The plaintiffs in this case are a group of landowners in Nobel County who, from 2008 to 2010, entered into oil and gas leases, some of which were assigned to Chesapeake Exploration, LLC. Some of the leases had a three-year primary term, some five years, with typical provisions to extend the primary term. However, the lease provision really at issue was titled “Preferential Right to Renew,” referred to as “paragraph 14.” Both the plaintiffs and defendants filed motions for summary judgment. Judge Edmund A. Sargus Jr. of the federal District Court in Columbus decided the case on Sept. 26, 2013. Wiley v. Triad Hunter LLC, 2013 U.S. Dist. LEXIS 143058 United States District Court for the Southern District of Ohio, Eastern Division.

Paragraph 14 provides, in summary, that if during the primary term and one year thereafter, the lessor receives an acceptable, bona fide third-party offer to lease, the lessor would provide the lessee with the particulars. The lessee then would have 30 days to advise the lessor of its agreement to match the offer. Also, any lease “granted by lessor in contravention of the purposes of this paragraph shall be deemed null and void.”

The plaintiffs received a bona fide offer to lease their land. At this point, let me digress. Hoping that an existing lease will expire, third parties will offer a new lease to the landowner, sometimes called a “top lease,” that will take effect upon the existing lease’s termination. Paragraph 14 would seem to protect the lessee by giving, in effect, a right of first refusal on equal terms.

Picking up the story and summarizing for brevity, apparently the new leases were a better deal. So, despite the fact that the existing leases were within their primary terms, the plaintiffs forwarded the offered lease to the lessee. In one of the letters to the lessee, the plaintiffs informed the lessee that the lease had in fact been forfeited based on the plaintiff’s interpretation of paragraph 14. The lessee responded by saying that it disagreed with the plaintiff’s interpretation and taking the position that it need do nothing pursuant to paragraph 14.

The plaintiffs filed suit. In their complaint, the plaintiffs sought a declaration that the lessee’s failure to match the third-party offers would terminate and cancel the leases under the terms of paragraph 14. The lessees counterclaimed, and one of those claims asked the court to toll the primary term of the leases until final resolution of the case. The Plaintiffs filed a motion for summary judgment arguing that the failure to match constitutes a material breach of the lease. The lessees filed a cross-motion arguing that paragraph 14 is unambiguous and does not give plaintiffs the right to terminate the leases.

So, is paragraph 14 ambiguous? And what does it mean? The court had to decide if these questions are a legitimate issue for a jury to decide or “whether it is so one-sided that one party must prevail as a matter of law.”

At the onset, the court pointed out that paragraph 14 had been at issue in previous cases, especially Chesapeake Exploration, LLC v. Catlett Quality Plumbing & Heating, Inc., No. 5:12CV188, 2012 U.S. Dist. LEXIS 156169, 2012 WL 5364259 (N.D. Ohio Oct. 30, 2012) and Koonce v. Chesapeake Exploration, LLC, No. 2012 CV 136 (Columbiana Cnty. Ct. Com. Pl. 2012).

The court framed the plaintiffs’ arguments thus: (1) they can accept a third-party offer, which would then terminate the existing leases. And (2) any failure to match the offer and to effectuate that new agreement constitutes a material breach of paragraph 14, rendering it void.

The plaintiffs’ argument focused on their interpretation of the word “renew” in the title of paragraph 14. The court said that the plaintiffs “have gone on at length to argue that ‘renew’ can have any number of meanings, (citing Catlett) including one that leads to their desired end — a renewal [that] can create a new legal relationship [with the third-party offeror] during the pendency of the former legal relationship.”

Lessees argued that “renew” can only apply to the existing lease, not the new lease, and that the provision is unambiguous — it allows the lessee to match another offer to lease the oil and gas rights for the land at issue if that offer comes during the temporal limitations provided; and failure to match is not a material breach of the contract. Finally, they point out that the courts to interpret this provision so far have held that this provision does not allow landowner-lessors to use a third-party offer to terminate an existing lease.

The court then went through the process of ascertaining the intent of the parties to the lease by examining paragraph 14 line by line. In short, the court found paragraph 14 to be unambiguous. And, citing an 1897 Ohio Oil Co. (now Marathon) case, explained that “[t]he rights and remedies of the parties to an oil or gas lease must be determined by the terms of the written instrument.”

The court agreed with lessees, finding the language of paragraph 14 unambiguous. “It refers to if and when the lessee decides to match the third-party offer, not to the lessee’s obligation to match the third-party offer or cancel the existing contract.”

Additionally, the court found:

1. Plaintiffs’ interpretation of paragraph 14 to be at odds with other provisions of the lease; for example, the granting clause establishing a three- or five-year term
2. There was no support in the record that the amount of consideration they received in exchange for the leases was inadequate or “trifling”

The Holding

So, the court held, “If the lessee chooses not to match the offer, the current lease continues until it ends under the terms of the contract. To be sure, plaintiffs can accept a third-party offer while the current leases at issue remain valid. Doing so, however, cannot deprive [the lessee] ‘of its current rights in the lease.’ (citing Catlett and Koonce) ‘provided that the replacement lease cannot be effective before the ‘primary term’ ends. (citing Koonce).’”

Tolling

Lessees also argued that the uncertainty created by plaintiffs’ lawsuit prevented it from investing in the leased properties and that some of the leases will expire soon. The court agreed and extended the primary terms finding tolling appropriate as a matter of equity so as to restore the parties to the position they occupied originally.

Takeaway

As we have discussed before, bad timing, technicalities, finding that a neighbor got a better deal or strained interpretations do not necessarily result in termination of a lease. They need to be negotiated and read carefully — and then enforced.