Ohio Supreme Court Rules that Lease Expiration Claim is Subject to Twenty-One Year Statute of Limitations
Ohio Supreme Court Rules that Lease Expiration Claim is Subject to Twenty-One Year Statute of Limitations
Let’s assume you own a 173 acre farm in Washington County, Pennsylvania. You purchased the farm in 2018. Prior to purchasing the farm, the seller disclosed that there was an old abandoned gas well on the property that had not produced since 1997. The seller also informed you that the old well was probably drilled pursuant to a lease his grandfather had signed with XYZ Gas back in 1965. Given the long period of non-production, your counsel advised you prior to the closing that the 1965 Lease had likely expired and that you could lease the oil and gas rights to another driller. In 2019, however, Big Oil Inc. contacts you and requests permission to survey a new well pad site located in the middle of your farm. The landman informs you that Big Oil acquired the 1965 Lease from XYZ Gas in 2010 and now intends to drill three Marcellus wells from the new pad. You tell the landman that the 1965 Lease expired years ago due to non-production and that Big Oil would have to sign a new lease with you before any drilling could take place. The landman disagrees and says that the period of non-production is irrelevant and that the 1965 Lease remains valid because any “claim” seeking judicial termination of the lease is now “barred” by the statute of limitations. You are confused, frustrated and angry. How is it possible that your lease expiration claim could be time barred? This unfair and troubling scenario was recently addressed by the Ohio Supreme Court in Browne v. Artex Oil Company.
At issue in Artex was an oil and gas lease signed in 1975 (the “1975 Lease”). The 1975 Lease covered 86 acres in Guernsey County, Ohio and contained a primary term of one year and would remain in effect beyond 1976 so “long thereafter as oil and gas…is produced by lessee from the land”. Prior to expiration of the primary term, the lessee drilled one vertical well (the “Shallow Well”) on the property. No other wells were ever drilled.
Years later, Artex Oil Company (“Artex”) acquired the 1975 Lease and began operating the Shallow Well. Between 1999 and 2014, the Shallow Well produced approximately 1,721 barrels of oil.
In 2012, Mr. and Mrs. Barry Browne (the “Brownes”) purchased the property. Given the inconsistent and meager production from the Shallow Well, the Brownes filed a lawsuit in December 2014 seeking, inter alia, judicial termination of the 1975 Lease. The Brownes’ complaint alleged that the 1975 Lease had expired due to non-production. Specifically, the Brownes argued that the Shallow Well had not produced any oil or gas between 1976 and 1999. The Brownes based their allegation of pre-1999 non-production on the public reports filed with the Ohio Department of Natural Resources which showed no reported production from the Shallow Well between 1976 and 1999. Given this apparent lack of production, the Brownes contended that the 1975 Lease automatically terminated when the primary term expired in 1976.
In response, Artex asserted that Ohio’s fifteen (15) year statute of limitations barred the Brownes’ claim. Artex did not dispute or contest the periods of non-production prior to 1999. Instead, Artex simply argued that such “evidence” was irrelevant and immaterial because it was beyond the statute of limitations. In other words, Artex suggested that the court could only “look back” fifteen (15) years and could not rely upon periods of non-production which occurred beyond this statutory period. Conversely, Artex argued that since there was evidence of sufficient production after 1999 (i.e., within the fifteen (15) year look back period), the 1975 Lease remained in effect and the Brownes’ claim failed as a matter of law. The trial court agreed with Artex and dismissed the Brownes’ complaint.
The Brownes filed an appeal with Ohio’s Fifth District Court of Appeals. On appeal, the Brownes argued that the trial court erred by applying the fifteen (15) year statute as opposed to the twenty-one (21) year statute set forth in R.C. §2305.04. This section provides as follows:
“An action to recover the title to or possession of real property shall be brought within twenty-one years after the cause of action accrued, but if a person entitled to bring the action is, at the time the cause of action accrues, within the age of minority or of unsound mind, the person, after the expiration of twenty-one years from the time the cause of action accrues, may bring the action within ten years after the disability is removed.”
