This case involves the issue of whether implied covenants in an oil and gas lease were breached and, if so, whether that breach resulted in a forfeiture of the lease. The court determined that the express language of the lease did not prevent reading implied covenants into the lease. However, the court also found that because the well continuously produced in paying quantities, there was no breach of any of the implied covenants. Finally, the court noted that a breach of an implied covenant rarely results in termination of a lease and explicitly declined to recognize partial horizontal termination of an oil and gas lease in Ohio.
In 1972, Appellant’s parents, as owners in fee simple to a 113-acre tract, executed an oil and gas lease granting Appellees, Positron Energy Resources, Inc., rights to the oil and gas minerals underlying the tract.59 Subject to the lease, Appellees drilled one well on the tract. In 2000, Appellant’s mother executed a deed to 29.803 acres of the original 113-acre tract, subject to the 1972 lease. Appellees’ well was located on the deeded land. Appellant later inherited the remaining acreage.
Appellant sought termination only to the remaining acreage. In April 2014, Appellant filed for a declaratory judgment, claiming that the 1972 oil and gas lease had terminated with respect to that acreage when Appellees breached multiple implied covenants. In the alternative, Appellant sought a partial horizontal forfeiture of the lease.60 The trial court dismissed Appellant’s complaint. On appeal, Appellant raised three points of error: (1) that the trial court improperly applied and analyzed the implied covenant to conduct all operations that affect Appellant’s royalty interest with reasonable care and due diligence; (2) that the lease terminated due to a breach of the implied covenant to explore further and reasonably develop;61 (3) and that the trial court improperly found that Appellant was required to give 10 days’ written notice of failure to pay shut-in payments before filing his complaint to terminate the lease.
Regarding the first point of error, Appellant argued that the well at issue was not operated with reasonable care and due diligence in order to maximize gas production.62 The court, noting that implied covenants may be construed so long as the lease contains “no express provisions to the contrary,”63 proceeded to analyze the lease under the test of whether there had been continuous production in paying quantities. The court defined production in paying quantities as quantities of oil or gas sufficient to yield profit, even if marginal, minus operating expenses, but not factoring in sunk costs or the amount of royalties paid.64 Relying on expert testimony, the court agreed with the trial court that the well continuously produced in paying quantities and that the Appellant received economic benefit from the production; therefore, no breach of an implied covenant occurred.
Addressing the second point of error, the court focused on Appellant’s alternative plea, seeking a partial horizontal forfeiture of the lease. Noting that Ohio law has never provided for partial horizontal forfeiture of a lease, the court analyzed prior decisions in which horizontal forfeiture had been sought for deep rights.65 Although the Appellant cited various cases where a vertical forfeiture was held to be appropriate, it was granted in situations where there was a violation of an implied covenant.66 As discussed above, there was no breach of any implied covenants and, therefore, no reason to allow a partial forfeiture, either vertically or horizontally. Thus, the court overruled Appellants second point of error.67
The court briefly discussed Appellant’s third point of error and found that the language of the lease did require Appellant to give 10 days’ written notice to Appellees for failure to pay shut-in payments before filing his complaint. However, the court held that Appellant’s failure to provide written notice was merely an additional basis for dismissing Appellant’s complaint.68
Ultimately, the court found no merit to Appellant’s three points of error and affirmed the holding of the trial court dismissing Appellant’s claim. The court’s analysis clarified that the standard for determining if a covenant has been breached during the second term is whether there has been continuous production in paying quantities and reiterated that such production will hold the entire lease. Finally, the court’s holding reaffirms Ohio case law declining to recognize partial horizontal lease forfeitures.
58 Fox v. Positron Energy Resources, Inc., 4th Dist. Washington No. 17CA2, 2017-Ohio-8700.
59 Id. at ¶ 4. A second lease was executed on the same lands in 1978, and a well drilled near the first one; this lease and well are not at issue in this case.
60 Id. at ¶ 6.
61 Id. at ¶ 40. The court noted that Appellant alleged a breach of the implied covenant to prevent drainage but did not develop this argument, and therefore, the court did not address the issue.
62 Id. at ¶ 13.
63 Id at ¶ 12 (citing Bohlen v. Anadarko, 2014-Ohio-5819, 26 N.E.3d 1176 (4th Dist.)).
64 Id. at ¶ 13.
65 Id. at ¶ 44-49 (citing Alford v. Collins-McGregor Operating Co., 4th Dist. Washington No. 16CA9, 2016-Ohio-5082; Marshall v. Beekay Co., 2015-Ohio-238, 27 N.E.3d 1 (4th Dist.)).
66 Id. at ¶ 41, 43.
67 Id. at ¶ 42.
68 Id. at ¶ 51.