Oil and Gas Update
Ohio Supreme Court to Hear Appeal on Expansion of Implied Covenants
April 24, 2017
Ohio Supreme Court to hear case seeking to expand the implied covenant to reasonably develop to include the obligation to explore deeper formations in Alford v. Collins-McGregor Operating Company, Washington App. No. 16CA9, 2016-Ohio-5082.
In this case, the plaintiff landowners sought a declaration of partial forfeiture of their leases, as to all depths below the Gordon Sand Formation, on the grounds that the defendant lessee lacked the capital and equipment to explore and produce from depths below the Gordon Sand Formation; specifically, that the lessee was unable to drill a horizontal well to produce from the Marcellus and Utica Formations. The lessors had leased 74 acres to lessee in 1980, and in 1981 the lessee drilled a single conventional well that has continually produced commercial volumes of gas. The trial court granted the lessee’s motion to dismiss the complaint for failure to state a claim upon which relief could be granted. The appellate court, relying on a recent decision in Marshall v. Beekay Co., 2015-Ohio-238, 27 N.E.3d 1(4th Dist.), refused to expand the implied covenant to reasonably develop a leasehold estate to allow for the forfeiture of a lease as a remedy for undeveloped deep rights. The appellate court left the door open for the Ohio Supreme Court to consider the issue, however, noting that “this is a complex, evolving issue with no easy answer.”
The Supreme Court’s decision in Alford v. Collins-McGregor Operating Company could have a substantial impact in Ohio in litigation concerning implied covenants to develop.
This article was authored by Elizabeth Elmore, Jackson Kelly PLLC. For more information on the author, see here.