The Ohio shale boom started slowly when a few small companies quietly began acquiring mineral leases for as little as $25 per acre. This soon gave way to a full blown land rush in the fall of 2010. But as lease prices skyrocketed through the Fall of 2011, disillusioned lessors who signed before the peak of the market were the ones rushing – to the courthouse to file lawsuits to cancel their leases.
In order to gain leverage and legitimize their lawsuit, lessors frequently allege that their lease is “unconscionable” or they were fraudulently induced to sign it. “Exhibit A” to these lawsuits is often a technical error in the lease signing or a “fraudulent” statement made by a landman. There are exceptions, but many of these kinds of lawsuits have no legal basis.…
In Eastern Ohio, before 2010, a customary signing bonus for an oil and gas lease was usually less than $25 per acre, as it had been for years. By the fall of 2011, after the shale boom hit, lease bonus prices had risen in leaps and bounds to their peak (so far) of about $6,000 per acre before pulling back significantly in the spring of 2012.
Naturally, everyone who did not have the foresight or nerve to hold out for $6,000 per acre was left feeling more than a little miffed. After all, a typical bonus check on a 100 acre parcel in 2009 or early 2010 would have been $2,500 but that bonus may have swelled to $600,000 in less than two years!
Courts Do Not Decide What is “Enough”
Fortunately for our economy and legal system, a party to a contract cannot later adjust the contract price when they finally realize the value of a transaction. In fact, it is the imbalance of information, risk tolerance, and vision among different people that is the driving force of business in the United States.
But even reasonable lessors were overwhelmed by the incredible disparity between lease bonuses paid during the shale boom. That disparity, combined with the belief that the oil and gas companies have bottomless bank accounts, spawned lawsuits by lessors to try to break leases with the hope of signing for more.
Of course, breaking contracts requires more than just a lot of hard feelings about not getting …
The Point: Oil and gas leases are specialized instruments of real estate and contract law. The very existence of the lease can turn on court opinions over 100 years old (with little between now and then) and the court’s interpretation of something as ephemeral as “good faith” can be determinative. Curative documents, a royalty check endorsement, division orders and the like may clarify ambiguities when a lot of money is at stake.
Discussion: The relationship between the owner of minerals (which may be different from the owner of the surface, the subject of a future blog) and the oil company is typically defined in and oil and gas lease where the Owner, in a contract, grants to Lessee defined rights to the property in exchange for promises and money. The length of the lease, the term, is addressed in one of the most important provisions the lease — the “habendum” or term clause, which usually appears near the beginning of the lease. The term clause in an oil and gas lease is the product of long development and experience. It attempts to reconcile the competing interests of the parties. Owner wants a well and its royalty payments quickly (a short term) while Lessee wants flexibility and as much time as possible (a long term). Given the new interest in oil and gas production in Ohio, it is crucial to understand the term clause for both old/existing leases and new ones.…