“Paragraph 19” Lease Provision Upheld

In 2007, the Easthams entered into a lease with a lessee who later assigned the lease to Chesapeake. The lease term was five years. Paragraph 19 of the lease stated,

“In consideration of the acceptance of this lease by the Lessee, the Lessor agrees for himself and his heirs, successors and assigns, that no other lease for the minerals covered by this lease shall be granted by the Lessor during the term of this lease or any extension or renewal thereof granted to the Lessee here in. Upon the expiration of this lease and within sixty (60) days thereafter, Lessor grants to Lessee an option to extend or renew under similar terms a like lease.”

On March 14, 2012, Chesapeake filed a notice of extension of the oil and gas lease with the Jefferson County Recorder. Upon filing the notice of extension, Chesapeake sent the Easthams a letter stating that it had extended the lease on the same terms for an additional five years. The letter enclosed a delay rental payment for $490.66.

The Easthams filed a class action suit alleging that Paragraph 19 does not give Chesapeake the option to unilaterally extend the lease, but rather requires that the parties renegotiate the lease at the end of the initial five-year term.

The federal district court agreed with Chesapeake, granting summary judgment in its favor and denying summary judgment to the Easthams, concluding that under the plain language of the lease, Paragraph 19 gave Chesapeake two options: either to extend the lease under its existing terms or renegotiate under new terms.

The Easthams appealed that decision to the Sixth Circuit Court of Appeals and it published its opinion of June 6, 2014. Eastham v. Cheasapeake Appalachia, No. 13-4233, 6th Cir. (June 6, 2014).

The appellate court did not agree with Easthams’ argument that options to “extend” ware synonymous with options to “renew” under Ohio law. Easthams relied on a recent Ohio trial court case, Flannery, et al., v. Enervest Operating, LLC, et al., C.P. No. 12 CVH 27524 (Carroll Cnty. Common Pleas, April 14, 2014). In that case, the state trial court interpreted contract language identical to Paragraph 19 and concluded that there is “no meaningful distinction between an option to extend and an option to renew” a lease. But, as the appellate court said, the Flannery decision is not binding on it. Instead, the appellate court relied on an Ohio Supreme Court case that recognized the distinction.

Then, addressing the argument that the provision was ambiguous, the court said, “The plain language of the lease agreement indicates that Paragraph 19 is unambiguous. Again, the viability of the Easthams’ construction of Paragraph 19 requires the assumption that the terms “extend” and “renew” mean the same thing.” … “Contrary to the Easthams’ argument, however, these words have different meanings.”

Finally, the court said, “Although a party always has the option to attempt to renegotiate new contract terms, through the phrase “renew under similar terms a like lease” Chesapeake here reserved the right to unilaterally bind the Easthams to a new agreement “under similar terms” to the preceding agreement for a new length of time. Indeed, the ability of one party to bind the other unilaterally is an essential feature of option contracts generally.”

Responding to the Easthams’ argument that they had been swindled and the contract should be unenforceable as against public policy, the court said,

“The presumption under Ohio law is the freedom to contract.” *** “And, we were unable to locate either an act of the Ohio General Assembly or an Ohio court case that supports the Easthams’ assertion with regard to Ohio’s public policy about construing oil and gas leases. In short, the Easthams have not actually offered any public policy that the lease could have violated.”

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