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Fracking and Alternative Energy

Steptoe & Johnson PLLC: Implied Covenant to Develop in Ohio Negated by Express Language in Lease: Bilbaran Farm Inc. v. Bakerwell Inc., et al.

By Timothy M. McKeen and Jason Lucas

On June 12, 2013, Ohio's Fifth District Court of Appeals held that a general waiver of implied covenants in an oil and gas lease negates the lessee’s duty to develop other formations and acreage (Bilbaran Farm, Inc. v. Bakerwell, Inc., et al., No. 12-CA-21, Ohio App., 5th Dist., Knox Co.) [enhanced version available to subscribers]).

In 2003, Bilbaran Farm, Inc. leased 275.67 acres to Professional Petroleum Services, Inc. After drilling three wells in the Clinton formation, Professional assigned the lease to Bakerwell, Inc. The lease stipulated “no implied covenants…have been made or relied upon by the [parties][.]”

Bilbaran filed suit against Bakerwell to release the undeveloped formations and additional acreage from the lease. Bilbaran argued the Defendants’ inaction defied the purpose of the original assignment of fully developing the property for oil and gas extraction and thus, the lessees relinquished their rights in the undeveloped property.

The appellate court disagreed with Bilbaran’s argument and held that the express general waiver contained in the lease was sufficient to disclaim Ohio’s implied duty to develop the land, thus relieving Bakerwell of its duty to develop the other formations and undeveloped acreage for oil and gas production.

This case further cements the precedent that an implied covenant to develop leased property can be expressly disclaimed by a general waiver. Click here to read the opinion.

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