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Ohio Appeals Court Overturns Ruling That Held Certain Oil and Gas Leases Were Void

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In Hupp v. Beck, Ohio’s 7th District Court of Appeals overturned the trial court’s decision that certain oil and gas leases were void ab initio (i.e. at their inception) because the trial court considered them to be a “no term or perpetual lease” due to the delay rental provisions and a secondary term that defined production in paying quantities as being determined by the “judgment of the lessee.”

Appellant, Beck, appealed the trial court’s ruling that appellant’s preprinted lease forms were void because they were no term/ perpetual leases, and that appellant breached the implied covenant to reasonably develop. The appellant used pre-printed forms that contained a 10 year primary term and a secondary term that was in effect so long as oil and gas were produced in paying quantities “in the judgment of the lessee.” The delay rental clause stated that the lease will terminate if a well was not commenced in 12 months unless delay rentals were paid.

The court of appeals ruled that the lease was not a void “no term” lease because it contained two distinct terms: a 10 year primary term, and a secondary term that would last as long as oil and gas were produced. Even though the additional words “in the judgment of the lessee” were added, the court held that the lease was still not perpetual because an operator is under a good faith requirement to determine “paying quantities,” and it would be uneconomic to continue drilling.

In addition, the court of appeals clarified that the purpose of delay rentals are a substitute for drilling while the lease is still in the primary term. The court further noted that the implied covenants under a lease can be expressly waived. The 7th District Court of Appeals has jurisdiction over Belmont, Carroll, Columbiana, Harrison, Jefferson, Mahoning, Monroe, and Noble Counties. This case can still be appealed to the Supreme Court of Ohio.

Click here to read the decision.

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