This Ohio Supreme Court case involved a dispute as to whether the State of Ohio recognized the implied covenant to explore further, and if so, whether partial horizontal forfeiture can be used to remedy the breach of this covenant.13 The court determined that the issues in this case were already governed by the implied covenant of reasonable development, and creating an additional covenant would be unhelpful. The second issue was quickly deemed irrelevant because there was no need to apply a remedy for an unrecognized covenant.
Linda Griffith Alford, George Alford Jr., Bershelle Alford Giambattista, Joseph Alford, Judith Hanlon Farnsworth, Donna R. Hanlon, and James C. Eutzler (“the Landowners”) owned 74 acres of land in Washington County, Ohio, and they entered into an oil and gas lease with Collins- McGregor Operating Company (“Collins-McGregor”) on September 16, 1980.14 The lease provided for a primary term of one year and as long thereafter as oil or gas was produced from the land. A well was drilled in 1981, and it continuously produced oil and gas in paying quantities from a formation called the Gordon Sand. Since that time, there was not any production from the lands at any depths below the Gordon Sand.
In 2015, the Landowners filed suit against Collins-McGregor for breach of implied covenants and sought a judgment that the portion of the lease covering depths below the Gordon Sand was terminated. They contended that exploration and production of oil and gas had occurred near their property from the Marcellus and Utica formations, which had depths below the Gordon Sands. They argued that Collins-McGregor did not attempt to drill to levels deeper than the Gordon Sand because they did not have the equipment or financial resources to do so, and therefore, the lease had terminated as to the deeper depths for failure to comply with the implied covenant to explore further.15 Collins-McGregor responded with a motion to dismiss for failure to state a claim asserting the state of Ohio did not recognize the implied covenant to explore further, and even if it did, the remedy of horizontal forfeiture was not an available remedy. The trial court granted the motion to dismiss, and on appeal, the holding was affirmed by the appellate court.
The Landowners appealed to the Supreme Court of Ohio claiming the appellate court erred in upholding the dismissal of their complaint because their lawsuit alleged a breach of the implied covenant to explore further. The court acknowledged that due to the fact that the lease did not contain a disclaimer of implied covenants, nor did it address whether any specific number of wells must be drilled or depth to which any wells must be drilled, the lease was subject to the implied covenant of reasonable development.16
The court reasoned that the implied covenant of reasonable development focused on all facts and circumstances relevant to development, including those that relate to exploration. The court determined that creating an implied covenant to explore further was too narrow because it would only focus on a small subset of factors that are relevant to the overall profitability of development. Therefore, the court held that recognizing a separate covenant to explore further would be excessive and unhelpful because the Landowners’ interests were already adequately protected by the implied covenant of reasonable development.17
The Supreme Court of Ohio upheld the appellate court holding and found that the state of Ohio did not recognize the implied covenant to explore further; therefore, the Landowners had failed to state a claim upon which relief could be granted. The court suggested the implied covenant of reasonable development was the proper vehicle for the Landowners’ suit, but because the Landowners had only raised the implied covenant to explore further in their appeal, the court did not address the issue.18
In conclusion, an implied covenant to explore further does not exist as a separate covenant in Ohio, but an operator may still have a duty to explore further under the covenant of reasonable development. If a lessor believes their interest is affected by a lessee’s failure to explore additional depths and formations, the implied covenant to reasonably develop will sufficiently protect their interests and is the proper vehicle on which to base a suit.
12 Alford v. Collins-McGregor Operating Co. , 152 Ohio St. 3d 303, 2018-Ohio-8, 95 N.E. 3d 382.
13 Id. at ¶2.
14 Id. at ¶3.
15 Id. at ¶7.
16 Id. at ¶12.
17 Id. at ¶23.
18 Id. at ¶24.