The Sixth Circuit Court of Appeals ruled last week that Ohio landowners do not have a contractual right to terminate their oil and gas leases with Chesapeake Exploration LLC based on Chesapeake's failure to match third-party offers to lease the same property. Affirming the district court's ruling, the appeals panel held that the leases unambiguously gave Chesapeake a "right rather than . . . an obligation" to match the third-party offers.
At issue was Paragraph 14 of the lease agreements which gives Chesapeake first-refusal rights:
14. PREFERENTIAL RIGHT TO RENEW. If, at any time during the primary term hereof, or within one (1) year from the expiration, cancellation or termination of this Lease, Lessor receives an acceptable, bona fide third-party offer to lease the Leasehold, in whole or part, Lessor shall promptly provide the Lessee, in writing, of all the verifiable particulars of such third-party offer. Lessee shall have thirty (30) days from the receipt thereof to advise Lessor, in writing, of its agreement to match said third-party offer as to all terms and consideration; immediately thereafter, Lessor and Lessee shall take all cooperative steps necessary to effectuate the consummation of said transaction and the survival of said transaction through any statutorily mandated right of cancellation thereof. Any lease or option to lease the Leasehold, in whole or part, granted by Lessor in contravention of the purposes of this paragraph shall be deemed null and void.
The Sixth Circuit rejected the homeowners' assertion that the word "shall" created an obligation to match third party offers. Instead, the court explained that "Paragraph 14 does not say that Chesapeake 'shall match' any third-party offer; what it says, rather, is that Chesapeake 'shall have thirty (30) days' to advise a landowner of Chesapeake's decision to accept such an offer." The Court also noted that the homeowners' interpretation of the lease as creating a right to cancellation in the event of Chesapeake's failure to match would contradict the fixed three-year term of the agreement.
The panel was composed of Judges Karen Nelson Moore (a Clinton appointee), Raymond Kethledge (a George W. Bush appointee), and Jane Branstetter Stranch (an Obama appointee).
More coverage of the decision can be found here, with the full opinion published here.
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