This case centers on the proper application of the habendum clause in an oil and gas lease and various breach of implied covenant claims for an oil and gas lease that expired by its own terms in 2001. Victor Rudolph (hereinafter “Rudolph”), the Plaintiff/Appellant, brought a number of claims against the Defendant/Appellee, Viking International Resources Co., Inc. (hereinafter “Viking”) and other parties, in an attempt to formally terminate the lease and recover damages based on the alleged breaches of several implied covenants.
Rudolph acquired the subject property in 1994 subject to a lease granted by a previous landowner in 1978. The parties did not dispute that the well on the leased premises did not produce any oil and gas from 1998-2001. Viking acquired an interest in the lease in 2003. Later, Rudolph transferred the surface estate and reserved the mineral interest. In 2012, Rudolph received a division order for the subject property. Believing the lease had terminated, Rudolph did not sign and return the division order.28
In 2014, Rudolph filed suit against Viking and other interest holders on the lease. Rudolph claimed that the lease terminated by its own terms as a result of a period of non-production from 1998-2001 and that the Defendants had violated several implied covenants. Both Viking and Rudolph filed for summary judgment. The trial court granted Viking’s motion on the grounds that Rudolph’s claims were barred by the statute of limitations and laches. Rudolph appealed.29
Rudolph brought a number of issues on appeal, in relevant part:
1. That the trial court erred by ruling that the statute of limitations barred his claims that the lease had terminated by its own terms;
2. That the trial court erred by granting Viking’ summary judgment defense of laches;
3. That the trial court erred by granting summary judgment to Viking on the merits of the implied covenant claims; and
4. That the trial court erred by denying Rudolph’s summary judgment motion for declaratory judgment.30
In Ohio, courts must look to the nature or subject of a claim to determine the appropriate statute of limitations.31 Although some technicalities may be disputed, it is generally accepted that an oil and gas lease creates an interest in real property for the lessee and not a mere contractual right.32 Rudolph’s claim was based on an oil and gas lease creating a real property interest in Viking and the other lessors; therefore, the 21-year statute of limitations for recovery of real property is appropriate, and not the 8 or 15-year statutes for contract claims.33,34 Rudolph filed this claim in 2014, well within the twenty-one years. Unlike the real property interest created by a lease, the implied covenants of an oil and gas lease originate in contract law and are governed accordingly.
As such, Rudolph’s claims for breaches of implied covenants were subject to the 15-year statute of limitations on contract claims and improperly dismissed.
Because Rudolph’s claims were governed by 21 and 15-year statutes of limitations, his 2014 filing was not barred by statute.
The court then considered the second point of error; that the trial court erred in granting Viking summary judgment on a laches theory.
The trial court also granted summary judgment in favor of Viking’s claim that Rudolph was estopped from bringing his claims under the doctrine of laches. Laches is an equitable claim centered on the failure to assert a right for an unreasonable and unexplained length of time, under circumstances prejudicial to an adverse party.35
Laches is comprised of four elements established by a preponderance of the evidence:
1. Unreasonable delay or lapse of time in asserting a right;
2. Absence of an excuse for the delay;
3. Knowledge, actual or constructive, or the injury or wrong; and
4. Prejudice to the other party.36
Rudolph said many times that he believed the lease had terminated by its own terms until he received the division order for the subject property. Until Rudolph received the division order in 2012, he had no reason to believe an adverse claim existed against his mineral interest and no reason to file suit to protect that interest. The court did not feel that a 2-year delay in filing suit from this event was unreasonable. Further, even if the court were to assume that Rudolph’s delay was unreasonable (thereby satisfying the first element above), Viking presented no evidence that the delay prejudiced Viking nor that Rudolph knew of or caused the purported injury.37 “Viking [could not] establish a laches defense to Rudolph’s claim that the lease terminated for lack of production because the first element – an unreasonable delay in asserting a right [did] not exist.”38
Although the court conceded that Laches could effectively bar Rudolph’s claims for breach of implied covenants, it noted that Viking failed to satisfy all elements of the defense in its motion for summary judgment and reversed the trial court on the second point of error.
Next, the court turned to Rudolph’s third point of error, that the trial court erred by granting Viking summary judgment on the merits of the implied covenant claims.
Neither party moved for summary judgment on this matter, yet the trial court granted summary judgment to Viking. The appellate court overturned this decision stating that the trial court should have allowed Rudolph an opportunity to present evidence on this matter prior to deciding on it.39
Finally, the appellate court looked at the trial court’s decision to deny summary judgment on Rudolph’s claim to quiet title.
The court held that the period of non-production from 1998-2001 terminated the lease automatically. As discussed above, oil and gas leases create real property interests; here, the lease created a fee simple determinable in Viking and a possibility of reverter in Rudolph. In such a case, as soon as the lease terminates, the mineral owner recovers the previously leased mineral interest and holds that interest in fee simple. When a lease terminates for non-production, as in the case at hand, it does so automatically and by its own terms; no affirmative action is required by a landowner in order to formally terminate a lease.40
The court concluded that there was no genuine issue of material fact and that the trial court erred in its decision to deny summary judgment. The lease terminated due to non-production and the mineral interest reverted back to Rudolph automatically upon said termination.
In conclusion, the Appellate Court held that Rudolph was prejudiced by the trial court and reversed the trial court’s decision. Non-production automatically terminated the lease. Rudolph was not obligated to bring a claim any sooner than he did because the mineral interest already reverted to him by the terms of the lease and he had no notice of an adverse claim until 2012. Further, Rudolph was not estopped from bringing his claim as a result of the statute of limitations, nor as a result of Viking’s claim of laches.41 Oil companies should note that it is extremely important to examine all of the production records from a lease or well before buying an interest in a potentially expired lease. Moreover, oil and gas leases are real estate transactions that automatically terminate according to the specific terms of their habendum clauses.
27 Rudolph v. Viking International Resources Co., Inc., 4th Dist. Washington No. 15CA26, 2017-Ohio-7369.
28 Id. at ¶ 14-15.
29 Id. at ¶ 29.
30 Id. at ¶ 30.
31 Id. at ¶ 42.
32 Id. at ¶ 45.
33 Ohio Rev. Code Ann. § 2305.04 (West), Ohio Rev. Code Ann. § 2305.06 (West).
34 Rudolph at ¶ 36.
35 Id. at ¶ 66 (quoting Connin v. Bailey, 15 Ohio St.3d 34, 35, 472 N.E.2d 328 (1984)).
37 Id. at ¶ 69.
38 Id. at ¶ 23.
39 Id. at ¶ 79.
40 Id. at ¶ 46.
41 Id. at ¶ 82.