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"Ohio Appellate Decision on Implied Duty to Develop Affirms Victory for Oil and Gas Producers"

By: Robert L. Bays, J. Breton McNab and J. Breckenridge Martin
Oil & Gas Alert
January 22, 2015

Last April, we alerted you to a trial court victory in an Ohio oil and gas case in which Bowles Rice defended the owners of the leasehold estate in the deep oil and gas formations from a challenge by the landowners who wished to have those rights deemed terminated or abandoned because production had only occurred from shallow formations (View April 2014 e-alert). Today, Bowles Rice is very pleased to announce that Bowles Rice lawyers Robert Bays and Bret McNab successfully defended the trial court's decision in an appeal to the Fourth District Court of Appeals of Ohio. (Read the opinion)

In this case, the landowners asked the Court of Common Pleas in Washington County, Ohio to declare two oil and gas leases forfeited or abandoned as to formations below the Germantown Sands since there had been no production of oil and gas below that formation. The trial court refused, finding instead in favor of the owner of the deep rights leasehold estate and holding there was no abandonment and no breach of the implied covenant to development because production in paying quantities occurred on the leased premises from shallow producing wells drilled above the Germantown Sands. On appeal, the landowners contended the deep rights were separated from the shallow rights by a 1960 assignment of the lease which, they argued, created a new and distinct leasehold with its own independent obligations and duties to develop. The Fourth District Court of Appeals of Ohio rejected the argument.

This is a significant decision for Ohio oil and gas producers. Recent interest in the Utica Shale and the bonus money offered for new leases have made every old oil and gas lease susceptible to increasingly creative challenges by those who wish to "get out from under" them. Bob and Bret regard this decision as the first Appeals Court ruling that supports the proposition that an assignment of deep rights does not create a separate duty to develop where there has been shallow production under the lease.

For more information about this case or related matters, please contact Bob Bays, Bret McNab, or Breck Martin with the Bowles Rice Oil and Gas Industry Team or call (304) 485-8500.

Read the opinion here.