On November 5, 2015, in Chesapeake Exploration, L.L.C., et al. v. Kenneth Buell, et al., 2015-Ohio-4551, the Ohio Supreme Court issued its second decision interpreting Ohio’s Dormant Mineral Act (the “ODMA”). The ODMA is a statute that allows a surface owner of a severed estate to have subsurface oil and gas rights deemed abandoned and vested in the surface owner if there has not been any specified savings activities, including any recorded title transactions, within a 20-year period. The case addresses two questions of state law certified from the U.S. District Court for the Southern District of Ohio. By a five-justice majority, with four justices concurring in the reasoning, the court ruled that a recorded oil and gas lease is a “title transaction” sufficient to prevent the subject mineral rights from being deemed abandoned under the statute. The court also held unanimously that the unrecorded expiration of an oil and gas lease does not qualify as a “title transaction.”
A Recorded Oil and Gas Lease Is a “Title Transaction” Under the ODMA The first certified question was whether the recorded lease of a severed subsurface mineral estate is a “title transaction” under R.C. 5301.56(5)(3)(a). As an initial matter, the court considered the scope of the definition of “title transaction” as used in the ODMA. The Marketable Title Act, the broader statutory scheme that encompasses the ODMA, defines a “title transaction” as “any transaction affecting title to any interest in land, including title by will or descent, title by tax deed … warranty deed, quit claim deed, or mortgage.” The respondents argued that because an oil and gas lease is not listed among the expressly enumerated transactions in the statute, it does not qualify as a “title transaction.” The court rejected this view, and instead accepted the petitioners’ position that a “title transaction” under the statute is not limited to the transactions listed. The court reasoned that the word “any,” by definition, is not a word of limitation. The court additionally held that a title transaction was not limited to transactions that transfer an ownership interest in property, but that it also encompassed an interest in using the land.
Having determined that the definition of “title transaction” was not limited to the expressly enumerated events in the statute, the court turned to the question of whether an oil and gas lease was a “transaction affecting title to any interest in land.” The court pointed out that the Ohio General Assembly recently clarified that both licenses and leases of oil and gas rights create an interest in real estate. See R.C. 5301.09. In determining whether the creation of that interest in real estate causes the mineral interest to be the “subject of a transaction affecting title to any interest in land,” the court examined the “unique nature” of oil and gas leases, and reviewed the rights commonly granted under such leases. The court stated that the subject lease, as well as oil and gas leases cited in prior Ohio cases, granted to the lessee the exclusive right to use the mineral estate to develop and produce the oil and gas. The subject lease also provided the lessee the right to conduct geophysical tests, install roads, construct pipelines, and restrict the lessor’s use of the surface estate within a certain buffer around a well or pipeline. Accordingly, the court determined that “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.” Because “[t]he lessee also enjoys reasonable use of the surface estate to accomplish the purpose of the lease … the lease affects the possession and custody of both the mineral and surface estates,” and a lessor effectively relinquishes all but an interest in the bonus, delay rental, and royalty payments provided for in the lease. Furthermore, an oil and gas lease is generally binding on successors and therefore is an encumbrance that remains with realty.
Finally, the court noted that a recorded lease in the chain of title notifies all others with a potential interest, and in that way is more of an encumbrance than a mortgage – one of the specifically enumerated title transactions in the statute. Ultimately the court held that because the “effect on ownership, possession, and custody is an inherent attribute of an oil and gas lease,” a recorded lease constitutes a title transaction because “it affects title to the surface and mineral owners’ interest in land.” It is therefore a saving event under R.C. 5301.56(B)(3)(a) because “the mineral interest has been the subject of a title transaction that has been filed or recorded in the appropriate county recorder’s office.”
The Unrecorded Expiration of an Oil and Gas Lease Is Not a “Title Transaction” Under the ODMA The court next turned to the second question certified, “whether the expiration of a recorded lease and the reversion of the rights granted under that lease is a title transaction that restarts the 20 year forfeiture clock under the DMA at the time of the reversion.”
The court initially noted that there is no authority in Ohio on the issue, and declined to follow a Michigan case that had determined that the expiration of a mineral lease prevented abandonment of the mineral interest under a similar statute, based on differences in the language of the two statutory schemes. Finding no persuasive authority, the court focused on whether the expiration of a recorded oil and gas lease provided sufficient notice to third parties, emphasizing that the ODMA’s requirement that a title transaction be filed or recorded “furthers the legislative purpose of ‘simplifying and facilitating land title transactions,’ R.C. 5301.55, by providing record notice of title activity involving the mineral rights.”
The court declined to accept the petitioners’ argument that the notice requirement was satisfied by the recorded lease itself because it provides notice of both the lease term and expiration. The court found that “although the terms of the lease might describe the events by which expiration could occur, the lease itself does not provide notice of the actual occurrence of the lease expiration and the reversion of rights in the lessor. A title searcher looking at the lease will not be able to tell that the parties’ inaction has triggered the expiration.” As a result, the court found that the terms of a recorded oil and gas lease could not provide sufficient notice of activity under the lease, nor could the expiration of such a lease be considered a “title transaction that has been recorded or filed ... when the expiration is unrecorded.” The court emphasized that this holding did not apply to the recorded expiration or release of a lease.
The majority opinion was written by Justice O’Connor, and joined by Justices Lanzinger, French, and O’Neill. Justice Kennedy concurred with the majority’s decision, but would have found that a recorded oil and gas lease is a title transaction based upon different reasoning. Justices Pfeifer and O’Donnell dissented in part, and would have found that a recorded lease is not a title transaction under the Ohio Dormant Mineral Act.
Upcoming Cases This case marks the second major Ohio Supreme Court decision interpreting the ODMA, following Dodd v. Croskey, 37 N.E.3d 147 (Ohio 2015), issued by the court in June 2015. The cases of Walker v. Shondrick-Nau, Case No. 2014-0803, and Corban v. Chesapeake Exploration, L.L.C., Case No. 2014-0804, have been briefed and oral argument has been heard by the court. At issue in those cases is whether the ODMA as originally passed in 1989, or as amended in 2006, applies to claims asserted after 2006 alleging that the rights to oil, gas, and other minerals automatically vested in the surface landholder prior to the 2006 amendments as a result of abandonment. Corban also addresses whether payment of a delay rental during the primary term of an oil and gas lease is a title transaction and “savings event” under the ODMA. The court will hear oral argument in the case of Eisenbarth v. Reusser, Case No. 2014-1767, on November 17, 2015, in which it will consider, among other issues, whether the “look-back” period under the 1989 ODMA is fixed or rolling.
Client Alert 2015-312