The Ohio Supreme Court has recently declined to recognize an implied covenant to develop further that would assist landowners when their lessee does not explore formations that are available for oil and gas production.
In Alford v. Collins-McGregor Operating Company, a group of Ohio landowners sued their lessee, seeking a partial termination of an oil and gas lease.The landowners sought a judgment that the portion of their lease covering depths below the Gordon Sand had terminated because their lease had either expired or been abandoned because the lessee had failed to explore whether production could be obtained from those formations below the Gordon Sand; i.e., the Marcellus and Utica formations. Specifically, the landowners alleged that the lessee had breached the implied covenant of reasonable development and the implied covenant to explore further.
The purpose of the implied covenant of reasonable development is to protect the lessor's interest in the lease, which is to obtain production and, hence, profits once the right to drill has been granted to the lessee.The Ohio Supreme Court noted that it had not previously considered the implied covenant to explore further. It agreed with the lessee that there is no need for the implied covenant to explore further because the covenant of reasonable development provides sufficient protection to landowners concerning productive use of the land. According to the Ohio Supreme Court, the landowners' interest in exploration in deep formations below the Gordon Sand are sufficiently protected by the implied covenant of reasonable development. It therefore declined to recognize a separate covenant to explore further.