The Fifth District Court of Appeals recently held in Bilbaran Farm, Inc. v. Bakerwell, Inc., 2013-Ohio-2487, that a general implied covenant waiver contained within an oil and gas lease is sufficient to waive the implied covenant to develop land.
Bilbaran Farm, Inc., owned 275.67 acres located in Knox County, Ohio. The 2003 lease agreement granted the defendant the right to drill, produce, and market oil and gas located within the Bilbaran Farm property. The lease did not state the number of wells that must be drilled on the property, it merely stated that a well must be drilled within 12 months of executing the lease or a delay rental must be paid to Bilbaran Farm. Most importantly, the lease contained the following language:
This lease contains all of the agreements and understandings of the Lessor and the Lessee respecting the subject matter hereof and no implied covenants or obligations, or verbal representations or promises, have been made…
In 2012, Plaintiff Bilbaran Farm filed a complaint in Knox County seeking to cancel the lease claiming that the defendants “breached their duty under the lease to develop the rest of the undeveloped portion of the lease,” amongst others. Defendants disagreed and argued that even though 215.67 acres were undeveloped, because the lease did not contain an implied or expressed duty to develop the land, Bilbaran Farm’s claims fail as a matter of law. The trial court agreed with the defendants and dismissed Bilbaran Farm’s Complaint.
Ohio law clearly states that oil and gas leases are contracts that contain an implied covenant to reasonably develop the land. An exception to this general rule exists—when there is an express provision to the contrary. The Fifth District Court of Appeals looked to a similar unreported case, Bushman v. MFC Drilling, Inc. for guidance. In Bushman, the plaintiff argued that a “general disclaimer” of implied covenants, which would include the covenant to develop the leased property, was against public policy and should not be enforced. Instead, the plaintiff argued, a specific waiver of the implied covenant was necessary. The Bushman court disagreed, holding that there is no Ohio legal authority to support this conclusion, and general contract law controls.
The Fifth District Court of Appeals agreed with the Bushman court, holding that a general waiver of implied covenants is sufficient to disclaim a duty to reasonably develop the land. The Fifth District went on to cite Bushman, stating “the mere fact that the terms of an executed contract turn out to be unfavorable to one of the parties does not override the fundamental concept in Ohio law that the parties enjoy ‘freedom of contract’ and are bound to the contractual relationship that they create.”
The Bilbaran Farm case is important for two reasons. First, this is the first published case in Ohio that recognizes that a general implied covenant waiver is sufficient to waive the implied duty to reasonably develop land that is read into every oil and gas lease. Many of the oil and gas leases entered into years ago contain similar general implied wavier provisions, and therefore, defendants have yet another defense to add to their stonewalling of plaintiff’s numerous public policy arguments. Second, there has been the suggestion in one recent controversial Ohio case that an oil and gas lease that contains a waiver of implied covenants, which would include the duty to reasonably develop the land, will render an oil and gas lease to be an illusory contract. The Bilbaran Farm case is a direct counter to this holding, as parties are free to contract.
Due to the drastic increase in interest in oil and gas leasing in Ohio within the last three years, the courts have been flooded with lawsuits filed by lease holders who feel their lease terms are unfavorable and are asking courts to declare their leases void as against public policy. The Bilbaran Farm case provides additional support for lease holders against these types of attacks.