The Bohlens entered into a lease with Alliance in 2006 for a one year primary term. Paragraph 3 of the lease contained a delay rental provision:
This lease, however, shall become null and void and all rights of either party hereunder shall cease and terminate unless the Lessee shall thereafter pay a delay rental of $5,500.00 Dollars each year, payments to be made yearly, but in no event not less than yearly, for the privilege of deferring the commencement of a well.
In an addendum, the parties also provided:
In the event that during any calendar year the total royalties paid from production of the leased premises, shall be less than the annual rental of $5,500.00, Lessee shall tender to Lessor such sum that will equal to the $5,500.00 annual rental payment.
Within seven months of signing the lease, Alliance drilled two wells, one of which was a producer. Between 2008 and 2013, Alliance paid royalties to the Bohlens, but the royalty amounts fell below the $5,500 per year required by the lease.
The Bohlens filed suit, making a twofold argument that the lease had terminated. First, they claimed that the lease had lapsed due to Alliance’s failure to pay the entire $5,500 minimum annual royalty payment, which the Bohlens characterized as a delay rental required by Paragraph 3 of the lease (and therefore, subject to the termination provision in the delay rental clause). Next, the Bohlens claimed that regardless of whether the lease had terminated for failure to pay the required payments, the lease allowed Alliance to make delay rental payments during the secondary term, and therefore was a perpetual lease that was void ab initio as offensive to Ohio public policy.
Affirming the court of appeals’ ruling in favor of Alliance and Anadarko, the Supreme Court held that the royalty shortfall did not trigger the automatic termination of the lease. “The plain language of the parties’ oil and gas lease requires the lessee to pay a delay rental for deferring commencement of a well, otherwise the lease terminates.” But here, “the lessee did not defer commencement of a well beyond the primary term of the lease, because at least one well was drilled within the first year,” Justice Fischer wrote. “Therefore, the lease did not terminate under the delay-rental clause.” And the requirement in the addendum that provided for the $5,500 minimum annual rental was not tied to the automatic termination language in the delay-rental clause. The Court also rejected the Bohlens’ characterization that the lease was perpetual and thus void for public policy, concluding that the lease could not be extended indefinitely through the payment of delay rentals.
[Disclosure: Vorys represented amicus curiae Ohio Oil and Gas Association in this case.]