In the shale energy economy, the landman is the tip of the spear. While the term “landman” has colloquially broadened to include a variety of related professions (most commonly title abstractors), the traditional landman is primarily a leasing agent, travelling to areas where exploration and production companies may be interested in drilling, knocking on doors and negotiating oil and gas leases. The profession is one of proud independence and highly-specialized knowledge and ability. However, a recent decision by Ohio’s Seventh District Court of Appeals, affirming a decision by the Mahoning County Court of Common Pleas, may threaten the traditional model of the landman profession – if not its very existence.
The court’s decision in Dundics v. Eric Petroleum Corp., affirmed on appeal, holds that landmen who negotiate oil and gas leases must be licensed real estate brokers in order to be entitled to compensation. This decision represents a significant problem for professional landmen, and, by extension, E&P companies, as very few landmen have real estate brokers’ licenses. And why would they? Obtaining a real estate broker’s license is a major investment of time, money, and effort. The requirements imposed by R.C. Chapter 4735, dealing with educational and experiential requirements for becoming a licensed real estate broker, are geared exclusively toward the activities we usually associate with real estate agents and brokers – selling houses, leasing commercial properties, etc. Nothing in the requirements addresses oil and gas leasing.
Dundics, then, effectively requires independent landmen to spend considerable amounts of time and money on irrelevant coursework and participating in irrelevant transactions in order to keep doing their entirely-unrelated jobs – a rather absurd result.
Why did the court reach such an onerous conclusion? First, the court noted that “inquiry into legislative intent, legislative history, public policy, [and] the consequences of an interpretation…is inappropriate unless we find the statute is ambiguous.” That is, the court’s job is to apply the law as written, a fundamental pillar of our separation of powers. If the law is unambiguous, the court must apply it without considering whether the result is absurd, against public policy and/or against the intent of the legislature. So, we have to look at the way that the law is written. R.C. 4735.21 provides that:
“No right of action shall accrue to any person…for the collection of compensation for the performance of the acts mentioned in section 4735.01 (including “negotiat[ing] the sale, exchange, purchase, rental, or leasing of any real estate”) of the Revised Code without alleging and proving that such person…was licensed as a real estate broker or foreign real estate dealer.”
R.C. 4735.01(B) provides that:
“’Real Estate’ includes leaseholds as well as any and every interest or estate in land situated in this state…”
The court held that the statute is unambiguous in its application to all transactions involving “Real Estate,” and that the definition of “Real Estate” in R.C. 4735.01(B) is broad enough to include oil and gas leases. In the court’s eyes, that settled it, despite the less-than-desirable result.
Dundics is unclear as to whether an alternative form of compensation (e.g. hourly or salary) for those without brokers’ licenses may avoid conflict with R.C. 4735.21, but it clearly invalidates the traditional commission-based model. The effect, then, of Dundics may be to force E&P companies to:
- Conduct all leasing activities in-house.
- Re‑negotiate all contracts with landmen to provide for an alternative method of compensation.
- Conduct all leasing activity through licensed real estate brokers.
- Some combination of the above.
We recommend that landmen, land services companies and E&P companies conduct a thorough examination of their compensation arrangements in light of Dundics.On April 3, a Notice of Appeal was filed with the Supreme Court of Ohio, along with Dundics’s brief and an Amicus Curiae brief filed by the American Association of Professional Landmen. We will closely monitor the appeal and update this post in the event that the Supreme Court of Ohio takes up the issue.
Update: Sept. 25, 2018 – Relying on the same reasoning as the Seventh District Court of Appeals, the Ohio Supreme Court has affirmed the decision in Dundics. A full copy of the slip opinion can be found here.
In a passage that squares well with our previous analysis above, Chief Justice Maureen O’Connor, writing for the unanimous court, indicated that “whether [applying licensure requirements to oil and gas landmen] makes sense is a policy question for the General Assembly to decide. Our task is to interpret and apply the statutory language….There is simply no exception in the statutes governing real-estate-broker’s licenses for oil and gas leases or oil-and-gas land professionals.” Such an exception would solve the problem if and when the General Assembly carves it out.
However, R.C. 4735.01(I)(1)(a) excepts the “regular employees” of companies acquiring interests in real estate “in the regular course of, or as an incident to the management of the property and the investment in it” from the broker’s licensure requirements. Since the initial ruling by the Seventh District Court of Appeals, some brokers have responded by bringing their formerly-independent landmen in-house as W-2 employees. While different employment types and compensation regimes each carry their own benefits and burdens, for both the employer and employee, it seems that the primary structure for landmen and brokers established by decades of market forces will be unavailable unless and until the General Assembly acts.