Can You Lease Your Oil And Gas Rights If Not All Of The Owners Join In?
By Paul R. Yagelski, Esq.
You own oil and gas rights, but you do not own 100% of the rights. You have been offered an oil and gas lease but the other owners refuse to join in. Can you lease your oil and gas rights? It depends. There is a majority and minority view.
Under the majority view, if you own only a portion of the oil and gas rights, no matter how small, you can lease your oil and gas rights to the oil and gas company without the consent of, or even over objections of, the other co-tenants. This right to realize the value of the estate by developing the minerals on common land, without the consent of the other co-tenants, is subject only to the duty to account to the tenants out of possession for their proportional share of the returns. See 28 Energy & Min. L. Inst. Ch. 6 (2008). Pennsylvania and Ohio follow the majority view. See Lichtenfels v. Bridgeview Coal Co., 344 Pa. Super. 257, 496 A.2d 782, 785 (1985) (citing Coleman’s Appeal, 62 Pa. 252 (1869) and Prairie Oil and Gas Co. v. Allen, 2 F.2d 566 (8th Cir. 1924)); McIntosh v. Ropp., 233 Pa. 497, 82 A. 497 (1912); Black v. Sylvania Producing Co., 105 Ohio St. 346, 137 N.E. 904 (1922).
Under the minority view, you would not be able to lease your oil and gas rights unless the other non-consenting owners join in. If you did lease the oil and gas rights without the consent of the non-consenting co-owners, you could be subject to a lawsuit for waste. In addition, drilling without the consent of the co-owner of the undivided interest can be enjoined. See 28 Energy & Min. L. Inst. Ch.6 (2008). Until recently, West Virginia followed the minority view. South Penn Oil Co. V. Haught, 71 W.Va. 720, 78 S.E. 759 (1913); Law v. Heck Oil Co., 106 W. Va. 296 145 S.E. 601 (1928). With the passage of the Co-tenancy Modernization and Majority Protection Act, this is no longer the case; more specifically, this is no longer entirely the case.
On June 3, 2018, West Virginia’s Co-tenancy Modernization and Majority Protection Act (“Act”) W.Va. Code, §37B-1-1, became effective. Under this statute, a co-tenant can lease the oil and gas rights without the joinder of the other co-tenants where:
- There are 7 or more royalty owners;
- The operator or owner makes or has made reasonable efforts to negotiate with all royalty owners in an oil or natural gas mineral property; and
- Royalty owners vested with at least three-fourths of the right to develop, operate, and produce oil, natural gas, or their constituents consent to the lawful use or development of the oil or natural gas mineral property.
W.Va. Code, §37B-1-4.
If the requirements are fulfilled, the operator’s or owner’s use or development of the oil or natural gas mineral property is permissible, is not waste, and is not a trespass. Id. In such a case, the consenting co-tenants and their lessees, operators, agents, contractors, or assigns are not liable for damages for waste or trespass due to the lawful use or development of the oil and natural gas mineral property. Id. In such a case, a non-consenting co-tenant is entitled to receive, based on his or her election, either one of the following:
- A pro-rata share of the production royalty, paid on the gross proceeds received at the first point of sale to an unaffiliated third-party purchaser and free of post-production expenses, equal to the highest royalty percentage paid to his or her consenting co-tenants in the same mineral property, under a bona fide, arms-length lease transaction and lease bonus and delay rental payments or other non-royalty mineral payments, calculated on a weighted-average net mineral acre basis; or
- To participate in the development and receive his or her pro-rata share of the revenue and cost equal to his or her share of production attributable to the tract or tracts being developed according to the interest of such nonconsenting co-tenant, exclusive of any royalty or overriding royalty reserved in any lease, assignments thereof or agreements relating thereto, after the market value of such nonconsenting co-tenant’s share of production, exclusive of such royalty and overriding royalty, equals double the share of such costs payable or charged to the interest of such nonconsenting co-tenant.
A nonconsenting co-tenant has 45 days following the operator’s written delivery of its best and final lease offer to make his or her election for either a production royalty or a revenue share. If the nonconsenting co-tenant fails to deliver a written election to the operator prior to the expiration of such 45 day period, he or she is deemed to have elected the production royalty option. Within 30 days after a nonconsenting co-tenant has chosen or is deemed to have chosen the production royalty option, the nonconsenting co-tenant has the right to appeal regarding the issue of whether there has been compliance with the production royalty option, to verify the highest royalty paid in the same mineral property and the value for the lease bonus and delay rental payments: provided; however, that the operations upon the parcel may continue during the proceedings. See W.Va. Code, § 37B-1-4(c).
Despite the foregoing, however, when any tract of mineral property, where an interest in the oil and gas in place is owned by a non-consenting co-tenant, is used or developed pursuant to Section 37B-1-4, in no event shall drilling be initiated upon, or other surface disturbance occur, without the surface owner’s consent regardless of whether such surface owner possesses any actual ownership in the mineral interest.
Based upon the provisions of the Act, West Virginia no longer follows the minority position in its entirety. If there are less than seven royalty owners or if there are seven or more royalty owners, but these royalty owners are not vested with at least three-fourths of the right to develop, operate and produce oil, natural gas or their constituents, then the Act would not apply. If either situation applies, the oil and gas company would need the consent of all the co-owners of the oil or natural gas mineral property to develop the oil or natural gas.
It is not unusual for a royalty owner to own only a partial interest in the oil and gas. Invariably, one of the questions that then arises is whether the royalty owner can lease its interest without the consent of the other royalty owners. As such, it is important for the royalty owner to know whether the state where his or her oil and gas interest is located follows the majority or minority view. This is important not only legally, so that the royalty owner knows its rights and obligations, but it is also important practically as it may be important in negotiating an oil and gas lease.
If the royalty owner lives in a state, which follows the majority view, the royalty owner should know that he or she can lease the oil and gas interest without the joinder of the other owners, and that if he or she does not lease the oil and gas interest, the other owners can. Under such circumstances, the royalty owner may not have much leverage in negotiating an oil and gas lease as he or she could be left out of an oil and gas lease if one or more of the other owners lease their oil and gas interest. If the royalty owner lives in a state that follows the minority view, then the royalty owner may have leverage with the oil and gas company to the extent that the royalty owner may be able to get better terms if, for instance, the royalty owner is the lone holdout or one of other holdouts to executing an oil and gas lease.
If you are unsure which view your state follows regarding if you can lease your oil and gas rights and what your rights and obligations are under either view, you should contact an oil and gas attorney. We are licensed to practice in Ohio, Pennsylvania and West Virginia.