On January 21, 2016, the Supreme Court of Ohio issued its long-awaited decision in two previously consolidated cases, Hustack v. Beck Energy, sub nom. Hupp v. Beck Energy and State ex rel. Claugus Family Farm v. Seventh District Court of Appeals, Slip Opinion No. 2016-Ohio-178. The consolidated actions address the interpretation of approximately 700 nearly identical oil and gas leases between landowners and Beck Energy Corp (“Beck”). Hupp is an appeal of a judgment by the Seventh District Court of Appeals and Claugus is an original action filed with the Supreme Court of Ohio.
The Court addressed the following issues:
- Are the Form G&T (83) leases that Monroe County landowners and others signed with Beck Energy void because they are perpetual leases?
- Do the Beck Energy leases contain implied covenants to reasonably develop the land?
- Are the primary terms of the leases tolled during the pendency of the Ohio Supreme Court case?
The Court unanimously affirmed the Seventh District’s decision holding that the Beck Energy leases were valid and, thus, not void. The holding was based on the fact that the habendum clause of the leases clearly delineated a 10-year primary term during which oil and gas development had to occur to avoid expiration of the lease. Importantly, the Court also held that the delay rental clause of the lease, despite lacking explicit language, was only intended to apply during the primary term of the leases.
As to the second issue noted above, the Court also held 5-2 (with Justices Pfeifer and O’Donnell dissenting) that the leases did not have an implied covenant to reasonably develop. The Court’s decision was based on the following two factors: (1) the leases required development during the 10-year primary term; and (2) the leases specifically disclaimed all implied covenants.
The Court, also in a 5-2 decision, denied Beck’s motion to toll the leases during the pendency of the Ohio Supreme Court case. The Court’s reasoning was singularly based on the fact that it determined that the leases were valid. This decision, however, seems to side-step the basis for asking for tolling. Based on the Court’s reasoning, Beck and/or XTO Energy (the assignee of the deep rights under the Beck leases) should have been actively developing the leases during the pendency of the case, despite the fact that the validity of the leases was directly at issue before the Ohio Supreme Court. However, if Beck/XTO had done so, and the Court reached an opposite conclusion on the validity of the leases (i.e., found the leases void), then Beck/XTO could have been found liable for improperly drilling on those landowners’ property. Beck/XTO were stuck between the proverbial “rock and a hard place.” As a result of the Court’s decision on tolling, it appears that Beck/XTO have effectively lost approximately 1 year of the primary terms of the leases – the Supreme Court of Ohio was pending since January 2015. So, although the Court upheld the validity of the leases, it is very possible that Beck/XTO lost a number of leases due to an expiration of the primary terms. More problematic is the precedential impact that this decision on tolling may have for cases in the future.
Finally, and also in a 5-2 decision, the Court determined that the Claugus Family Farm’s requests for a writ of prohibition to prevent enforcement of the Seventh District’s tolling order was denied. The reasoning was based upon the Court’s determination that the Claugus Family Farm had an adequate remedy at law because it could have intervened at a meaningful time in the Seventh District Court of Appeals while the Hupp case was pending there.
The Court’s reasoning and holding on the validity of the leases was sound and consistent with how oil and gas leases with similar language have been interpreted in other states. This holding is very positive for the oil and gas industry. However, the Court’s decision on the tolling issue was curious, and could have a strong impact on how oil and gas lease cases are litigated in the future in Ohio.