Recent Decision Upholds Oil & Gas Lease Even Though the Non-Assignment Clause was Breached

(December 2013) – On November 18, 2013, in the lawsuit titled Harding v. Viking International Resources, Inc., Case No. 13 CA 13, the Fourth District decided that a producer’s violation of an assignment clause (which stated that the lease could not be assigned without the mutual agreement of the parties in writing) did not terminate the oil and gas lease. Significantly, the Fourth District affirmed the trial court’s decision that, despite the fact that the assignment clause had been breached, “the leases remained in effect.”

Although the Fourth District upheld the underlying lease, it did decide that because the assignment was in violation of the assignment clause, it was void, and therefore reverted the lease (which was still in effect) to the original lessee. The landowner, however, was still bound by the lease.

In light of the recent Utica Shale boom, these “lease assignment” clauses have become the subject of a number of landowner challenges to existing leases. Generally, landowners assert that their oil and gas lease was assigned without their consent and therefore the lease has been terminated or “forfeited.” Often, landowners assert these challenges even though there are producing wells on their property, and where the landowners have accepted royalties and free gas, often for over a decade. The goal of such challenges, generally, is to obtain a “forfeiture” of the existing oil and gas lease, which provides the landowners with the ability to sign a new “deep rights” lease, with signing bonus and increased royalties.

As we have discussed in prior updates, the existing law (both in Ohio and outside the State) provides substantial defenses to these actions. Recently, the Fourth District Court of Appeals, in an appeal from a Washington County trial court decision, provided additional authority supporting that breach of an assignment clause does not terminate an otherwise valid oil and gas lease.

By affirming the validity of the underlying oil and gas lease — even where there was a breach of an assignment clause — the Fourth District created strong precedent in support of the protection of existing oil and gas leases. Viking acts to remove the primary goal of landowners’ challenges, which is invalidation of an existing lease for purposes of signing a new “deep rights” lease. While the invalidation of the assignment is not an optimal result for an oil and gas producer, it does not appear to create a strong incentive for landowners to continue with these suits. Viking, presumably, will be cited by producer’s counsel both in and outside of the Fourth District — including in the Seventh District (which covers Harrison, Carroll, Columbiana, and other counties) and the Fifth District (which covers Stark, Tuscarawas, and other counties), in hopes of having its validation of existing oil and gas leases adopted throughout the State. If you have questions about this article, contact Attorney James M. Wherley, Jr.