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Tuesday, January 9, 2018

Landowners Lose Another Utica Shale Case Before Ohio Supreme Court

From VORYS:
In a January 3, 2018 decision, the Supreme Court of Ohio held that Ohio does not recognize an implied covenant to explore further as a distinct implied covenant in oil and gas leases. See Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8
BACKGROUND 
The appellant-landowners were subject to an oil and gas lease executed by their predecessors in favor of the appellee-lessee in 1980. The landowners’ lease contained a one-year primary term and a standard habendum clause. The lease did not require the lessee to drill a specific number of wells or produce from a particular depth. It also did not disclaim implied covenants. One well was drilled under the lease in 1981, which produced from the Gordon Sand formation. In 2015, the landowners filed suit, alleging that while deeper formations like the Utica and Marcellus shales were being developed near their property, their lessee had not explored for oil and gas on their property from any depths below the Gordon Sand. The landowners claimed that this failure violated an implied covenant to explore further, and they asked the court to forfeit the lease as to the deeper depths. 
The lessee successfully moved to dismiss the suit, arguing that Ohio law does not recognize the remedy of horizontal forfeiture, and the court of appeals affirmed. On appeal to the Supreme Court of Ohio, the landowners claimed that lower courts were wrong in dismissing their suit, as they stated a claim for the breach of the implied covenant to explore further, and that such a claim could be remedied through horizontal forfeiture of the unexplored depths.
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