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Beck Energy Leases With 700 Landowners Valid Despite Years Without Drilling

Beck Energy Corp.’s leases with nearly 700 southern and eastern Ohio landowners require the company to commence preparations to drill wells within 10 years of signing the agreements if it wants to maintain control of the properties for oil and gas exploration, the Ohio Supreme Court ruled today.

Landowners who initiated a class-action lawsuit against Beck Energy complained the company has gone for years after signing leases without drilling for or producing oil or gas, and they believed the leases were crafted to allow Beck Energy to perpetually control the land by only paying minor fees to the property owners. Writing for the Supreme Court majority, Justice Judith L. French explained the valid leases do require Beck Energy to commence preparations for drilling wells within the first 10 years of leasing the rights.

In a separate matter, the Court denied a request to toll the terms of Beck Energy leases involved in the case.

Two Cases Consolidated
The Court consolidated two separate cases, one of which arrived on appeal, and the other made directly to the Court, because both involved nearly identical oil and gas leases. Larry and Lori Hustack, along with Clyde and Molly Hupp, filed suit against Beck Energy in September 2011. The Hustacks acquired interest in a 2008 lease that was written on a standard form Beck Energy often used, known as a “Form G&T (83) lease.” They claimed the Form G&T (83) lease allowed Beck Energy to maintain the land indefinitely without developing it, making it a perpetual lease, which is against Ohio public policy. They asked the trial court to void their lease with Beck Energy, and they amended their suit to assert claims on behalf of a class of more than 400 other Monroe County landowners who signed Form G&T (83) leases with Beck Energy.

The landowners sought and received a summary judgment in the trial court declaring the leases void because they were leases in perpetuity, and Beck Energy appealed. Upon the landowners’
motion, the trial court certified the class as all Ohio lessors subject to a Form G&T (83) lease with Beck Energy upon whose land no preparations for drilling had occurred. The class included 415 landowners in Monroe County and 200 to 300 more landowners outside of Monroe County. The unnamed class members were not notified that they were made part of the lawsuit. At the request of Beck Energy, the trial court tolled the leases of only the landowners named in the case, meaning the time left on the leases was frozen pending the outcome of Beck Energy’s appeal.

Appeals Court Addresses Two Issues
Beck Energy appealed the trial court’s ruling to the Seventh District Court of Appeals. While the appeals court was considering Beck Energy’s claim that the leases were valid, the company also asked the appeals court to modify the trial court’s tolling order so that it applied to all class members. The appeals court granted Beck Energy’s request in September 2013.

A year later, the Seventh District held that the trial court misinterpreted the Form G&T (83) leases and ruled they were valid. The parties agreed to toll the leases until the Supreme Court agreed to hear the case. The Supreme Court agreed to address two issues: whether the leases were written to allow them to be maintained without development, and whether those leases were subject to an “implied covenant of reasonable development.”

Landowners Without Notice Go Directly to Supreme Court
Claugus Family Farm, which owns a tract of land in Monroe County subject to a Form G&T (83) lease, was part of the certified class, but was not specifically named in the class-action lawsuit. Claugus Family stated that Beck Energy did not drill a well or produce oil or gas on its property in the first 10 years of its lease, which Claugus Family claimed expired in February 2014. In anticipation of the Beck Energy lease expiring, Claugus Family signed a lease with Gulfport Energy Corp. that gave the company 90 days to review the farm’s land title for any defects. Gulfport found that Claugus Family was subject to the tolling order freezing its lease with Beck Energy, and it cancelled its deal with the farm. Claugus Family then filed writs of mandamus and prohibition with the Supreme Court to prevent the Seventh District from applying its tolling order to the farm.

Validity of Leases
Justice French explained that a typical oil and gas lease includes a primary term, which sets a definite duration for the lease, and a secondary term, which allows the lease to be extended under certain conditions, such as the continual production of oil or gas from an active well. Citing the Supreme Court’s 1993 Ionno v. Glen-Gery Corp. decision, Justice French wrote that long-term leases of mineral rights in which there is no development of the land are void as against public policy.  The provision in dispute with the Form G&T (83) leases was a clause that read: “This lease shall continue in force and the rights granted hereunder be quietly enjoyed by the Lessee for a term of ten years and so much longer thereafter as oil and gas or their constituents are produced or are capable of being produced on the premises in paying quantities, in the judgment of the Lessee, or as the premises shall be operated by the Lessee in the search for oil or gas and as provided in paragraph 7 following.”

