One of the core principles of the American legal system is that people are free to enter into contracts and negotiate those terms as they see fit. But sometimes the law prohibits certain rights from being “signed away.” The interplay between state and federal law and the ability to contract freely can be a complex and overlapping web of regulations, laws, precedent, and even morals. Recently, the Ohio Supreme Court ruled on a case that demonstrates the complex relationship between Ohio law and the ability of parties to negotiate certain terms within an oil and gas lease.
The Background. Ascent Resources-Utica, L.L.C. (“Defendant”) acquired leases to the oil and gas rights of farmland located in Jefferson County, Ohio allowing it to physically occupy the land which included the right to explore the land for oil and gas, construct wells, erect telephone lines, powerlines, and pipelines, and to build roads. The leases also had a primary and secondary term language that specified that the leases would terminate after five years unless a well is producing oil or gas or unless Defendant had commenced drilling operations within 90 days of the expiration of the five-year term.
After five years had passed, the owners of the farmland in Jefferson County (“Plaintiffs”) filed a lawsuit for declaratory judgment asking the Jefferson County Court of Common Pleas to find that the oil and gas leases had expired because of Defendant’s failure to produce oil or gas or to commence drilling within 90 days. Defendant counterclaimed that the leases had not expired because it had obtained permits to drill wells on the land and had begun constructing those wells before the expiration of the leases. Defendant also moved to stay the lawsuit, asserting that arbitration was the proper mechanism to determine whether the leases had expired, not a court.
What is Arbitration and is it Legal? Arbitration is a method of resolving disputes, outside of the court system, in which two contracting parties agree to settle a dispute using an independent, impartial third party (the “arbitrator”). Arbitration usually involves presenting evidence and arguments to the arbitrator, who will then decide how the dispute should be settled. Arbitration can be a quicker, less burdensome method of resolving a dispute. Because of this, parties to a contract will often agree to forgo their right to sue in a court of law, and instead, abide by any arbitration decision.
Ohio law also recognizes the rights of parties to agree to use arbitration, rather than a court, to settle a dispute. Ohio Revised Code § 2711.01(A) provides that “[a] provision in any written contract, except as provided in [§ 2711.01(B)], to settle by arbitration . . . shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract.” What this means is that Ohio will enforce arbitration clauses contained within a contract, except in limited circumstances. One of those limited circumstances arises in Ohio Revised Code § 2711.01(B). § 2711.01(B)(1) provides that “[s]ections 2711.01 to 2711.16 . . . do not apply to controversies involving the title to or the possession of real estate . . .” Because land and real estate are so precious, Ohio will not enforce an arbitration clause when the controversy involves the title to or possession of land or other real estate.
To be or not to be? After considering the above provisions of the Ohio Revised Code, the Jefferson County Court of Common Pleas denied Defendant’s request to stay the proceedings pending arbitration. The Common Pleas Court concluded that Plaintiffs’ claims involved the title to or possession of land and therefore was exempt from arbitration under Ohio law. However, the Seventh District Court of Appeals disagreed with the Jefferson County court. The Seventh District reasoned that the controversy was not about title to land or possession of land, rather it was about the termination of a lease, and therefore should be subject to the arbitration provisions within the leases.
The case eventually made its way to the Ohio Supreme Court, which was tasked with answering one single question: is an action seeking to determine that an oil and gas lease has expired by its own terms the type of controversy “involving the title to or the possession of real estate” so that the action is exempt from arbitration under Ohio Revised Code § 2711.01(B)(1)?
The Ohio Supreme Court determined that yes, under Ohio law, an action seeking to determine whether an oil and gas lease has expired by its own terms is not subject to arbitration. The Ohio Supreme Court reasoned that an oil and gas lease grants the lessee a property interest in the land and constitutes a title transaction because it affects title to real estate. Additionally, the Ohio Supreme Court found that an oil and gas lease affects the possession of land because a lessee has a vested right to the possession of the land to the extent reasonably necessary to carry out the terms of the lease. Lastly, the Ohio Supreme Court provided that if the conditions of the primary term or secondary term of an oil and gas lease are not met, then the lease terminates, and the property interest created by the oil and gas lease reverts back to the owner/lessor.
In reaching its holding, the Ohio Supreme Court concluded that Plaintiffs’ lawsuit is exactly the type of controversy that involves the title to or the possession of real estate. If Plaintiffs are successful, then it will quiet title to the farmland, remove the leases as encumbrances to the property, and restore the possession of the land to the Plaintiffs. If Plaintiffs are unsuccessful, then title to the land will remain subject to the terms of the leases which affects the transferability of the land. Additionally, the Ohio Supreme Court concluded that if Plaintiffs were unsuccessful then Defendant would have the continued right to possess and occupy the land. Therefore, the Ohio Supreme Court found that Plaintiffs’ controversy regarding the termination of oil and gas leases is the type of controversy that is exempt from arbitration clauses under § 2711.01(B)(1).
Conclusion. Although Ohio recognizes the ability of parties to freely negotiate and enter into contracts, there are cases when the law will step in to override provisions of a contract. The determination of title to and possession of real property is one of those instances. Such a determination can have drastic and long-lasting effects on the property rights of individuals. Therefore, as evidenced by this Ohio Supreme Court ruling, Ohio courts will not enforce an arbitration provision when the controversy is whether or not oil and gas leases have terminated. To read more of the Ohio Supreme Court’s Opinion visit: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2022/2022-Ohio-869.pdf.
