Oil and Gas Leases Are Title Transactions Under Ohio Dormant Mineral Act

By Kathleen Maloney - Courtesy of CourtNewsOhio.gov

A lease that grants oil and gas rights to another party and was recorded with the county recorder is a title transaction under the state’s Dormant Mineral Act, the Ohio Supreme Court ruled today. However, the Court concluded, the unrecorded expiration of an oil and gas lease does not qualify as a title transaction.

In mineral-rich areas, such as Marcellus and Utica Shale regions of eastern Ohio, rights to the surface property and the minerals below are often owned separately. However, the mineral interests can be considered abandoned if 20 years pass without a title transaction or the occurrence of another event described in the statute.

The Court’s decision, written by Chief Justice Maureen O’Connor, was unanimous in ruling that the unrecorded expiration of an oil and gas lease is not a title transaction. The Court divided, though, on whether the leases themselves are title transactions – with one justice concurring in the judgment but not the reasoning, and two justices dissenting.

The holding answers questions submitted by a federal court considering a dispute between the owners of 90-plus acres in Harrison County and the various companies that have leased the property’s mineral interests. The case now returns to the federal court for additional proceedings.

Land and Mineral Rights Changed Multiple Times
A mining company split the surface and mineral rights on this Harrison County land in 1958. Clarence and Anna Bell Sedoris became owners of the land, while the mining company kept the oil and gas interests.

Throughout the years, the surface property and mineral rights changed hands many times. The landowners now are Dennis Elias, Jeffrey and Janice Elias, and Arieh and Sunni Ordronneau. (Kenneth Buell was dismissed from the case.) North American Coal Royalty Company owns the mineral rights, and multiple companies, including Chesapeake Exploration, lease parts of those rights.

In October 2012, some of the lessees of the oil and gas rights sued the property owners, Coal Royalty, and one of the other lessees in federal court to “quiet” any claims to those resources. Eventually, Coal Royalty and all the mineral rights’ lessees were realigned on one side as the plaintiffs in this case.

Elements of State Law
Ohio’s Dormant Mineral Act, R.C. 5301.56, is part of the Marketable Title Act and creates a method to rejoin a surface property with abandoned mineral interests. The act’s purpose is “to clear title and promote the use of the mineral rights for development and production,” today’s Supreme Court opinion noted. The original act became law in 1989 and was amended in 2006.

Chief Justice O’Connor explained that while the parties disagree about which version of the law applies in this case, that question was not one submitted by the federal court for review. The questions before the Court involved the meaning of “title transaction,” and the analysis of the issues was the same under either version of the law.

Oil and Gas Leases Are Title Transactions
The first question was whether an oil and gas lease is a title transaction within the meaning of the state law. Severed minerals interests can be considered abandoned and return to the surface property owner unless an event that saves the mineral interests occurs in a 20-year window.

The law lists six possible “saving events,” including situations in which the mineral interests have been subject to a title transaction that has been filed or recorded with the appropriate county recorder.

The Marketable Title Act, which includes the Dormant Mineral Act, defines a “title transaction” as “any transaction affecting title to any interest in land, including title by will or descent, title by tax deed, or by trustee’s, assignee’s, guardian’s, executor’s, administrator’s, or sheriff’s deed, or decree of any court, as well as warranty deed, quit claim deed, or mortgage.”

Because the law uses the words “any” and “including,” the meaning of “title transaction” is not limited to only those examples listed, the chief justice reasoned. The justices dissenting on this issue would limit the definition to transactions that “alter who owns the property at issue.” However, the Court’s majority concluded that “is an overly restrictive reading of the statutory definition.”

“We find that by [the terms of this lease] or substantially similar terms, the mineral interest has been the subject of a title transaction because the oil and gas lease affects title to the surface and mineral interests in land in a number of ways,” Chief Justice O’Connor explained. “As discussed above, a ‘title transaction’ as defined in R.C. 5301.47(F) is not limited to a transaction that alters an ownership interest. Transactions creating interests like easements or use restrictions are also title transactions. This is consistent with the meaning of the word ‘title,’ which, as a concept rather than a legal instrument, is defined as ‘[t]he union of all elements (as ownership, possession, and custody) constituting the legal right to control and dispose of property.’”

“The lease in this case grants the lessee an unequivocal and exclusive right to the mineral estate for a fixed term plus an indefinite extended term upon the happening of certain conditions, such as actual production of oil and gas or a prescribed payment to the lessor,” she continued. “Based on the vested nature of this grant, the oil and gas lease has been construed as transferring to the lessee a fee simple determinable in the mineral estate with a reversionary interest retained by the lessor that can be triggered by events or conditions specified in the lease. … Even if the lessor conveys title to the surface or mineral estates during the lifetime of the lease to a third party, the lease is binding on those successors and is therefore an encumbrance that remains with the realty.”