Alternatively, the Brownes argued that since an oil and gas lease conveys only a fee simple determinable estate, the occurrence of the “determinable” event (i.e., non-production) automatically terminates the lease. See, Chesapeake Exploration, LLC v. Buell, 45 N.E.3d 185 (Ohio 2015) (observing that “…the lessee’s interest automatically terminates upon the lessee’s failure to satisfy any of the listed provisions which would serve to extend the term of the lease. In such a case, no affirmative action on the part of the lessor is required to formally terminate the lease, it expires on its own terms…”). As such, the Brownes contended that their lease expiration claim was not subject to any statute of limitations – the 1975 Lease automatically expired without any judicial action. The Fifth District rejected both of these arguments and held that the Brownes’ claim was governed by the fifteen (15) year statute of limitations applicable to written contracts. The Brownes then appealed to the Ohio Supreme Court.
The Ohio Supreme Court first addressed Artex’s contention that the fifteen (15) year statute of limitation applies to a lease expiration claim. The panel correctly observed that an oil and gas lease creates only a fee simple determinable estate and that non-production during the secondary term can terminate the leasehold estate granted to the driller. The panel then opined that because lease expiration claims are ostensibly based on the occurrence of a determinable event (i.e., non-production), such claims are not technically “breach” of contract actions. Rather, the plaintiff-landowner is merely seeking judicial confirmation that the leasehold estate has expired:
“Although termination of a lease pursuant to a habendum clause occurs by operation of law, there is no record notice on the chain of title that the mineral rights have reverted to the lessor unless the lessee takes the additional step of recording a formal release. In the absence of a formal release, a lessor may ‘need to resort to the courts to obtain complete relief, i.e. cancellation of the lease of record and removal of the cloud from the title.’ Rudolph v. Viking Internatl. Resources Co., Inc., 2017-Ohio-7369, 84 N.E. 3d 1066 (4th Dist.), ¶ 41, citing Summers, Oil & Gas, Section 19:1 (3d Ed.2016). That is what the Brownes seek here-a judicial declaration that the lease terminated by its own terms due to lack of production and that the mineral estate reverted to the Brownes or to their predecessors in interest by operation of law.”
Because the Brownes’ claim did not arise out of a breach of the 1975 Lease, the panel concluded that the fifteen (15) year limitation set forth in R.C. §2305.06 was inapplicable. The Supreme Court essentially ruled that the Brownes’ complaint raised a property claim, not a breach of contract claim. As such, the panel reversed the Fifth District’s opinion and remanded the matter back to the trial court.
The panel next addressed the Brownes’ contention that no statute of limitation should apply to their lease expiration claim. The Brownes’ theory was not novel. Other courts, including intermediate appellate courts in Ohio, had previously ruled that lease expiration claims are generally not subject to a statute of limitations. See, Montana-Fresno Oil Co. v. Powell, 219 Cal.App.2d 653 (Cal. 1963) (“[I]f the term of the lease previously ended by reason of failure to produce oil in paying quantities, nothing that occurred after that time would cancel the termination or initiate a new lease”); Ladd Petroleum Corp. v. Eagle Oil & Gas Co., 695 S.W.2d 99 (Tex. App. 1985) (“[W]e conclude that once a lease terminates by its own terms, it cannot be ratified or revived”); Schultheiss v. Heinrich Enterprises, Inc., 2016 Ohio 121 (Fourth District – Washington County 2016) (observing that the statute of limitations and other equitable defenses are inapplicable to lease expiration claims); Cox v. Kimble, 2015 Ohio 2470 (Fifth District – Guernsey County 2015) (rejecting statute of limitation defense and reasoning that “when Appellees failed to drill the second well, they failed to meet the express terms of the secondary term…the lease terminated by its own terms and the 60 acres not included in the first well reverted to Appellants automatically”). These courts reasoned that because the property interest conveyed to the driller automatically terminates when the lease ceases to produce, the oil and gas rights revert back to the landowner by operation of law – there is no claim for relief subject to a statute of limitations. See, Tisdale v. Walla, 1994 WL 738733 (11th District – Ashtabula County 1994) (“[I]n such a case, no affirmative action on the part of the lessor is required to formally terminate the lease; it expires on its own terms”). Leading oil and gas authors have also espoused this rationale. See, 3-6 Williams & Meyers, Oil and Gas Law, Section 604.7 (2014) (“[S]ince the termination of a lease by operation of the limitation provision of the habendum clause is automatic, the lessor’s delay in bringing suit appears immaterial”). Despite this weight of authority, the Ohio Supreme Court rejected the Brownes’ argument. The panel opined, unconvincingly, that Ohio’s public policy behind statute of limitations outweighed the technical legal argument advanced by the Brownes. In a rather circular manner, majority opinion concluded that the Brownes were wrong simply because “the General Assembly has instructed that civil actions are subject to a statute of limitations…” The author submits that the Ohio Supreme Court’s reasoning on this issue was unpersuasive and erroneous.
