Submitted March 1, 2017
from the Court of Appeals for Washington County, No. 14CA13,
Fields, Dehmlow & Vessels, L.L.C., and Ethan Vessels, for
Hanlon, Estadt, McCormick & Schramm Co., L.P.A., and Erik
A. Schramm, for appellee Alliance Petroleum Corporation.
Kegler, Brown, Hill & Ritter Co., L.P.A., and John P.
Brody, for appellee Artex Energy Group, L.L.C., successor in
interest to Anadarko E&P Onshore, L.L.C.
Sater, Seymour & Pease, L.L.P., Timothy B. McGranor, and
Gregory D. Russell, urging affirmance for amicus curiae, Ohio
Oil and Gas Association.
1} In this case, we are asked to determine a
lessor's right to terminate an oil and gas lease when a
lessee fails to make minimum annual-rental or royalty
payments. We determine that the provision in the lease
requiring the lessee to pay a minimum annual rental of $5,
500 does not invoke the termination provision in the
unrelated delay-rental clause and that the lease is not void
as against public policy. Accordingly, we affirm the judgment
of the court of appeals reversing the trial court's
summary judgment in favor of the lessors and remanding the
cause to the trial court for further proceedings.
FACTUAL BACKGROUND AND PROCEDURAL POSTURE
2} Plaintiffs-appellants, Ronald and Barbara Bohlen,
own 12 parcels of real estate in Lawrence Township in
Washington County, Ohio. The tracts total approximately 500
acres of land. In February 2006, the Bohlens entered into an
oil and gas lease with defendant-appellee Alliance Petroleum
Corporation ("Alliance"). The Bohlens granted
Alliance the exclusive right to use their land for oil and
gas exploration and operations, and in exchange, Alliance
agreed to make "royalty" payments to the Bohlens
based on Alliance's oil and gas production and proceeds.
3} In terms of duration, the lease provides for
"a term of One (1) years [sic] and so much longer
thereafter as oil or gas or their constituents are produced
or are capable of being produced on the premises in paying
quantities, in the sole judgment of the Lessee, or as the
premises shall be operated by the Lessee in the search for
oil or gas." The lease also provides that Alliance must
pay the Bohlens a "delay rental" of $5, 500 each
year "for the privilege of deferring the commencement of
a well, " otherwise the lease "become[s] null and
void" and the rights of the parties under the lease
terminate. Under the lease, a well is commenced "when
drilling operations have commenced on leased premises."
4} In addition, the lease contains an addendum that
provides that if the royalty payments Alliance makes to the
Bohlens are less than $5, 500 in any calendar year, then
Alliance must pay the Bohlens any shortfall between the
royalty payments and the $5, 500 "annual rental
5} Within a year after the lease was executed,
Alliance drilled and completed two wells on two separate
parcels on the Bohlens' property. Neither of the wells
produced any oil. Well No. 1 produced gas in 2007, but it has
not produced any since that time. Well No. 2 has produced gas
since its inception in 2007.
6} The Bohlens received annual payments from
Alliance as follows: $5, 500 in 2007, $4, 284.83 in 2008, $4,
172.47 in 2009, $4, 757.22 in 2010, $5, 448.51 in 2011, $5,
141.84 in 2012, and $5, 245.90 in 2013. Alliance assigned a
partial interest in the lease to Anadarko E&P Onshore,
L.L.C. ("Anadarko") in September 2011.
7} In 2013, the Bohlens filed a declaratory-judgment
action against Alliance and Anadarko, requesting an order
declaring the lease forfeited. The parties filed
cross-motions for summary judgment. In their motion for
summary judgment, the Bohlens argued that the lease violates
public policy and is void ab initio because it allows
Alliance and Anadarko to encumber the property indefinitely
by paying delay rentals. The Bohlens also argued that the
lease terminated under its own terms because Alliance and
Anadarko did not pay the minimum annual rental of $5, 500 as
required by the delay-rental clause. Finally, the Bohlens
argued that the lease terminated under its own terms because
of a failure of production.
8} The trial court found in favor of the Bohlens and
declared that (1) the lease is void ab initio as against
public policy because it allows the lessees to indefinitely
forestall production by paying a nominal annual delay rental,
(2) the lease had terminated under its own terms because
Alliance and/or Anadarko had failed to pay $5, 500 annually,
and (3) Alliance and Anadarko had violated the express and
implied terms of the lease by failing to produce sufficient
oil or gas from the wells. Thus, the trial court ordered
forfeiture of the lease.
9} Alliance and Anadarko appealed the trial
court's judgment. The Fourth District Court of Appeals
reversed the trial court's judgment. The appellate court
determined that the trial court erred in holding that the
lease is a no-term lease, because the lease contains a
primary term during which drilling must commence.
2014-Ohio-5819, 26 N.E.3d 1176, ¶ 19 (4th Dist), citing
Hupp v. Beck Energy Corp.,2014-Ohio-4255, 20 N.E.3d
732, ¶ 115 (7th Dist.). The appellate court determined
that the trial court erred in holding that the lease allows
Alliance and/or Anadarko to extend the lease in perpetuity by
paying a delay-rental fee, because the delay-rental clause
applies only during the primary term of the lease.
Id. at ¶ 20. The appellate court also
determined that the trial court erred in holding that the
lease had terminated when Alliance failed to pay the annual
minimum rental of $5, 500 as required in the lease addendum.
Id. at ¶ 26. According to the Fourth District,
because Alliance began drilling its wells in 2007, within the
one-year primary term, the termination provision never became
effective and the requirement in the addendum that the lessee
pay $5, 500 a year did not revive the termination provision.
Id. Finally, the appellate court determined that the
trial court erred in holding that the lease had expired
because of Alliance and/or Anadarko's failure to produce
oil or gas in ...