MARIETTA -- Landowners are abuzz about leasing their land for shale production. New leases are typically paying royalties greater than the traditional 12.5%. New leases now come with up-front "bonuses" just to sign the lease. Some "bonuses" have reached as high as $5,000 per acre.
But, what if there is already a lease covering your land? The leases typically in place will preserve all of the oil and gas rights to the lessee to the center of the earth. So, if there is an existing gas lease, the landowner usually cannot re-lease the same property.
The question is: How long does an oil and gas lease endure? Most existing gas leases contain a habendum clause that specifies the duration of the lease. These leases have a primary term ranging from a few months to several years. This means that the lease, at a minimum, exists from the signing date until the end of the primary term.
Then, most leases have a secondary term. Most state that the lease will continue "so long as oil or gas is found in paying quantities" or similar words. This means that the lease continues as long as the lessee is profitably producing the well.
However, questions arise.
How much is "paying quantities"? Ohio courts have not provided a firm cutoff. Courts have held that zero production is not "paying quantities." Courts look to see if royalties have been paid to the landowner. Even small royalties are often sufficient to establish "paying quantities."
But….royalty means royalty. Some shallow producers are sending out small checks claiming to be royalties, but they are nothing but small checks. A true royalty should verifiably be correlated to the production from the property. Random small checks, unrelated to actual production, are not royalties.
Gaps in production? If production declines or stops, the operator has an obligation to restore production. The oft-quoted saying is that "the law abhors a forfeiture." So, courts will not fault an operator for stopping production for several months to get the well producing again. Several years is another matter.
What can the landowner do to cancel an unproductive lease? The first method is the statutory forfeiture. Under Ohio law, the landowner can send a notice via certified mail to the lessee declaring that the lease is void.
If the lessee fails to respond, and after thirty days from receipt, but before sixty days, the landowner can then file an "Affidavit of Forfeiture" with the county recorder's office. This notifies all potential lessees that the land is free of the lease that previously held the property.
Usually, however, the lessee responds. By statute, the lessee can file an "Affidavit of Production" or "Affidavit of Non-forfeiture" with the recorder's office. This nullifies the landowner's attempt to cancel the lease.
The only remaining option is to file a lawsuit. The landowner sues the operator/producer. The landowner asks the court to declare that the lease is expired because gas or oil is not being produced in paying quantities. Ultimately, the court will conduct a trial to decide whether the production satisfies the terms of the lease.
If the court sides with the landowner, the Court will issue an order directing the county recorder to cancel the lease. If the court sides with the operator, the lease remains in effect.
Is all of this worth it? Ten years ago, probably not.
Today? Yes, it is. As a landowner, you may be wrongfully barred from reaping the benefits of the new leases -- simply because the existing lessee claims "production." It is worth checking.
Disclaimer. As with all articles on legal issues, this article is intended for educational and informational purposes. The reader should not rely on this article as a substitute for actual legal advice regarding his or her particular case. You should consult an attorney regarding the specifics of your situation.
Ethan Vessels is an attorney in Marietta, Ohio with the firm of Fields, Dehmlow & Vessels, LLC. His firm is actively representing landowners throughout East and Southeast Ohio regarding oil & gas lease forfeiture actions, as well as royalty disputes and other oil & gas matters. Visit www.fieldsdehmlow.com for more information.