On March 15th, 2017, the Ohio Supreme Court accepted a discretionary appeal in Alford v. Collins-McGregor Operating Company, Washington App. No. 16CA9, 2016-Ohio-5082. The Alford appeal arises from the Washington County Court of Appeals, Ohio’s 4th Appellate District. In Alford, the 4th District declined to expand Ohio’s implied covenant of reasonable development to encompass unexplored, deep formations.
The plaintiffs in Alford sought to forfeit their 1980 oil and gas lease as to all depths below the Gordon Sand formation. The plaintiffs own approximately 74 acres that are held by production from one well – a well that has undisputedly produced in paying quantities from 1981 through the time of the case. However, the plaintiffs asserted that the defendant-operators did not have the equipment or capital to explore or produce from depths below the Gordon Sand formation; specifically, they were unable to drill a horizontal well to produce from the Marcellus and Utica shales.
The court of appeals, in applying its recent decision in Marshall v. Beekay Co., 2015-Ohio-238, 27 N.E.3d 1 (4th Dist.), refused to expand the implied covenant to reasonably develop to allow for the forfeiture of a lease as a remedy for undeveloped deep rights. However, the Alford court left the door open for the Supreme Court in saying that “this is a complex, evolving issue with no easy answer.”
Although the determination of whether an operator breached an implied covenant is an issue often dependent on specific lease language, and thus one to be addressed on a lease-by-lease basis, the Supreme Court’s decision in Alford could have statewide ramifications in litigation concerning implied covenants.
You can keep an eye on how the appeal progresses here.