From 2008 to 2010, numerous landowners in eastern Ohio entered into oil and gas leases with Anschutz Exploration Company, which were later assigned to Chesapeake Exploration LLC. These leases contain a “Preferential Right to Renew” or a “fair market value” provision (Paragraph 14 in the lease).
This clause provides that, “[i]f, at any time during the primary term…or within one year from the expiration, cancellation or termination of this Lease, Lessor receives an acceptable bona fide third-party offer to lease the Leasehold, in whole or in part, Lessor shall promptly provide the Lessee, in writing, of all of the verifiable particulars of such offer. Lessee shall have thirty (30) days…to advise Lessor, in writing, of its agreement to match said third-party offer…”
To settle disagreements about the meaning of this provision, Chesapeake filed a declaratory judgment action against numerous landowners who threatened to terminate the leases unless Chesapeake matched or “bettered” third-party offers that they had received.
On October 30, 2012, the Court found no ambiguity in the provision and ruled that Chesapeake has the right to match a bona fide offer and renew the lease; and if Chesapeake chose not to match the offer, the lease “run[s] its course.”
On October 30, 2013, the Sixth Circuit Court of Appeals affirmed the lower court’s decision. The Sixth Circuit rejected the landowners interpretation that Chesapeake was obligated to match any third-party offers and failing to do so constituted a breach of the lease, requiring Chesapeake to remove its equipment immediately.
The Circuit Court found that the language of the “preferential right to renew” clause does not require Chesapeake to “match” any third-party offer, but rather allows Chesapeake thirty (30) days in which to decide whether to accept or reject the offer. Chesapeake has a “right” to match, not an “obligation” to match a third-party offer. If Chesapeake decides not to exercise its right, the lease remains “ in force…so long as” Chesapeake is actively engaged in drilling operations.
For additional information on “fair market value” lawsuits, see “Analysis of fracking related litigation,” pages 59-61, which can be downloaded from this blog.
This post was written by Barclay Nicholson (firstname.lastname@example.org or 713.651.3662) from Norton Rose Fulbright’s Energy Practice Group.