When something is owned by more than one person at the same time, there can be problems.
Background (and we mean far back!)
Since the Statute of Westminster II, c. 22 (1285), a cotenant has been subject to the law of waste. This rule of liability is found in the law of all states, either by virtue of the adoption of the rule as part of the common law or by the adoption of a specific statute dealing with the subject. Therefore, as a general proposition, a cotenant may not remove minerals from concurrently owned land without the consent of his concurrent owners. Williams and Meyers, Oil and Gas Law, § 502.
But waste goes both ways. Given the fugitive nature of oil, which may be drained from the land by a well on adjoining property, if the cotenant owning a small interest in the land had to give his consent before the others could move towards securing the oil, he could arbitrarily destroy the valuable quality of the land.
Most states, therefore, strike a balance and allow “unilateral” production by a cotenant subject to an accounting to the other cotenant, i.e., a sharing of net proceeds.
Assume that three siblings, A, B, and C, inherited the minerals on a 160-acre parcel of land. Oil Company proposes to drill a 40-acre well on the property and all three siblings sign a lease providing for a 1/8 royalty in exchange for Oil Company’s paying the expenses. If production is realized, the proceeds will be divided as follows:
Please click here to view table.
Now assume C won’t sign a lease.
Ohio Law Under Ohio law, a tenant-in-common generally may transfer, devise, or encumber his interest in the property without the consent of his cotenant. Koster v. Bodreaux, 11 Ohio App.3d 1, 5 (1982), citing 4 Thompson on Real Property, Separate and Concurrent Ownership, Section 1793, at 136-137 (1979).
Ohio courts have not decided the more specific issue of whether one tenant-in-common may make a valid lease of his mineral rights without the consent of his cotenant. Courts in other states that have considered this issue have not ruled consistently. While some courts have held that one tenant-in-common may lease his oil rights without the consent of his cotenant, others have held to the contrary. Still other courts permit a tenant-in-common to exploit underground deposits, but require him to account to his cotenant for any profit he receives.
Ohio law states generally that “[o]ne tenant-in-common . . . may recover from another tenant-in-common . . . his share of rents and profits received by such tenant-in-common . . . from the estate, according to the justice and equity of the case.” Ohio Revised Code 5307.21. Ohio courts have not considered this requirement in the context of underground mineral rights. Because this issue has not been considered in Ohio, an argument may exist that oil and gas rights, because they are finite and exhaustible, should not be subject to the general rule that a tenant-in-common may transfer his interest in property without his cotenant’s consent. It is unclear, however, how a court would decide the issue.
With that background, A, B, and Oil Company may elect to proceed without C, but such unilateral development is risky for Oil Company. In such a case, Oil Company becomes a tenant-in-common with C as to the rights granted by the lease, i.e., the right to explore for and produce the minerals. How are the proceeds divided? As there is no lease providing for a 1/8 royalty and an allocation of expenses, a possible outcome is:
Please click here to view table.
Since C has benefitted from Oil Company’s work and they are cotenants, absent any agreement, Oil Company may be able to deduct from C’s share of the production C’s share of the expenses. So, even though A and B may be able to lease and Oil Company can produce, is Oil Company likely to do so for a 58% (as opposed to 87.5% if all three siblings agreed to lease) share?
Where Ohio common law has not apparently resolved this issue, Ohio statutes have — at least some circumstances.
Well spacing regulations, which are in part designed to protect each mineral owner’s correlative rights, mandate a specified acreage for each drilling unit. If the acreage cannot be obtained voluntarily, the Ohio Revised Code provides for “mandatory pooling.” ORC § 1509.27. That is, if the ABC property comprises 38 acres of the 40-acre drilling unit, 2 acres of the neighbor’s property could be forced to a participate if the Chief of the Ohio Department of Natural Resources’ (“ODNR”) Division of Oil and Gas Resources Management determines that it is necessary to protect correlative rights and to effectively develop the mineral resources.
Mandatory pooling may also be used when a recalcitrant cotenant will not sign a lease. In such a case, the Mandatory Pooling Order from ODNR would likely provide that mandatorily pooled parties are granted their pro rata share of the standard 1/8th royalty interest upon production of the well. However, it would also stipulate that parties must share all reasonable costs and expenses of drilling and operation of the well:
- If the owner elects to participate (working interest owner), then the Mandatory Pooling Order must specify the basis upon which each owner of a tract pooled by the order shall share in these expenses.
- A non-participating owner will not receive any share of production, exclusive of his/her share of the royalty interest, until their share of such costs are recovered plus an additional risk penalty (200% for high financial risk and horizontal wells, 150% for others). ORC § 1509.27.
Thus, continuing the hypothetical, where C is now a non-participating owner, the allocation is:
Until costs and penalties are paid:
Please click here to view table.
It is not likely that a 58% share will be acceptable for the working interest, even after payment of costs and the risk penalty.
A more likely scenario is that the ABC property comprises only a small portion of the drilling unit, say 2 acres out of a 640 unit, so that the economics are far more favorable. The “C share,” even after cost and penalties are deducted, is 1/3 x 2/640 or 0.0010417 (0.104%). Even if it were 2 acres out of a 40-acre drilling unit, it would be 1.67%.
Even so, there is really not much incentive for the recalcitrant to agree to anything. He/she gets the same royalty, and the penalty is not much of a penalty when it applies only upon commencement of production (when everyone believes millions of barrels will be produced). So, the issue is to determine how to place the well so as to minimize the recalcitrant’s share or to find an alternative method.
The age-old method of ending a co-tenancy is partition, and in Ohio this remedy is provided for by statute. Ohio Revised Code section 5707.01 states:
“Tenants in common, survivorship tenants, and coparceners, of any estate in lands, tenements, or hereditaments within the state, may be compelled to make or suffer partition thereof as provided in sections 5307.01 to 5307.25 of the Revised Code.”
The code sections that follow set out a procedure for filing a petition, obtaining an order of partition from the court of common pleas, the appointment of one to three commissioner(s) to make the partition, etc. If it cannot be partitioned “without loss of value,” the commissioner establishes a value and one cotenant pays the other or there is a sale by the sheriff or at public auction.
In the ABC case, the hard part would be to determine the value of the minerals, which could lead to rolling the dice at a public sale. Instead, the cotenants would probably be better off to negotiate a price and, to put some of the risk on the seller, perhaps the payment could be made out of the buyer’s royalty, if any.
Recognize, however, that speculation, emotions, distrust, and a possible bonanza work against settlement, thus adding to the time and money it will take to accomplish it.