When something is owned by more than one person at the same time, there can be problems.

Background (and we mean far back!)

Since the Statute of Westminster II, c. 22 (1285), a co-tenant has been subject to the law of waste. This rule of liability is found in the law of all states in one form or another. Therefore, as a general proposition, a cotenant may not remove minerals from concurrently owned land without the consent of the other cotenants. Williams and Meyers, Oil and Gas Law, § 502.

But waste goes both ways. Given the fugitive nature of oil, which may be drained from the land by a well on adjoining property, if the cotenant owning a small interest in the land was required to give his consent before the others could  produce the oil, he could arbitrarily destroy the valuable quality of the land.

Most states, therefore, strike a balance and allow “unilateral” production by a cotenant subject to an accounting to the other cotenant, i.e., a sharing of net proceeds.

Hypothetical

Assume that three siblings, A, B, and C, inherited the minerals on a 160-acre parcel of land. Oil Company proposes to drill a 40-acre well on the property and all three siblings sign a lease providing for a 1/8 royalty in exchange for Oil Company’s paying the expenses. If production is realized, the proceeds will be divided as follows:

Now assume C won’t sign a lease.

Ohio Law

Under Ohio law, a tenant-in-common generally may transfer, devise, or encumber his interest in the property without the consent of his co-tenant. Koster v. Bodreaux, 11 Ohio App.3d 1, 5 (1982), citing 4 Thompson on Real Property, Separate and Concurrent Ownership, Section 1793, at 136-137 (1979).

Ohio courts have not decided the more specific issue of whether one tenant-in-common may make a valid lease of his mineral rights without the consent of his cotenant, and courts in other states that have considered this issue have not ruled consistently. While some courts have held that one tenant-in-common may lease his oil rights without the consent of his cotenant, others have held to the contrary. Still other courts permit a tenant-in-common to exploit underground deposits, but require him to account to a cotenant for any profit that is realized.

Ohio law states generally that “[o]ne tenant-in-common . . . may recover from another tenant-in-common . . . his share of rents and profits received by such tenant-in-common . . . from the estate, according to the justice and equity of the case.” Ohio Revised Code 5307.21. Ohio courts have not considered this requirement in the context of underground mineral rights. But, given this statute and since oil and gas resources are finite and transitory, Ohio courts may be receptive to the argument that one cotenant should be allowed to produce minerals from the property without the other cotenant’s consent.

With that background, A, B, and Oil Company may elect to proceed without C, but such unilateral development is risky for Oil Company. In such a case, Oil Company becomes a tenant-in-common with C as to the rights granted by the lease, i.e., the right to explore for and produce the minerals. How are the proceeds divided? As there is no lease providing for a 1/8 royalty and an allocation of expenses for C, a possible outcome is:

Since C has benefitted from Oil Company’s work and they are cotenants, absent any agreement, Oil Company may be able to deduct from C’s share of the production C’s share of the expenses. So, even though A and B may be able to lease and Oil Company can produce, Oil Company’s interest in production from the well is merely 58.3% (as opposed to 87.5% if all three siblings agreed to lease).

Alternatives

Although Ohio case law offers no clear answers when one or more cotenants are holdouts, the Ohio Revised Code gives operators options.

I.  Mandatory Pooling

If the minimum acreage needed to drill a well cannot be obtained voluntarily, the Ohio Revised Code provides for “mandatory pooling” – a procedure to force an uncooperative owner to participate in a drilling unit in certain situations.  ORC § 1509.27.  Mandatory pooling is process designed to protect correlative rights and to effectively develop the mineral resources.

The procedure also anticipates the situation where the recalcitrant cotenant of a mineral estate will not sign a lease. In such a case, the Mandatory Pooling Order from ODNR would likely provide that mandatorily pooled parties are granted a pro rata share of production from the well and the standard 1/8th royalty interest upon production of the well.  However, such an Order would also require the parties to share all reasonable costs and expenses of drilling and operating the well as follows:

• If the owner elects to participate (working interest owner), then the Mandatory Pooling Order must specify the basis upon which each owner of a tract pooled by the order shall share in these expenses.
• A non-participating owner will not receive any share of production, exclusive of his/her share of the royalty interest, until their share of such costs are recovered by the Oil Company, plus an additional risk penalty.  The costs and penalty cannot exceed 200% of the non-participating owner’s proportionate costs of the well for high financial risk and horizontal wells, or 150% for other wells. ORC § 1509.27.

Thus, continuing the hypothetical, if C becomes a non-participating owner, the allocation is:

Until costs and penalties are paid:

*paid to working interest to recover costs and penalties

After costs and penalties are paid:

In this scenario, the Oil Company (and all other working interests) benefit from the penalty imposed upon the recalcitrant cotenant until the well has paid out but the Oil Company’s interest in the production is still merely 58.3%.

The scenarios above assume that the entire unit is located on ABC property.  However, if ABC property comprises only a small portion of the drilling unit, say 2 acres out of a 640 unit, the economics are far more favorable. In that situation, C’s interest, even after cost and penalties are deducted, is 1/3 x 2/640 or 0.0010417 (0.104%). Even if it were 2 acres out of a 40-acre drilling unit, it would be 1.67%.

These figures illustrate the importance of strategizing to determine where to locate the well so as to minimize the recalcitrant’s share or, the importance of striking a deal.

II.  Partition

The age-old method of ending a cotenancy is partition, and in Ohio this remedy is provided for by statute. Ohio Revised Code section 5707.01 states:
Tenants in common, survivorship tenants, and coparceners, of any estate in lands, tenements, or hereditaments within the state, may be compelled to make or suffer partition thereof as provided in sections 5307.01 to 5307.25 of the Revised Code.

The code sections that follow outline a procedure for filing a petition, obtaining an order of partition from the court of common pleas, the appointment of one to three commissioner(s) to make the partition, etc. If it cannot be partitioned “without loss of value,” the commissioner establishes a value and one cotenant pays the other or there is a sale by the sheriff or at public auction.

In the context of Ohio shale resources, a Court would likely struggle with the speculative nature of the value of the mineral interests and whether physically dividing the property would devalue the property, especially when a recalcitrant owner would own one of the contiguous parcels.  Given these problems, a court may very well order a sale of the property, which amounts to a roll of the dice for all owners.  Instead of assuming this risk, all cotenants would probably be better off to negotiate a price and find a way to settle the dispute without a sale.  Recognize, however, that emotions, distrust, and speculation about a possible bonanza always make settling partition actions difficult.