In Chesapeake Exploration, LLC v. Buell (Slip Opinion No. 2015-Ohio-4551) (Chesapeake), the Ohio Supreme Court addressed two certified questions from the United States District Court for the Southern District of Ohio.
Question 1: Is the recorded lease of a severed subsurface mineral estate a title transaction under the Ohio Dormant Mineral Act, Ohio Revised Code § 5301.56(B)(3)(a)?
The Dormant Mineral Act ("DMA") is codified in R.C. 5301.56. Pursuant to the current version of the DMA which was amended in 2006, a severed mineral interest will be deemed abandoned and reunited with the surface rights unless (1) a saving event has occurred in a 20-year window preceding the statutorily required notice by the owner of the surface rights, and (2) the surface owner has followed the requisite procedural steps described elsewhere in the statute. (We note that in this opinion the court does not address when the 20-year window begins for the original DMA, which was drafted in 1989.)
There are six possible saving events which are listed in R.C. 5301.56(B)(3). Pursuant to 5301.56(B)(3)(a), if a "mineral interest has been the subject of a title transaction that has been filed or recorded in the office of the county recorder of the county in which the lands are located," during the 20-year window, the DMA will not apply. Whether an oil and gas lease was a "title transaction" within the meaning R.C. 5301.56(B)(3)(a) was directly before the court in Chesapeake.
The court determined that a recorded oil and gas lease is a title transaction that satisfies R.C. 5301.56(B)(3)(a) and is therefore considered a saving event. The court noted that R.C. 5301.47(F) defines a title transaction as "any transaction affecting title to any interest in land...." The statute lists numerous instruments that affect title to land, but does not specifically list oil and gas leases. The court determined, however, that the list was not exclusive to those instruments enumerated, stating that "[a] title transaction is 'any transaction affecting title to any interest in land,' which means that it is not limited to the transactions enumerated in the statute or to transactions that transfer an ownership interest." Chesapeake, at ¶ 39.
The court then had to determine if a recorded oil and gas lease is a transaction that affects title to any interest in land. The court analyzed the nature of a recorded oil and gas lease to determine if, through such a lease, the mineral interest has been the subject of a "transaction affecting title to any interest in land" within the meaning of R.C. 5301.56(B)(3).
First, the court cited Harris v. Ohio Oil Co., 57 Ohio St. 118, 48 N.E. 502 (1897), in which an oil and gas lease was described as "more than a mere license" because it created a "vested, though limited, estate in the lands the purposes named in the lease." Chesapeake at ¶ 44 (citing Harris at 129-130). In Harris, the court held that "[a]n instrument in such form is more than a mere license. It is a lease of the land for the purpose and period limited therein, and the lessee has a vested right to the possession of the land to the extent reasonably necessary to perform the terms of the instrument on his part." Id. ¶ 47(Citing Harris at 129-130).
The court then noted that effective March 23, 2015, R. C. 5301.09 was amended as follows: "In recognition that such leases and licenses create an interest in real estate." So, from March 23, 2015, by statute an oil and gas lease creates an interest in real estate.
The court then analyzed the terms of the lease in question and noted that the lease restricted use of the surface estate, ran with the land, allowed reasonable use of the surface for production purposes, that only the lessee could terminate the lease, and several other provisions. The court explained: "We find that by these or substantially similar terms, the mineral interest has been the subject of a title transaction because the oil and gas lease affects title to the surface and mineral interests in land in a number of ways." Id. at ¶ 58).
The court explained that a "title transaction" as defined in R.C. 5301.47(F) is not limited to a transaction that alters an ownership interest. Transactions creating interests like easements or use restrictions are also title transactions. "The rights and privileges granted under an oil and gas lease, although limited to the purposes of the lease, are sufficiently vast to affect the possession and custody of the mineral estate, even if not its ownership." Id. at ¶ 60.
The court explained that an oil and gas lease granted the lessee the exclusive right to the mineral estate for a fixed term which can be extended by production. "Based on the vested nature of this grant, the oil and gas lease has been construed as transferring to the lessee a fee simple determinable in the mineral estate with a reversionary interest retained by the lessor that can be triggered by events or conditions specified in the lease." Id. at ¶ 61. As a result, "during the lease, the lessor effectively relinquishes his or her ownership interest in the oil and gas underlying the property in favor of the lessee's exclusive right to those resources." Id. at ¶ 62.
