Oil and Gas Leases in Ohio: Interests in Land (Real Estate) or License to Enter Land to Explore/Drill for Oil and Gas?

The United States District Court for the Southern District of Ohio recently asked itself the same question (as the title to this article asks) in Wellington Resource Group LLC v. Beck Energy Corporation, Case No. 2:12-CC-104 (Sept. 20, 2013). Wellington dealt with a dispute concerning a broker’s right to a commission for the sale of oil and gas leases.

Basically, Wellington argued it was entitled to a commission. Beck filed a motion to dismiss, essentially arguing that there was no contract between Beck and Wellington; and alternatively, that Wellington was not a licensed broker, and since (according to Beck) oil and gas leases are interests in real estate, Wellington would have had to be a licensed real estate broker under Ohio law to collect a commission. In other words; no license, no fee. All agreed that the crux of the case based on licensure would revolve around whether or not oil and gas leases were recognized in Ohio as interests in real estate (if such leases were not real estate, the license requirement would not apply).

Wellington brought suit in federal court based upon “diversity jurisdiction”. This basically means that the federal court has the power to hear a civil case where the persons that are parties to the action are "diverse" in citizenship (citizens of different states) or non-U.S. citizens. (An alternate avenue to the federal courts arises when the subject matter of the case regards a question of federal law). When federal jurisdiction in a case is premised on diversity, the court is to apply the substantive law of the state where the federal court is located (Ohio, in Wellington). This is easy, under Ohio law if there are recent decisions of the Ohio Supreme Court (Ohio’s highest level of state court authority) directly on point. If not, the federal court must make an educated guess to determine how the Supreme Court of Ohio, if presented with the issue, would resolve it.

Finding no recent cases directly on point (regarding the issue of whether or not oil and gas leases are interests in land), the court in Wellington did a thorough job researching Ohio case law, going as far back as 1898. Based upon this research, the court in Wellington disagreed with Beck and refused to grant its motion to dismiss on this issue, concluding that the court’s “thorough survey of Ohio case law leaves this Court convinced that the Ohio Supreme Court, if given the occasion to rule on this issue today, would so hold” that “Oil and gas leases are not ‘real estate’ under Ohio law”.

The court in Wellington reasoned that, in Ohio, "oil and gas leases are not leases as that term is traditionally used; instead, Ohio courts appear to recognize that such leases create a license to enter upon the land for the purpose of exploring and drilling for oil and gas." While there has been some seemingly contrary authority, the Court in Wellington found most persuasive the fact that (i) there was a relatively recent federal case that supported its holding (In re Frederick Petroleum Corp., 98 B.R. 762, 766 (S.D. Ohio 1989), (ii) other states (e.g., Oklahoma, Kansas, New York) have held that oil and gas leases are not real estate; (iii) the Ohio Legislature is currently considering (HB 493) regulating brokerage of oil and gas rights under the auspices of the Ohio Division of Oil and Gas Resources Management (vs. the Ohio Division of Real Estate); and the last word of the Ohio Supreme Court (in Back v. Ohio Fuel Gas Co., 113 N.E. 2nd 865 (Ohio 1953) clearly provided that a grant of “all the oil and gas in and under” a tract of land, as well as “the right and privilege of operating upon said premises…for the obtaining of such oil and gas” was no more than a “license to effect …severance” of oil and gas from land, not an interest in land.

Unless and until the Ohio Supreme Court rules otherwise, it seems safe to say that oil and gas leases are not interests in land (which explains, by the way, why they do not need to be notarized if they are recorded). Nevertheless, even though the leases themselves are not “interests in land”, one’s rights to gas/oil/minerals underneath their land may indeed be sold or “licensed” to others no matter how they are defined.

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