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Current Issues In Oil & Gas Leasing

Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

Many landowners are reviewing the terms of their existing oil and gas leases very carefully to determine whether or not they can take part in the recent oil and gas leasing boom affecting Eastern Ohio.  In many cases, the answer is that the lease is valid and there is nothing the landowner can do to get out of the lease.  However, there are a number of circumstances that could give rise to a claim that the oil and gas lease is invalid. 

Landowners must carefully review their delay rental payment provision in the lease.  Most delay rental paragraphs provide for the lease to terminate “unless” the lessee has tendered delay rental payments to the landowner within a specified time.   If the lessee fails to deliver the payment on time, in many cases the lease will be deemed to be void and forfeited.  However, landowners who are presented with late payments should beware that cashing the late payment could ratify the lease.  Thus, landowners should not cash delinquent checks until they consult with an oil and gas attorney to determine whether or not the lease is void.

Additionally, landowners whose oil and gas leases were not notarized or were not properly notarized may also have a claim that their oil and gas lease is invalid.  Many lessees have a practice of having oil and gas leases signed, but notarized at a different location with the landowner not present.  Ohio law does not allow for out-of-presence notarization of documents like some other states.  As a result, if your oil and gas lease was not signed in front of a notary public, you may have a claim to have it deemed null and void.  To the extent the landowner has accepted royalties and other payments for several years, the ability to claim the lease null and void may be limited and estopped. 

Landowners should also review their lease to determine if their lease can be assigned.  Many oil and gas leases contain a provision prohibiting the lessee’s assignment of a lease to a third party without their consent.  As a result, if the lease is assigned, the landowner should promptly give notice to the oil and gas lessee that it is in breach of the lease and that no assignment is permitted without the landowner’s consent.  If the clause provides that the landowner’s consent cannot be unreasonably withheld, then the landowner will need to specify reasons to justify the refusal to consent to the assignment.  However, if no such reasonableness limitation is imposed in writing on the assignment clause, then the landowner is free to withhold consent for any reason.  The landowner should be very cautious about consenting to any assignment, due to the fact that many of Ohio’s oil and gas leases were written before the concept of horizontal drilling was ever considered.  Generally, a landowner should not consent to an assignment, regardless of the compensation offered, until one has attempted to amend the lease to address issues specifically associated with horizontal drilling. 

Additionally, landowners should review the terms of their pooling or unitization paragraph in the lease to determine if any limitations exist on the size of their oil and gas unit.  Many older leases in Ohio contain a unit size limitation of smaller than 640 acres.  Most lessees desiring to drill a well into the Utica Shale need unit sizes in excess of 640 acres.  As a result, many landowners are being approached by land persons in an effort to revise the size of their unitization clause.  Landowners should not consent to such a revision without taking the opportunity to amend their lease to provide additional protections for their land and to seek appropriate compensation.  Landowners should beware that the common response to these requests is a threat to drill around the landowner or that the landowner will be forced to be in the drilling unit.  By banding together, neighboring landowners can undermine these threats.

After years of owning the property, many landowners are disappointed to find out that the oil and gas rights were reserved by someone perhaps as long as 110 years ago.  However, landowners do have an opportunity to have these prior reservations deemed abandoned under Ohio’s Dormant Mineral Title Act.  Under the Dormant Mineral Title Act, a landowner can deem the oil and gas rights abandoned if they have not been assigned a tax parcel mineral I.D. number, no oil and gas has been produced from the property, and the prior reservation has not been referenced in the landowner’s recorded chain of title or the mineral reservation recorded chain of title in the last 20 years.  Those mineral interest holders desiring to reserve their rights should file an affidavit every 20 years in the county Recorder’s Office, or have a parcel number assigned to their mineral interests.  Under the Dormant Mineral Title Act, a landowner, wanting the reservation released, is required to serve notice, whether by certified mail or publication, upon the party who holds the reserved mineral rights.  Upon receipt of notice the party holding the reserved mineral rights has a period of 60 days in which to file an affidavit expressing the desire to retain the interest.  Failure to file the affidavit results in the mineral interest being deemed abandoned and reverting to the surface owner of the real estate. 

Many landowners also have problems getting a lessee to file a release of an expired lease, even though all parties agree the lease has terminated.  Landowners should consider using Ohio’s lease forfeiture/cancellation statute, which allows the landowner to serve a certified letter upon the lessee seeking to declare the lease void.  In the event the lessee does not file an affidavit opposing the lessor’s claim in the Recorder’s Office within 60 days of such notice, then the landowner has the ability to request the Recorder to stamp the lease forfeited by operation of law. 

In the event the lease has expired more than five years ago, typically the landowner can file an Affidavit of Non Compliance setting forth the fact that the lease has expired.  The Affidavit of Non Compliance is quicker than the lease forfeiture process discussed above, as it simply serves as evidence that the lease has expired but does not cancel the lease.  Unlike the forfeiture process, the Recorder will not stamp the lease forfeited.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

William G. Williams, Esq. is an oil and gas attorney with the law firm of Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.  

Copyright © 2011 Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

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