notice by publication to the mineral owners (the Sharps) properly complied with Section (E)(1) of the DMA; and (ii) whether the oil and gas leases executed by the Millers, prior to claiming the minerals under the DMA, constituted savings events for the Sharps. The court held in favor of the Millers on both issues confirming the abandonment of the Sharps’ oil and gas interests.
The Sharps alleged that they received insufficient notice of the surface owners’ intent to abandon the minerals, claiming that a reasonable search by the Millers would have revealed the identities and addresses of the Sharps, and thus required notice to be served by certified mail instead of by publication. In rejecting the Sharps’ argument that the Millers failed to exercise reasonable due diligence, the court used the failed results of the Sharps’ own search to establish that the Millers’ search was sufficient. In line with its recent decision Shilts v. Beardmore, 7th Dist. Monroe No. 16 MO 0003, 2018-Ohio-863, the Seventh District again declined to establish an objective bright-line rule for when notice by publication is permitted or to define “reasonable due diligence.” Instead, the court will continue to apply a subjective test and look to the facts and circumstances in each individual case to determine if the surface owners conducted a reasonable search in attempting to identify the mineral interest holders. Additionally, whether a surface owner’s search was reasonable may depend on the outcome of the mineral owner’s search using alternative resources, such as searching the records of adjacent counties, search engine inquires, and searching for heirs on subscription websites like ancestry.com.
In a matter of first impression, the court rejected the argument that oil and gas leases executed by the Millers, prior to claiming the minerals under the DMA, constituted savings events for the Sharps. While the Ohio Supreme Court has held that a recorded oil and gas lease is a title transaction (Chesapeake Exploration, L.L.C. v. Buell, 144 Ohio St.3d 490, 2015-Ohio-4551, 45 N.E.3d 185, ¶66), the Seventh District noted that the Millers did not own the minerals at the time of the lease. Therefore, the mineral interest was not the “subject of” the title transaction. As such, the leases did not constitute savings events under the DMA for the Sharps and did not preclude abandonment of the Sharps’ interest under the DMA.
The Sharps have until January 10, 2019 to appeal the Seventh District’s decision to the Ohio Supreme Court.
The Ohio Supreme Court recently rejected a constitutional challenge to Ohio’s forced pooling statute in State ex rel. Kerns v. Simmers, Slip Opinion No. 2018-Ohio-256. A group of landowners (the “Landowners”) sought a writ of mandamus compelling the Chief of the Ohio Department of Natural Resources (ODNR) to commence appropriation proceedings to compensate landowners with interests included in an oil and gas drilling unit through a unitization order. The Landowners alleged that the Chief’s order issued pursuant to R.C. 1509.28 was “unlawful or unreasonable” and constituted an unconstitutional taking of their property without compensation. Under R.C. 1509.36, the Landowners appealed the Chief’s order to the Ohio Oil and Gas Commission (the “Commission”). The Commission, concluding that it lacked jurisdiction to determine the constitutionality of the order, dismissed the appeal. Instead of appealing the Commission’s decision to the Franklin County Court of Common Pleas within 30 days as permitted by R.C. 1509.37, the Landowners filed a petition for a writ of mandamus to the Ohio Supreme Court.
The Ohio Supreme Court denied the writ and dismissed the Landowners’ case, reasoning that the Landowners failed to utilize the adequate legal remedy available. To be entitled to a writ of mandamus, the Landowners needed to show (1) that they had a clear legal right to appropriation proceedings, (2) that the ODNR had a clear legal duty to commence the proceedings, and (3) that the Landowners had no plain and adequate legal remedy. Under R.C. 1509.37, the Landowners could have appealed the Commission’s decision to the Franklin County Court of Common Pleas to determine the constitutionality of the unitization statute. In denying the writ, the court determined that the Landowners had a complete, beneficial and speedy remedy at law by way of an appeal to the Franklin County Court of Common Pleas as provided in R.C. Chapter 1509 and should have pursued their appeal there. While dismissing this challenge on procedural grounds, it appears inevitable that the Ohio Supreme Court will ultimately have to determine the constitutionality of Ohio’s forced pooling statute.
In Woodhouse Hunting Club, Inc. v. Hoyt, an unpublished opinion filed February 2, 2018, the Pennsylvania Superior Court upheld the practice of “title washing” of unseated land in Pennsylvania. Prior to January 1, 1948, title washing occurred through a tax sale of unseated land from which oil, gas and/or minerals (the “subsurface estate”) had been previously severed. If the subsurface estate had not been separately assessed, the tax sale of the unseated land would extinguish the prior severance and vest the tax sale purchaser with full ownership in the surface and subsurface estates. If the oil and gas had been separately assessed, then the tax sale of the surface would have no effect on the subsurface estate. After January 1, 1948, mineral estates were no longer separately assessed from the surface in Pennsylvania and title washing could no longer occur. In 2016, the Pennsylvania Supreme Court upheld the practice of “title washing” of unseated or unimproved land in Pennsylvania. Herder Spring Hunting Club v. Keller, 143 A.3d 358 (Pa. 2016).
Prior to the Superior Court ruling, the trial court had quieted title in favor of Woodhouse Hunting Club, Inc. based upon the Club’s argument that Hoyt did not own subsurface mineral rights due to a 1902 title wash. In issuing its ruling in Hoyt, the Superior Court noted that the Herder Spring decision addressed and disposed of all of Hoyt’s issues in the case. Therefore, the Superior Court relied on the holding in Herder Spring in affirming the trial court’s decision to grant summary judgment and quiet title in favor of Woodhouse Hunting Club, Inc.
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 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.