Ohio’s Seventh District Court of Appeals recently held that an “anti-washout” provision found in multiple assignments of overriding royalty interests covering leases that subsequently expired was not binding on the original lessee’s assignees, which had taken new leases to those same lands, as there was no privity of contract. See, Marquette ORRI Holdings, L.L.C. v. Ascent Resources-Utica, L.L.C. (2022-Ohio-3786). This case marked the first time that an Ohio court considered whether an “anti-washout” provision in an assignment of overriding royalty interests was binding on subsequent lessees.
In Marquette ORRI Holdings, L.L.C., Marquette Exploration, LLC acquired oil and gas leases in Belmont and Jefferson Counties. Thereafter, it recorded multiple assignments conveying overriding royalty interests in certain of those leases to its affiliate, Marquette ORRI Holdings, LLC. Marquette ORRI Holdings, LLC then assigned a portion of these overriding royalty interests to Utica ORRI Holdings, LLC. The foregoing overriding royalty interest assignments contained an “anti-washout” provision, which was designed to prevent a lessee from letting a lease expire only to sign a new lease with the mineral owner and “wash-out” the overriding royalty interest. Specifically, the assignments included an extension and renewal clause stating that the overriding royalty interest would apply and attach to various instruments that would perpetuate the original lease and/or any new lease covering the leased premises “taken, contracted for or acquired by Assignor or an Affiliate of Assignor” within one year of the expiration of such lease. In addition, the assignments contained a provision stating that the terms and conditions therein shall be binding on the parties’ successors and assigns.
Following the assignments of overriding royalty interest, Marquette Exploration, LLC merged into Hess Corporation, who assigned the leases to Ascent Resources-Utica, LLC. Afterwards, EQT Production Company, and XTO Energy, Inc. each acquired one of the leases from Ascent. Some time after, certain of the leases expired and, within one year of said expiration, the landowners agreed to a new lease with Ascent, EQT, or XTO. Although oil and gas was produced from wells drilled under the new leases, no overriding royalty interests were paid to Marquette ORRI Holdings, LLC or Utica ORRI Holdings, LLC. Consequently, they filed claims against Ascent, EQT, or XTO for breach of contract, amongst other claims. The trial court ruled that the overriding royalty interests could not be extended or renewed once the underlying leases expired.
On appeal, the Court acknowledged that the only question to be answered was whether Ascent, EQT, or XTO were bound by the terms of the expired leases and the assignments of overriding royalty interest; specifically, the extension and renewal clause. The Court affirmed the trial court’s ruling and held that the extension and renewal clauses were not binding on Ascent, EQT, or XTO. In coming to its decision, the Court explained that a contract is binding only upon the parties to the contract and those in privity with them. Because Ascent, EQT, or XTO were not parties to the original (now expired) leases or the assignments of overriding royalty interests and did not assume the obligations thereunder, the Court found that there was no privity of contract between the disputing parties and held that the overriding royalty interests expired when the original leases expired.