In a unanimous decision issued June 1, 2017, the Ohio Supreme Court affirmed the rights of lessees in Bohlen et al. v. Anadarko E&P Onshore, L.L.C.; Alliance Petroleum Corporation et al.
The lease at issue in Bohlen included a one-year primary term with a $5,500 delay rental. Given the one-year primary term, the terms “bonus” and “delay rental” referred to the same sum of $5,500 paid to the Bohlens. Additionally, the lease contained a minimum royalty clause, also for $5,500. The minimum royalty clause required that the lessee pay the lessor no less than $5,500 in royalties for each calendar year, even if the royalty based on production fell below that level.
Alliance Petroleum, the original lessees of the property at issue, drilled two wells on the leased property within the primary term of the lease. In certain years since the 2007 inception of production, royalties paid to the Bohlens were less than the $5,500 minimum royalty.
In 2013, the lessors brought an action to declare the lease forfeited because it violated public policy by allowing for the deferral of development ad infinitum by payment of delay rentals. Additionally, the plaintiffs argued that the lessees had failed to meet the obligation to pay the annual minimum royalty (called “annual rental payment” on the face of the lease). Plaintiffs argued that failure to pay minimum royalties was cause for forfeiture.
The printed form lease used in this case included language indicating that failure to pay rent or royalties due under the lease would not result in forfeiture. The parties struck through that language prior to execution of the form.
The Bohlens argued that the intentional striking of language indicated the parties’ intent for forfeiture to be the remedy in the case the lessee failed to meet its obligations. That argument relied upon out-of-state authority and was unsupported by any Ohio precedent.
Despite Alliance Petroleum’s commencement of operations on two wells prior to the expiration of the primary term, the Bohlens asked the Court to rule that the delay rental provision rendered the lease null and void.
Consistent with its holding in State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, the Bohlen Court held that the delay rental clause was not void as against public policy because it did not allow the lessee to extend the lease beyond the primary term without development. Delay rental provisions cease to be in force upon the expiration of a lease’s primary term.
Additionally, the Court refused to accept the argument that the intentional removal of language from a form instrument indicates an affirmative agreement on contrary language. Despite the operator’s failure to pay the contracted for minimum royalty, the Bohlens were not entitled to seek forfeiture. The Court easily distinguished this case from authorities relied upon by the Bohlens where forfeiture was the remedy proscribed on the face of the lease agreement.
At oral argument, the Justices seemed unmoved by the appellant-lessors’ arguments and seemed firm in the belief that the lessors were bound by the deal they struck. Upon the issuance of the decision, it appears that attitude carried the day with all seven Justices concurring with Justice Fischer’s decision affirming the Appellate Court’s ruling in favor of the lessees.