Although anti-washout provisions may promote a policy of fairness for override owners, Ohio’s Seventh District Court of Appeals held that, where no relevant privity of contract exists between a new Lessee and the owners of overriding royalties under the old lease, these provisions aren’t enforceable.[1]
The circumstances of this case are fairly straightforward. Oil and gas leases were signed in 2010, but subsequently expired by their terms. Between the date of execution and the date of expiration, the 2010 Lessees made certain overriding royalty assignments that contained extension and renewal clauses. In relevant part, the extension and renewal language applied to “new leases…covering all or a portion of the lands” for a specified term.[2] The parties eventually stipulated that the specified term would be for one year after the leases’ expiration. Further, these overriding royalty assignments purported to be “covenants running with the lands.”[3]
Ultimately, the 2010 leases expired and new leases were taken by new parties within the one year term. Appellants claimed to own ORIs in the new leases by virtue of the extension and renewal clauses contained in the earlier assignments of the 2010 leases.[4] When appellees refused to honor this treatment, appellants brought suit.
Relying on rules of contract law, the Seventh District Court of Appeals stated, “[t]he problem that appellants cannot overcome… is that appellees were not parties to leases that contained the [extension and renewal] clauses. In this case, there was no privity of contract.”[5] As to privity of contract, the court further explains, “[a] contract is binding only upon the parties to the contract and those in privity with them and an action for breach of contract can only be maintained by the parties to the contract or those deriving rights from the contracting parties.”[6]
The most important fact of this case is that the 2010 Lessees and the new Lessees were completely different entities. The new Lessees were not party to the earlier leases or assignments and shared no privity of contract with appellants. As a result, the appellants had no claim to an overriding royalty interest under the new leases.
Anti-washout provisions serve a valuable purpose in preventing a Lessee from sitting on a lease until it expires, in an attempt to recoup net revenue interests. That said, ORI assignees cannot enforce such provisions in Ohio against a new Lessee with whom they share no relevant privity of contract with.
[1] Marquette ORRI Holdings, L.L.C. v. Ascent Resources- Utica, L.L.C., 2022-Ohio-3786.
[2] Id. at ¶3.
[3] Id. at ¶4.
[4] Id. at ¶7.
[5] Id. at ¶28.
[6] Id.
Andrew represents companies active in the oil and gas industry in both litigation and arbitration matters, from risk management to trial. He also advises clients on compliance and regulatory issues and handles proceedings in front of administrative agencies / governmental bodies, including the Ohio Department of Natural Resources and the Ohio Department of Commerce.
In addition to his energy practice, Andrew has broad experience in commercial and business litigation, including breach of contract / lease claims, construction disputes, non-compete / non-solicitation disputes, trade secrets, business torts, and real property-related claims. He is OSHA certified in Construction Safety and Health and has drafted and reviewed numerous construction contracts.