On November 18, 2013, the Court of Appeals of Ohio, Fourth Appellate District, decided an appeal over an anti-assignment clause involving three leases in Washington County, Ohio in Harding v. Viking Int’l Res. Co., 2013-Ohio-5236; 2013 Ohio App. LEXIS 5447. The issue in Harding focused on whether the assignments of oil and gas leases from the original lessee to the assignee lessee were valid in light of a provision in the original leases that prohibited the assignment of the leases by the lessee without the lessors’ consent.
The facts of this case are as follows:
Jack and Ryan Harding were the successors-in-interest to three oil and gas leases encumbering several tracts of land, with Carlton Oil Company (“Carlton”) as lessee. All three of the leases contained the same anti-assignment clause:
The rights of the Lessor may be assigned in whole or in part and shall be binding upon their heirs, executors and assigns. The rights and responsibilities of the Lessee may not be assigned without the mutual agreement of the parties in writing.
In 2011, Carlton assigned all of its interests in the leases to Viking International Resources Company, Inc. (“Viking”). The Hardings were not parties to the assignments and the record indicated that they did not provide written consent for the assignments. The record did, however, indicate that the Hardings completed and returned a W-9 form that Viking mailed to them in August 2011 in order to being receiving royalty payments; and accepted and cashed royalty payments from Viking for eight months until they finally objected to the assignments, by letter in May of 2012.
In the underlying suit, the Hardings alleged that Carlton assigned the leases to Viking in violation of the anti-assignment clause and requested that the trial court declare the leases to be invalid, forfeited and void. Viking responded by asserting several affirmative defenses, including waiver, estoppel and ratification. Viking also filed a counterclaim seeking that the court quiet title in its favor and declare the leases to be valid, in full force and effect, and that Viking owns the lessee’s interest in the leases. The trial court held that the assignments were void but refused to invalidate the original leases, holding instead that the leases remained in effect and that the original lessee/assignor, Carlton, was the lessee. Harding, at ¶20.
The Court began its analysis by determining that oil and gas leases in Ohio are governed by contract law:
The rights and remedies of the parties to an oil or gas lease must be determined by the terms of the written instrument, and the law applicable to one form of lease may not be, and generally is not, applicable to another and different form. Such leases are contracts, and the terms of the contract with the law applicable to such terms must govern the rights of the parties.
Id. at 11, citing Harris v. Ohio Oil Co., 57 Ohio St. 118, 129, 48 N.E. 502 (1897). Under Ohio law contract rights may be assigned except under three conditions, one being that “…if there is clear contractual language prohibiting assignment, and assignment will not be enforced…” Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co., 112 Ohio St.3d 482, 488, 2006 Ohio 6551, 861 N.E.2d 121. The Court concluded that “The State of Ohio enforces anti-assignment clauses where there is clear contractual language prohibiting an assignment.” J.G. Wentworth, LLC v. Otisha Christian, et al., 7th Dist. Mahoning No. 07MA113, 2008-Ohio-3089, Para. 40.
Before reaching its conclusion regarding the enforceability of the anti-assignment clause, the Court analyzed the actions taken by the Hardings regarding the leases by executing and returning W-9 forms and the acceptance and cashing of monthly royalty checks for approximately eight months before raising an objection to the assignments. Viking cited to several cases in support of their argument that the actions of the Hardings waived their objection to the assignment to Viking:
- Acceptance and retention of benefits under a lease results in a party being estopped to assert invalidity of a lease. (Quadrant Exploration, Inc. v. Estate of William E. Greenwood, et al., 4th Dist. Washington No. 82X29, 1983 Ohio App. LEXIS 14550, 1983 WL3260 (Aug. 15, 1983); and
- It is rather universally held that acceptance of rents and royalties under an oil and gas lease is a waiver of forfeiture for breach of any covenant or condition for which such rents or royalties are paid. (Litton v. Geisler, et al., 80 Ohio App. 491, 76 N.E.2d 741 (4th Dist. 1945).
However, the Court discussed several cases from Ohio that reached the opposite conclusion:
- Estoppel inapplicable even where landowner cashed royalty checks, based in part upon the fact that landowners had a claim to the payments in absence of the lease. (Bonner Farms, Ltd. v. Thomas A. Fritz, Deborah D. Weise, and Exco-North Coast Energy, Inc., 355 Fed. Appx. 10, (6th Circ. 2009); and
- Estoppel inapplicable because landowners were entitled to royalties regardless of lease. (Stitzlein v. Willey and Columbia Gas Transmission Corporation, 5th Dis. Holmes No. CA-318, 1979 Ohio App. LEXIS 8691, 1979 WL 209691).
The Court distinguished the factual scenario in Harding v. Viking between the above cases on the basis that those cases “…seem to deal with an attempt to forfeit a lease or declare a lease to have expired by its own terms for either nonproduction of oil and gas, or failure to drill a certain number of wells within a certain amount of time…different principles are at play in the present case and thus, those cases are not controlling.” Viking, at ¶18-19. Thus, the Court agreed with the trial court’s approach of not voiding or forfeiting the underlying leases — the leases as between Carlton (the original lessee) and the Hardings (subsequent lessors) are still valid; it is the assignments between Carlton and Viking, the assignee, which are invalid. Ultimately holding for the Hardings (Appellees), the Court held that:
“We find [the trial court's] approach to be correct considering the facts of this case, which involves an attempt to invalidate an assignment, rather than an attempt to declare a forfeiture, or assert a breach of the expiration of an original oil and gas lease. The fact is, the dispute here involves a written contract which clearly specified the rights and duties of the parties with respect to the issue of assignment…Ohio enforces anti-assignment clauses where there is clear contractual language prohibiting an assignment. J.G. Wentworth, LLC, supra. Thus, we conclude that the clear and unambiguous anti-assignment clauses contained in the original oil and gas leases should be enforced.”
Viking at ¶20.
Now, that you’re running back to check your leases, feel free to contact us with questions regarding potential issues involving anti-assignment provisions in leases.