The following paragraph states that if Beck Energy does not commence preparations for drilling a well on the property within 12 months, it must pay a “delay rental” to the landowners at the price of $1 to $5 per acre per year.

The lease does not use the words primary and secondary term, and the landowners argued that while the 10-year term is noted, Beck Energy could extend the time without drilling indefinitely by its own judgment that gas or oil could be produced and by paying the nominal delay rentals annually to the landowners.

Noting the lease is not identical to others the Court has considered, Justice French determined it was similar enough to justify applying prior rulings, including a 1902 Ohio Supreme Court (Brown v. Fowler) decision that delay rentals can be paid only in the primary term. If the Form G&T (83) leases have only a 10-year primary term, that is the longest Beck Energy can pay the delay rental to keep control of the land without drilling, the Court decided.

Also noting case law regarding similar leases, Justice French determined the phrase “capable of being produced” refers to a well rather than to undeveloped land. The Court ruled that the phrase “in the judgment of the Lessee” also refers to oil and gas production from a well, and not to the possibility of production from undeveloped land.

With that interpretation of the lease provisions, the Court determined the Form G&T (83) leases have a 10-year primary term and cannot be extended beyond that term without drilling for oil or gas. The Court concluded the leases were not void.

Regarding the implied covenant to develop, Justice French noted that Ohio courts will not impose one if the lease states a required time when the land must be developed or if the lease specifies that no implied covenant should be read into the agreement. She noted that the Beck Energy leases state both a definite time for development and that implied covenants are not applicable. The Court affirmed the Seventh District’s decision on the validity of the leases.

Requirements for Writs Not Met
To succeed with its requests for writs of mandamus and prohibition, Claugus Family had to demonstrate that it had no other “adequate remedy in the ordinary course of law.” Justice French ruled the Claugus Family had an adequate remedy because it could have intervened in the class-action lawsuit while it was on appeal to the Seventh District. She noted that the Seventh District issued the tolling order in September 2013, and that Claugus Family admitted that its lawyer learned about the order within a month of it being issued.

“The Seventh District did not issue its decision on the merits of the appeal until September 26, 2014. Claugus Family could have moved to intervene in the appeal when it learned of the tolling order or in the next 11 months,” Justice French wrote.

Chief Justice Maureen O’Connor and Justices Judith Ann Lanzinger, Sharon L. Kennedy, and William M. O'Neill concurred in the decision.

Dissent Sides with Claugus Family
In a dissenting opinion, Justice Paul E. Pfeifer wrote that he agreed with the majority that the leases were not perpetual, but found fault in how Claugus Family and the other landowners added to the class-action lawsuit without notice were treated.

Justice Pfeifer noted the attorney for Claugus Family argued before the Court that the Beck leases were valid, and that the time expired on them. The attorney was seated next to the Hustacks’ attorney, who argued the leases were void. At the opposing table was Beck Energy’s attorney, who claimed Claugus Family was “skillfully and properly” represented in the class action by the Hustacks’ attorney, even though they have completely opposite opinions.

“Because the class was certified and the leases tolled, Claugus estimates that it will lose hundreds of thousands of dollars based on losing the lease it negotiated with Gulfport. We have no way of knowing the total extent of the economic carnage wrought on the 700 or so other landowners in Monroe County and elsewhere in southeastern Ohio that are affected by this decision,” he wrote.

Justice Pfeifer described the actions of the lower courts as “unorthodox” and questioned if the trial court properly followed the rules by joining a class of landowners who claimed the leases were invalid with a class of landowners who claimed the leases were valid. Under the rules for this type of class-action lawsuit, the added landowners were not required to receive notice of the case or a chance to opt out of it. He wrote the Seventh District should have decertified the class, and should not have tolled the leases to extend the time Beck had to drill.

“Furthermore, it is clear that the certification of the class resulted in the denial of due process to Claugus (no notice and no opportunity to opt out) and adversely affected the property and contract rights of Claugus and other similarly situated unnamed class members. On this basis alone, the Court should grant the writs and relief sought by Claugus,” he concluded.

Justice Terrence O’Donnell joined the dissent.

2014-0424 and 2014-1933. State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, Slip Opinion No. 2016-Ohio-178.

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