Challenging Non-Assignment Provisions in Oil & Gas Leases: A Multi-Faceted Approach

(September 2013) – As the case law concerning oil and gas leases in Ohio develops, including leases involving the Utica Shale, it is becoming more and more common for landowners to challenge provisions in leases that purport to restrict the lessees’ ability to assign or otherwise transfer their interests. Although these landowner challenges have increased, depending on the facts of each case, there are numerous legal and evidentiary defenses which can be asserted by lessees.

Anti-assignment provisions typically come in one of three forms: (1) a complete bar on assignment of a lease interest; (2) a bar on assignment without the written consent of the lessor; or (3) a bar on assignment without the consent of the lessor, where such consent cannot be unreasonably withheld. Depending on the exact language used in a particular lease and the underlying factual situation (such as if there is a producing well, for example), a number of defenses can be raised if a lessor claims that an action taken by the lessee breaches an anti-assignment provision.

First, some courts are taking a relatively strong stance, declaring that anti-assignment clauses requiring consent of a lessor are void as a matter of public policy because they are unreasonable restraints on alienation. The case of Shields v. Moffitt from Oklahoma is illustrative. The court in Shields agreed that “the clause in the oil and gas lease which provides that the lease may be assigned only with the written consent of the lessors constitutes an unlawful restraint on alienation which renders the restrictive clause void.”

Even if a court would not find that such clauses are wholly unenforceable restraints on transfer, courts generally construe such clauses narrowly, resolving any ambiguous language or doubts in favor of allowing assignment. Moreover, even if an anti-assignment provision does not explicitly state that consent of a lessor may not be unreasonably withheld, some courts have implied such a reasonableness requirement.

Another potential argument is that consent clauses—those requiring the consent of a lessor prior to assigning the lessee’s interest—are only binding on the original parties to the lease. As a result, such “personal” covenants are not enforceable by subsequent assignees. In other words, such clauses would not “run with the land.”

Even if a court finds that an anti-assignment provision is otherwise enforceable, if a lessor continues to accept royalties and free gas after an alleged improper assignment or transfer, the doctrines of waiver or estoppel may prevent the lessor from challenging the validity of the assignment or transfer. For example, if a landowner accepts royalties or free gas after he is aware of a transfer, the landowner may be barred from challenging such transfer.

Finally, it is important to note that landowners generally seek to have the underlying lease invalidated (i.e., “forfeited”) due to lack of compliance with the consent provision. However, the law of Ohio provides a strong presumption against forfeiture and, in most cases, restricts the remedy of the landowner to monetary damages which often do not exist or, at a minimum, are speculative.

The applicability of each of the above defenses depends on the exact facts and language at issue in a lease dispute. If you have questions about anti-assignment provisions, or about any other oil and gas law issue, please feel free to contact Attorney Whitney Willits at [email protected] or any of the attorneys in Black McCuskey’s Oil & Gas Practice Group.