Ohio Supreme Court Finds Beck Energy Leases Valid
Today the Ohio Supreme Court held that a certain form oil and gas lease used by Beck Energy is not a lease in perpetuity, and thus, is not void. This is disappointing news for many Ohio landowners but it's no surprise. See Court News Ohio and the Slip Opinion.
What is surprising is the Court's broad language regarding the implied covenants, particularly the implied covenant of reasonable development. The Court states:
Courts have sometimes imposed upon the parties to oil and gas leases an implied covenant to develop in a reasonable period of time, but only when the lease fails to refer specifically to the timeliness of development. We will not impose an implied covenant to develop when the lease requires that development must commence within a certain period or when the lease specifies that no implied covenant shall be read into the agreement. (Internal citations omitted.) The [Beck Energy] lease at issue here requires that development commence within ten years, and thus it is not a lease in perpetuity like the lease at issue in Ionno (2 Ohio St.3d at 132, 443 N.E.2d 504). In addition, there is specific language in the lease that disclaims any implied covenants.
The Court is referring to the 10-year primary term of the Beck Energy leases at issue. Although many older leases contain a one- or two-year primary term, and recent shale leases generally contain a five-year primary term, I've yet to see an oil and gas lease that contains no primary term. Does the language cited above mean that there are no implied covenants in any lease containing a primary term? Unfortunately, this will become a source of additional litigation.