Tags: Arbitration Clauses, oil and gas leases, Contract Terms, contracts, Property Rights, Ohio Law, Agriculture Law
Did you know that white sturgeon are North America’s largest fish? The largest white sturgeon on record was caught in 1898 and weighed approximately 1,500 pounds. Sturgeon is the common name for the species of fish that belong to the Acipenseridae family. The largest sturgeon on record was a Beluga sturgeon weighing in at 3,463 pounds and 24 feet long. Talk about a river monster! Swimming right along, this edition of the Ag Law Harvest brings you some intriguing election results from across the country, pandemic assistance for organic producers, and a lesson in signatures.
Maine first state to have “right to food.” Earlier this month, Maine voters passed the nation’s first “right to food” constitutional amendment. The referendum asked voters if they favored an amendment to the Maine Constitution “to declare that all individuals have a natural, inherent and unalienable right to grow, raise, harvest, produce and consume the food of their own choosing their own nourishment, sustenance, bodily health and well-being.” Supporters of the new amendment claim that the amendment will ensure the right of citizens to take back control of the food supply from large landowners and giant retailers. Opponents claim that the new amendment is deceptively vague and is a threat to food safety and animal welfare by encouraging residents to try and raise their own products in their backyards without any knowledge or experience. The scope and legality of Maine’s new constitutional amendment is surely to be tested and defined by the state’s courts, but until then, Maine citizens are the only ones the in the United States that can claim they have a constitutional right to food.
New York voters approve constitutional environmental rights amendment. New Yorkers voted on New York Proposal 2, also known as the “Environmental Rights Amendment.” The proposal passed with overwhelming support. The new amendment adds that “[e]ach person shall have a right to clean air and water, and a healthful environment” to the New York constitution. New York is one of a handful of states to have enacted a “green amendment” in its state constitution. Proponents of the amendment argue that such an amendment is long overdue while opponents argue that the amendment is too ambiguous and will do New York more harm than good.
USDA announces pandemic support for certified organic and transitioning operations. The U.S. Department of Agriculture (“USDA”) announced that it will be providing pandemic assistance to cover certification and education expenses to agricultural producers who are currently certified or to those seeking to become certified. The USDA will make $20 million available through the Organic and Transitional Education and Certification Program (“OTECP”) as part of the USDA’s Pandemic Assistance for Producers initiative. OTECP funding is provided through the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”). Producers can apply for expenses paid during the 2020, 2021, and 2022 fiscal years. For each fiscal year, OTECP will cover 25% of a certified operation’s eligible certification expenses, up to $250 per certification category. Crop and livestock operations transitioning to organic production may be eligible for 75% of eligible expenses, up to $750 for each year. Both certified organic operations and transitioning operations are eligible for 75% of eligible registration fees, up to $200, per year for educational events to help operations increase their knowledge of production and marketing practices. Applications are now open and will be available until January 7, 2022. Producers can apply through their local Farm Service Agency office. For more information on OTECP visit https://www.farmers.gov/pandemic-assistance/otecp.
A signature case. In 2018 Margaret Byars died intestate survived by her 5 children. After Byars’s death, one her sons, Keith, revealed that Margaret had allegedly executed a quitclaim deed in 2017 giving her Dayton home to Keith. The other siblings brought this lawsuit claiming that the deed was invalid and unenforceable because the facts surrounding the execution of the deed seemed a little odd. In 2017, Margaret was diagnosed with breast cancer and moved into a nursing facility. Shortly after entering the nursing home, Sophia Johnson, a family friend and the notary on the deed, showed up to notarize the quitclaim deed. Trial testimony revealed that the quitclaim deed was prepared and executed by a third party. Margaret did not physically sign the deed herself. In fact, the trial court noted that the signature looked like the handwriting of the person that prepared the deed and that no one saw Margaret authorize another to sign the deed for her. Sophia testified that when she showed up to notarize the deed, the deed was already completed and signed. Sophia also testified that Margaret seemed to intend to transfer the house to Keith and understood the nature and consequences of the deed. After hearing all the testimony, the trial court concluded that the deed was enforceable, and the house belonged to Keith. However, on appeal, the Second District Court of Appeals found the deed to be invalid. The Second District stated that in Ohio a grantor need not actually sign a deed in order to be valid, however, the court concluded that the “signature requirement may be satisfied by another affixing a grantor’s signature on a deed so long as the evidence shows that the grantor comprehend the deed, wanted its execution, and authorized the other to sign it.” The court concluded that the evidence showed that Margaret comprehended the deed and perhaps even wanted its execution. But the evidence did not show that Margaret authorized anyone to sign the deed for her. Because it could not be established that Margaret authorized the preparer or anyone else to sign the deed for her, the Second District court held that that deed was invalid under Ohio law. This case demonstrates the importance of attorneys and the work they do to make sure all asset transfers and estate planning documents are in compliance with the law to help avoid unnecessary lawsuits and prevent any unintended outcomes.
Tags: USDA, Constitutional Amendments, Right to Food, Environmental Rights, Green Amendments, deeds, Ohio Law, Signature Requirements, pandemic assistance