In SJBK, LLC v. Northwood Energy Corp., 2023 WL 8890826 (Ohio Ct. App. 7th Dist.), the plaintiff is a limited liability company that owns approximately 79.8 acres in Monroe County, Ohio.  The land is covered by an oil and gas lease granted by a prior owner of the land.  The landowner sued the oil and gas leaseholder, asserting that the leaseholder breached the lease by pooling about 65.8 acres of the leased premises, without pooling the reminder and without obtaining the landowner’s consent to pool only part of the leased premises.

The landowner argued that the consequence of this alleged breach is that the entire lease terminated. In contrast, the leaseholder argued that, under the circumstances, and under a proper interpretation of the lease as a whole, the lease terminated as to the unpooled acreage, but the lease remained in effect as to the pooled acreage because there was production in paying quantities from the pooled unit.  The Monroe County Common Pleas Court granted summary judgment in favor of the leaseholder and the landowner appealed.

The appellate court noted that paragraph 5 of the printed text of the lease authorizes the leaseholder to pool all or a portion of the leased premises, and to create one or more pooled units.  But paragraph 17 of an addendum also addresses pooling.  Paragraph 17 states in part: “Lessee agrees that the entirety of the leased premises shall be include[d] in any pooled unit formed, unless Lessee receives the prior written consent of the Lessor.”  The landowner based its claim on that portion of paragraph 17.

In contrast, the leaseholder argued that its pooling of part of the leased premises, without pooling the entirety, was not a breach.  The leaseholder asserted that the portion of paragraph 17 on which the landowner relies must be read in conjunction with the remainder of paragraph 17.  According to the leaseholder, when paragraph 17 is read as a whole, it is apparent that paragraph 17 does not make it a breach of the lease to pool just part of the leased premises.  Instead, paragraph 17 merely specifies the consequences if the leaseholder creates a pooled unit that does not include the entirety of the leased premises.  In particular, paragraph 17 acts as a Pugh clause by providing that any production from a pooled unit that includes only part of the leased premises will maintain the lease in effect as to the unpooled acreage for a maximum of two years after the end of the primary term.  The lease language on which the leaseholder relies states (emphasis added):

Any drilling or reworking on or production from a well located on a pooled unit shall continue this Lease in full force and effect as to that part of the premises contained within a pooled unit. If the entirety of the leased premises is not included in a single unit, [the] leasehold on any portion of the leased premises not contained in a pooled unit can only be maintained for a period of two years after the expiration of the primary term unless it is included in one or more pooled unit(s) or otherwise maintained under the terms of this lease.

After reviewing this argument, the appellate court also noted that paragraph 12 of the printed text of the lease states: “If this Lease is forfeited, terminated or canceled for any cause, it shall, nevertheless remain in full force and effect as to * * * any part of said land included in a pooled unit on which there are Operations.”  This would not necessarily defeat the landowner’s argument.  After all, this language conflicts with the landowner’s interpretation of paragraph 17 of the addendum, which (according to the landowner) causes the entire lease to terminate if the leaseholder pools part of the leased premises without pooling the entirety.  And, pursuant to an introductory clause that appears in the addendum, the addendum will control over any conflicting provisions in the printed text.

The appellate court noted, however, while such an introductory clause will control if there is a conflict between an addendum and a printed portion of the lease, such clauses do not eliminate the requirement that a court attempt to harmonize the different portions of a lease.  The leaseholder’s reading of paragraph 17 provided a plausible way to harmonize the provisions.  The initial part of paragraph 17 generally requires the leaseholder to pool the entire leased premises, in the event that the leaseholder pools any portion, but a Pugh clause in the latter part of paragraph 17 specifies the consequence if a leaseholder fails to do so.  This reading gives effect to the entirety of paragraph 17 of the addendum, as well as paragraph 12 of the printed text, which states that if part of the lease terminates, the lease will remain in effect as to a pooled unit from which there is production.

The landowner acknowledged that the latter portion of paragraph 17 operates as a Pugh clause, but the landowner argued that this Pugh clause applies only when the leaseholder obtains the landowner’s consent to pool a portion of the leased premises without pooling the entirety.  The appellate court disagreed, concluding that the provisions of the lease are best interpreted and harmonized by the interpretation advanced by the leaseholder.  Accordingly, the appellate court affirmed the lower court’s grant of summary judgment in favor of the leaseholder-defendant.