The court concluded "Under R.C. 5301.47(F), the recorded oil and gas lease constitutes a title transaction because it affects title to the surface and mineral owners' interests in land. And it is therefore a saving event under R.C. 5301.56(B)(3)(a) because '[t]he mineral interest has been the subject of a title transaction that has been filed or recorded' in the appropriate county recorder's office." Id. at ¶ 66.
Question 2: Is the expiration of a recorded lease and the reversion of the rights granted under that lease a title transaction that restarts the 20-year clock under the Dormant Mineral Act?
The court answered the question in the negative, stating that "the mere unrecorded expiration of a recorded lease and the reversion of rights cannot restart the clock." Id. at ¶ 68.
This result is contrary to the federal district court decision in McLaughlin v. CNX Gas Co., N.D. Ohio, 2013 WL 6579057, in which the court stated "the lease itself was a title transaction, there can be no dispute that the release of rights under that lease qualifies as a title transaction as well."
The court in Chesapeake explained that when an oil and gas lease expires by its term or by operations of law, there is no record notice that the mineral rights have reverted to the lessor unless the lessee takes the additional step of recording a formal release. The court explained that "even if the automatic expiration of an oil and gas lease was a "title transaction", it would not rise to the level of a saving event under R.C. 5301.56(B)(3)(a) when it is not filed or recorded as required by the statute." Id. at ¶ 75. However, the court also determined that the issue of a recorded formal transaction releasing rights under a lease was not before the court in this case. Thus, the court did not determine if a formal release would be considered a title transaction.
The court explained that the Petitioner argued that the lease itself should stop the 20-year clock for the entire term of the lease because it would be improper to say that the mineral interests were abandoned while subject to an active oil and gas lease. The court disagreed and explained that the term of the lease may be extended or caused to expire by any number of events. Thus, "the lease itself does not provide notice of the actual occurrence of the lease expiration and the reversion of rights in the lessor." Id. at ¶ 80. For that reason, a title examiner looking at the term of the lease cannot tell whether the lease has actually expired. The court concluded, "[t]hus, the terms of a recorded oil and gas lease cannot provide sufficient notice of activity under the lease to toll the 20-year clock during the life of the lease, nor can the expiration of such lease be considered a "title transaction that has been recorded or filed" within the meaning of R.C. 5301.56(B)(3)(a) when the expiration is unrecorded. Accordingly, we conclude that the unrecorded expiration of an oil and gas lease does not constitute a saving event under R.C. 5301.56(B)(3)(a) that would restart the 20-year clock." Id. at ¶ 81.
In this decision the court determined the recording of an oil and gas lease is a saving event and an unrecorded automatic release of the lease is not a saving event.
It is important to note that the court also determined the 20-year clock starts at the time the oil and gas lease is recorded and is not affected by the term of the lease. Based on this decision, when an oil and gas lease is filed of record, the title examiner will then look forward 20 years from the date the lease is recorded to determine if there is an additional saving event. It is possible that the lessee could record a release of the lease, but in this opinion the court did not determine if a recorded release would be a title transaction in accordance with R.C. 5301.56(B)(3)(a).
We also note that the court determined that actual production could restart the 20-year clock; however, based on the reasoning provided in this case, it is possible the court could determine the look-back period is not tolled during production. Since cessation of production is not recorded, a title examiner would be unable to determine by examining the record when production has ceased and the lease has expired. Thus, until the Ohio Supreme Court issues a decision on point, it would be prudent for a lessee to protect its mineral interest by filing a claim to preserve the mineral interest in compliance with 5301.56(B)(3)(e) even when there is actual production.
Finally, the court was clear that they were considering the 2006 DMA when making this decision. The original DMA ("1989 DMA") was amended in 2006 to include a notice requirement that must be provided by the surface owner. It is clear that an oil and gas lease would satisfy the definition of "title transaction" as provided in the 1989 DMA and would be considered a saving event. However, the 1989 DMA has numerous issues that are currently pending before the court. In particular, the court is considering whether the 1989 DMA automatically vests the severed mineral interest in the surface owner, the time when the 20-year look-back period begins, and whether the 20-year look-back period is rolling or static. Each of these issues must be resolved before we know what impact the above-discussed decision will have on the 1989 DMA.