The panel next addressed the Brownes’ alternative theory that the twenty-one (21) statute applied to their lease expiration claim. Consistent with its finding that the Brownes’ complaint was not based on a “breach” of the 1975 Lease, the Supreme Court held that the Brownes’ suit actually sought the recovery of a property interest, namely the Brownes’ reversionary interest in the underlying oil and gas estate. When framed in this context, the Brownes’ complaint clearly fell within the scope of the twenty-one (21) year statute:
“The court of appeals here erroneously held that the nature or subject matter of the Brownes’ claims was “a dispute over the written terms of the lease agreement.” 201-Ohio-3746, 116 N.E.3d 687, at ¶22. As we stated previously, the lease did not impose a contractual obligation upon the lessee to produce oil or gas. And the parties do not dispute either the terms of the lease or the meaning of those terms; they dispute only whether there was a period of nonproduction that terminated the lease by operation of law. Like the plaintiff in Rudolph, the Brownes seek recognition of their reversionary interest in the minerals, which themselves constitute part of the realty. We therefore hold that the Brownes’ claims are governed by the 21-year statute of limitations in R.C. 2305.04″
Although the Supreme Court concluded that the Brownes’ lease expiration claim was governed by the twenty-one (21) year statute, it did not express an opinion on exactly when the twenty-one years begins to run. This omission is significant and raises serious questions. Does the clock begin to run as soon as the lease ceases production or does the limitation period only begin to run when the landowner first becomes aware of a prior period of non-production? And who is the “landowner” against whom the statute will run? Can the prior knowledge or awareness of a remote historical landowner in the chain of title be attributed to the modern day owner? These questions remained unresolved by the Browne opinion.
Nonetheless, the Brownes argued that the twenty-one year period did not begin to run until they had knowledge of a justiciable controversy – i.e., when they realized there was a dispute over the 1975 Lease’s validity. According to the Brownes, this occurred in or around 2014. Under this approach, the Brownes would have until 2035 to file suit. But, because this precise issue (i.e., when the lease expiration claim accrued) was not raised by the parties or the lower courts, the Supreme Court declined to address that question on appeal. The matter was therefore remanded back to the trial court for further disposition.
The author submits that the Browne opinion is flawed. Although the panel recognized that non-production in the secondary term will automatically terminate the driller’s property interest by operation of law, it implicitly held that the landowner must nonetheless pursue some legal action within twenty-one years to effectuate and protect those reversionary rights. These positions are inherently inconsistent. As the dissent in Browne pointed out, the statute of limitations should have no bearing on whether an expired lease remains in effect or not:
“[B]ecause court action is not needed to terminate a lease that has expired on its own terms and by operation of law, a statute of limitations defense is not relevant to determining whether an oil and gas lease has terminated and the mineral rights have reverted to the landowner.”
The dubious nature of the majority opinion is further compounded by the panel’s neglect in addressing exactly when and how the purported twenty-one (21) year period begins to run. These open issues will have to be addressed by the Ohio courts in the near future. Although not binding on Pennsylvania courts, the author submits that Pennsylvania should not adopt or follow the faulty reasoning and rationale espoused by the Browne court.
1This conclusion is consistent with the Fourth District’s holding in Rudolph v. Viking International Resources, 84 N.E.3d 1066 (Fourth District – Washington County 2017).