Non-Consenting Landowners and Conflicts Between Leases
Written by Nils Peter Johnson about Leases + Ownership and Transfers on October 2, 2014
This article discusses situations arising when several people own the same piece of land, and only some of them sign an oil and gas lease. Resolving this issue requires a discussion of basic property ownership principles.
Types of Land Ownership
Ownership in land takes many forms. Some individuals are the sole owner of their land. Another piece of land could be owned by several people, such as when brothers and sisters inherit land from a parent. This joint ownership of a piece of property is usually called a tenancy in common, with the owners themselves known as tenants in common , or co-tenants.
Settling Disputes Between Co-Tenants
Owning property with others may very well result in disputes about how the property should be used. For example, what if one co-tenant wants to rent the property for a specific use, and the other co-tenant objects? Similarly, what if one co-tenant wants to sell his interest in the land to a developer and the other co-tenant has no interest in developing the land? By law, these types of disputes are settled according to the duties co-tenants owe to one another. Generally speaking, each co-tenant has an equal right to the possession and enjoyment of the entire property. This essentially means that each co-tenant may do whatever they want with the property, so long as it does not interfere with the other co-tenants right to use or profit from the entire property. So how does this relate to oil and gas leases?
Oil and Gas Leases – Non-consenting Tenants
Most states (Ohio included) permit one co-tenant (or her lessee) to develop oil and gas without the other co-tenant’s permission. The tenant who develops the land, however, must provide an accounting to the other co-tenants and cannot prevent the other co-tenants from developing the oil and gas or signing an oil and gas lease. This makes sense in light of a co-tenant’s right to enjoy the whole premises while not preventing any other co-tenants from doing so. The developing co-tenant must also share the profits of such development with the non-developing co-tenant. In other words, landowners who don’t sign oil and gas leases are technically entitled to their respective portion of the net revenue the well generates. Let’s look at an example.
Let’s assume one piece of land, Blackacre, is owned equally by two Co-Tenants: Alice and Bob. Alice signs an oil and gas lease with Company X. Bob objects and does not sign the lease. Company X proceeds to drill a profitable well on Blackacre. Alice, if she signed a typical lease, is entitled to 12.5% of the well’s revenue. Company X, by contrast, may recoup its costs from the well, but must split the remaining profits with Bob, who didn’t sign a lease. Bob therefore has tremendous upside for not consenting to the lease: depending on the amount of drilling costs Company X is entitled to retain, one half of the well’s profits is surely greater than the 12.5% royalty Alice, the developing tenant, enjoys.
Real World Consequences and Application
In practicality, it is in the drilling company’s best interest to obtain a lease from all co-tenants, like Alice in the example above. This way, they would not have to share the profits of successful wells with non-consenting co-tenants. A lease permits them to limit the co-tenants interest in the well to a fixed landowner royalty. In fact, this is precisely what happens in today’s oil and gas environment. Nevertheless, some landowners may still decline to sign an oil and gas lease. In such a circumstance, many states (Ohio included) provide a mechanism by which the drilling company can force the landowner’s mineral interest into an already designed drilling unit. The compensation the landowner receives from such a transaction tracks quite closely with the principles described above: the driller is entitled to recoup their drilling costs (or a multiple of them), at which point the non-consenting landowner receives a “super royalty.” Read more about forced pooling here.
Multiple or Conflicting Leases
We have discussed what happens when not all co-tenants sign a lease. But what happens when co-tenants sign leases with vastly different terms, or with different drilling companies? Believe it or not, there is not a substantial body of caselaw that develops this scenario. However, some courts have looked at the plain language of the leases themselves to determine if actions under one lease might perpetuate the term of a separate, unique lease. In actuality, the entity bearing the most development costs will work this out, either by acquiring all of the conflicting leases, or resolving the conflicting lease language by securing a lease amendment.
About Nils Peter Johnson
NILS PETER JOHNSON attended Western Reserve Academy, received his BA in philosophy from Bates College, and his JD from Vermont Law School where he studied environmental law. He is active in the Mahoning County Bar Association’s Taxation/Estate Planning Committee and volunteers regularly with the Canfield Rotary Club. He oversees Johnson & Johnson’s website, as well as GasandOilLaw.com.