What does it mean to reassign oil and gas lease rights?

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By Alan D. Wenger

Chesapeake Exploration LLC is assigning its rights to its Utica assets, including Chesapeake’s leases, to EAP Ohio, LLC, a company formed by Encino Energy and Canada Pension Plan Investment Board.

Encino has background in the oil and gas arena, and it expresses plans to invest in continued Utica drilling activity.

Some lessors impatient with Chesapeake might welcome the assignment, and for others it raises concerns.

Some Chesapeake leases — likely all the thousands of leases in forms negotiated through the Associated Landowners of the Valley (ALOV) and Standing United Really Excels (SURE) landowner groups — contain language allowing Chesapeake to assign the leases, “…subject to the written consent of the Lessor…Lessor’s consent shall not be unreasonably withheld, conditioned or delayed.”

Chesapeake lessors have been receiving, by certified mail, written requests from Chesapeake for consent to the Chesapeake to Encino assignment of a lease. What is a proper response? It depends on the status of your lease.

Check lease status

Has your lease expired? Most (but not necessarily all) Chesapeake leases were for a primary term of five years, though the primary term could be extended if a) the lessee gave notice of a primary term extension and paid a timely second bonus payment to the lessor in order to extend the primary term; or b) the lessee commenced operations under the lease (well drilled in a drilling unit in which the leasehold was a part, in which case you have hopefully been receiving royalty payments).

If neither of these occurred, and the primary term has expired, the lessee should have recorded a notice of lease termination with the county recorder where the property is located.

You should check with your county recorder if your lease has been terminated on record.

Chesapeake has terminated thousands of its Utica leases. Presumably, it would not send assignment consent notices for terminated leases, but you need to be careful just in case they did.

If your lease is expired (whether by recorded termination or not), you should not consent to a lease assignment, since the lessee might try to argue that your consent is evidence that the expired lease is still in effect despite lessee’s failure to take steps to keep the lease alive.

Is your lease is still alive?

If your lease has been extended by continuation of the primary term or by the leasehold being included in a drilling unit, your alternatives are to sign and return the consent, or you might simply not respond to it.

A lease’s “consent shall not be unreasonably withheld, conditioned or delayed” language probably means that absent a solid, timely submitted written reason for denial, the lessee is entitled to assign the lease.

The “unreasonable delay” period of time may not be defined in the lease, but probably would require denial of consent to be submitted in writing within 30 days or so.

Down the road

With the Chesapeake-Encino assignment, one might see Encino as likely as Chesapeake to prudently develop leasehold interests.

The ALOV/SURE form leases provide that a lessee assignor, as well as the assignee, remain “on the hook” under the lease. If the lessor refuses consent, Chesapeake could require grounds for that refusal, and “just because” grounds would not work — there would need to be a demonstrable fact-based jeopardy to the lessor arising from the assignment.

If a lessor receives the written consent request and does not respond, Chesapeake will likely maintain that the failure to consent was unreasonably withheld, conditioned or delayed, and the assignment to Encino will proceed. If a lessor does not respond in writing refusing consent, that lessor may thereby waive any future contesting of the assignment.

(Alan D. Wenger is an oil & gas lawyer in Youngstown, Ohio, and chair of the Oil & Gas Law Practice Group at Harrington, Hoppe & Mitchell.)

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