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Bohlen v. Anadarko E&P Onshore, L.L.C.

Supreme Court of Ohio

June 1, 2017

Bohlen et al., Appellants,
v.
Anadarko E&P Onshore, L.L.C.; Alliance Petroleum Corporation et al., Appellees.

          Submitted March 1, 2017

         Appeal from the Court of Appeals for Washington County, No. 14CA13, 2014-Ohio-5819.

          Fields, Dehmlow & Vessels, L.L.C., and Ethan Vessels, for appellants.

          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.

          Vorys, Sater, Seymour & Pease, L.L.P., Timothy B. McGranor, and Gregory D. Russell, urging affirmance for amicus curiae, Ohio Oil and Gas Association.

          FISCHER, J.

         {¶ 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.

         I. 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 payment."

         {¶ 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 ...


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