A recent decision from the Common Pleas Court of Washington County, Strahler v. Alliance Petroleum Corp. (Oct. 17, 2014), addresses two interesting issues concerning oil and gas leases.
In Strahler, the defendant-lessees were the current owners of two oil and gas leases covering the same 400 acre parcel. The first lease was executed in 1978 for a primary term of one year. The second lease was executed in 1984 for a primary term of three years. Production on the property commenced during the primary term of the 1978 lease and continued to the present.
One of the issues before the court was whether the 1984 lease was a top lease, or alternatively, a novation that extinguished the 1978 lease. The court found that the 1984 lease did not satisfy the requirements of a novation. Instead, the court found that the 1984 lease was a top lease. A top lease, the court held, “exists at its inception as a mere hope or expectancy in the extinction of existing superior leasehold rights, which extinction will confer upon the top lease owner the essence of a mineral lease, i.e., the right to explore for and produce minerals.”
The court also considered whether the producing well on the property held the entire acreage covered by the 1978 lease (400 acres) or only the 40 acre drilling unit set forth in the ODNR well permit. The court reasoned that the State of Ohio was not a party to the lease and that the language of the lease, not the permit, was determinative. The court found that the lease language contemplated that production held the entire 400 acres.
Read the full decision here.