By: Dick Emens and Heidi Kemp
Benjamin Franklin is credited with once stating “…in this world nothing can be said to be certain, except death and taxes.” We offer that one more thing can be added to that list: oil and gas lease assignments. Many landowners have been surprised and then frustrated to find out that they signed an oil and gas lease with one company but due to an assignment of their oil and gas lease, they now have to deal with another oil and gas company. And, unfortunately, assignments often occur without the landowner’s knowledge.
There are various reasons that your oil and gas lease may be assigned to another company. First, when the major leasing boom began in Eastern Ohio, it was a land grab. Companies were leasing whatever acreage they could get their hands on. Later, after the dust settled, companies began trading or assigning leases to each other to put together blocks of acreage to build Pooled Units for more effective production. Second, companies may require additional capital investment and thus enter into a joint venture with another oil and gas company. This may result in a partial assignment of leases to the partner company. And third, the oil and gas industry is constantly shifting and changing. Mergers and acquisitions occur at a high rate. When this happens, the leases may be assigned to the company who has acquired the selling company. These are just a few of the scenarios in which assignments of oil and gas leases may occur.
Now let’s look at the law. Are oil and gas leases assignable? With respect to oil and gas leases, the Supreme Court of Ohio has stated that “[t]he rights and remedies of the parties to an oil and gas lease must be determined by the terms of the written instrument” and “[s]uch leases are contracts, and the terms of the contract with the law applicable to such terms must govern the rights and remedies of the parties.” Harris v. Ohio Oil Co., 57 Ohio St. 118, 129, 48 N.E. 502 (1897). Since an oil and gas lease is a contract, contract law regarding assignments will apply.
The Ohio Supreme Court has noted:
“It is long-standing tradition in the common law that all contract rights may be assigned except under three conditions. First, if there is clear contractual language prohibiting assignment, an assignment will not be enforced. Second, an assignment must not materially change the duty of the obligor, materially increase the insurer’s burden or risk under the contract, materially impair the insurer’s chance of securing a return on performance, or materially reduce the contract’s value. Third, the assignment will not be valid if it is forbidden by statute or by public policy.” Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co., 112 Ohio St.3d 482, 488, 2006 Ohio 6551, 861 N.E.2d 121 (internal citations omitted).
Thus, you must start with the premise that an oil and gas lease may be assigned unless there is clear language in the lease that prohibits assignment. There is no current statute in Ohio that prohibits assignment of oil and gas leases and usually, an assignment to another oil and gas company is not going to materially change the duties of the Lessee since the new oil and gas company will be bound by the terms of the Lease.
The most important factor is what does your lease say about assignments? The lease may be silent and not address assignments. The assignment clause may prohibit an assignment of the lease. Or, the assignment clause may allow for assignment but only with the landowner’s consent. Review your lease carefully. And if you must consent to the assignment, you should obtain information about the new company to help make your decision. And as always, you should consider seeking assistance from knowledgeable legal counsel if you encounter any issues with an assignment of your oil and gas lease or if you are presented with a new oil and gas lease as you may want to negotiate a landowner friendly assignment clause.