On June 6, 2014, the 6th Circuit applied Ohio law and affirmed summary judgment in favor of an oil and gas lessee by the District Court for the Southern District of Ohio upholding the extension of an oil and gas lease on its original terms in the face of a challenge by the lessors that the lease had expired because it had not been renewed under “similar terms.” See Eastham v. Chesapeake Appalachia, L.L.C. Case No 1304233 (6th Cir 2014).
The lease in question contained a provision that “upon the expiration of this lease and within sixty (60) days thereafter, Lessor grants to Lessee an option to extend or renew under similar terms a like lease.” The Court rejected the Lessors’ contention that this language was ambiguous, holding instead that the Lessee had retained the option to either extend the original lease or to negotiate a renewal under similar terms. Lessors had contended that the terms “extend” and “renew” mean the same thing.
The Court also rejected Lessors’ claims that the extension of the lease would violate public policy, and that the lease as extended was unconscionable. Regarding public policy, the Court noted that Ohio law presumes freedom to contract, and concluded that “we were unable to locate either an act of the Ohio General Assembly or an Ohio court case to support the [Lessors'] assertion with regard to Ohio’s public policy about construing oil and gas leases.”
Finally, the Court concluded that the Lessors had failed to demonstrate either procedural or substantive unconscionability, citing Ohio cases that require a finding of both before a contract can be invalidated:
The [Lessors] are clearly dissatisfied with the terms of the lease—they now feel they could have done better under prevailing market rates. However, they have failed to demonstrate that the contract was commercially unreasonable… In short, simply because the [Lessors] are dissatisfied with the result of the contract, it does not follow that the contract is commercially unreasonable.”
Because several Common Pleas Courts in Ohio recently have invalidated oil and gas leases as perpetual leases on public policy and unconscionability grounds, this decision is worth noting.