“Additionally, a recorded lease in the chain of title notifies all others with a potential interest in the surface or the mineral estate that the land is encumbered. An oil and gas company searching land records for potential leasable mineral estates would find an estate already encumbered by a lease. In this way, the lease resembles more of an encumbrance than an easement or a mortgage. The lease forecloses the ability of the lessor or any third party to freely access the property for exploration, development, and extraction of mineral resources.”

Expiration of Oil and Gas Lease, Though, Is Not Title Transaction
On the federal court’s second question, the Court concluded that a lease’s expiration that is not recorded does not qualify as a title transaction affecting the 20-year window.

“[T]he terms of a recorded oil and gas lease cannot provide sufficient notice of activity under the lease to toll the 20-year clock during the life of the lease, nor can the expiration of such a lease be considered a ‘title transaction that has been recorded or filed’ within the meaning of R.C. 5301.56(B)(3)(a) when the expiration is unrecorded,” the chief justice wrote. “Accordingly, we conclude that the unrecorded expiration of an oil and gas lease does not constitute a saving event under R.C. 5301.56(B)(3)(a) that would restart the 20-year clock.”

Votes
Joining the chief justice’s opinion were Justices Judith Ann Lanzinger, Judith L. French, and William O’Neill.

Justice Sharon L. Kennedy concurred with the Court’s answers to the federal court’s questions and with the legal reasoning related to the lease expiration issue. However, she disagreed with the Court’s analysis of the first question regarding the meaning of “title transaction.”

Justice Paul E. Pfeifer concurred in part and dissented in part in an opinion joined by Justice Terrence O’Donnell.

Justice Presents Different Reasons Why Leases Are Title Transactions
While Justice Kennedy agreed that a recorded oil and gas lease is a title transaction, she disagreed with the majority’s analysis on the issue.

She first noted that contrary to Justice Pfeifer’s dissent, the General Assembly’s replacement of the language “conveyed, leased, transferred, or mortgaged” in R.C. 5301.56 with the more general term “title transaction” indicated an attempt to broaden, rather than narrow, the types of transactions that qualify as a saving event.

In her view, however, the Court’s majority did not need to address whether oil and gas leases create a specific property interest. Instead, the answer could be determined by reviewing the relevant statutes alone. She examined the Marketable Title Act and also the related laws requiring that certain documents be recorded.

“Harmonizing the provisions of the [Marketable Title Act] with the recording statutes contained in R.C. Chapters 2113, 5301, and 5309 reveals a commonality with the examples of title transactions listed in R.C. 5301.47(F),” she wrote. “The examples are claims or interests against, or in, land that must be recorded pursuant to the Revised Code. Therefore, construing the recording statutes and R.C. 5301.47(F) in pari materia, I would hold that any transaction that must be recorded must be a ‘title transaction’ within R.C. 5301.47(F) because the purpose of a recording requirement is to ‘provide a public record of transactions affecting title to land.’”

Two Justices Conclude Leases Are Not Title Transactions
Justice Pfeifer concurs with the Court’s opinion on the lease expiration issue. However, he concluded that a recorded oil and gas lease is not a title transaction. He emphasized that the “title transaction” definition does not include anything similar to a lease.

“Granted, R.C. 5301.47(F) does not state that its list of transactions that affect title is exhaustive, but every transaction mentioned in the statute either actually or potentially affects an ownership interest in the property,” he wrote. “Since all of the examples listed in R.C. 5301.47(F) bear on the ownership of property, it follows that a transaction like a lease, which does not alter who owns the property at issue, falls outside the scope of the statute.”

He added that the initial Dormant Mineral Act legislation included the lease of a property as a saving event, but that language was removed before the bill was enacted.

“This is not to say that leases have no role in the [Dormant Mineral Act],” he wrote. “A saving event occurs when ‘[t]here has been actual production or withdrawal of minerals by the holder … from lands covered by a lease to which the mineral interest is subject ….’ Simply put, a lease plays a part in a saving event when production begins pursuant to the lease’s terms, but not while the minerals to which it is attached remain unexploited.”

A recorded lease does not affect the owner’s title to the property and therefore is not a title transaction, Justice Pfeifer concluded.

2014-0067. Chesapeake Exploration, L.L.C. v. Buell, Slip Opinion No. 2015-Ohio-4551.

View oral argument video of this case.

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