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Federal Court Addresses Challenge to Effect of Oil and Gas Lease's Habendum Clause

By Mark Hylton

On March 10, 2022, the United States District Court for the Southern District of Ohio rejected the claim that the subject oil and gas lease had terminated as to acreage located outside of a producing unit based on the lease’s operations clause.

In Scenicview Estates, LLC v. Eclipse Resources I, LP, S.D.Ohio No. 2:19-cv-39, 2022 U.S. Dist. LEXIS 42373 (Mar. 10, 2022), lessor’s predecessor entered into an oil and gas lease with lessee for a five-year primary term set to end on September 19, 2017. The lease’s habendum clause also expressly contemplated that “operations . . . conducted on the Leasehold or lands pooled or unitized therewith” would hold the lease into the secondary term. Notably, the lease further provided that operations included “geophysical and other exploratory work, including, but not limited to, activities to drill an initial well” and “any preliminary or preparatory work necessary for drilling, conducting internal technical analysis to initiate and/or further develop a well, [and] obtaining permits and approvals associated therewith.” And, while not explicitly noted in the decision, from the nature of the claims, it appears that the lease also contained a Pugh clause (as a portion of the lease had already been included in a unit that had been producing for several years prior to the suit being filed).

In late-2018, lessor filed suit, alleging that the lease had expired as to the acreage outside of the producing unit. Finding that it had not, the Court began its analysis by noting that the lease was a contract, and that ordinary methods of contract interpretation should therefore be applied (e.g., unambiguous language in the lease should be given its plain meaning, etc.). Looking to the lease, the Court observed that it defined “operations” to include “preliminary or preparatory work necessary for drilling” and “conducting internal technical analysis.” That language was satisfied, according to the Court, by lessee’s activities both before and after pooling the outside acreage into a new unit just before the expiration of the lease’s primary term. That included title research, budgeting activities, surveying, mapping, cellar installation for the new unit wells, and the negotiations with other working interest owners in the unit area. In doing so, the Court expressly rejected lessor’s argument that those activities were inapplicable because they were not actually conducted physically on the land covered by the lease or the newly-pooled unit, finding that reading of the habendum clause to be “unreasonable” and inconsistent with a construction against lease expiration (which was required by another lease provision).

While Ohio’s body of oil and gas case law continues to develop, one thing remains clear. When it comes to these sorts of fact-based determinations involving the application (or non-application) of provisions in an oil and gas lease, the unambiguous language of the lease will be analyzed like the provisions of any other contract.

Tags: Lease, "Oil and Gas Lease", Operations, Habendum

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