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Court News Ohio
Court News Ohio

State Can Block Oil and Gas Sales from Land Purchased with Conservation Grants

The Ohio Public Works Commission can restrict the transfer of mineral rights for drilling of natural gas from land purchased with a grant from the voter-approved Clean Ohio Conservation Fund, the Supreme Court of Ohio ruled today.

A divided Supreme Court found the commission could impose a “transfer restriction” when it granted funds to the Guernsey County Community Development Corporation (CDC) to buy and preserve land along Leatherwood Creek. The restriction prevented the sale of mineral rights without the commission’s approval.

Without notifying the commission, the CDC first sold drilling rights in 2011 for a 14% royalty in oil and gas sales, and then sold the rights to future payments to Siltstone Resources for nearly $3.9 million.

In the Court’s lead opinion, Justice Jennifer Brunner stated while restrictions in deeds preventing the transfer of property are generally invalid, they can be imposed when they are contracted for by the parties and serve a public purpose. In this case, the commission was enforcing its grant agreement with the CDC and carrying out the intent of the constitutional amendment to use Clean Ohio bond funds to preserve and conserve public land, she wrote.

Chief Justice Maureen O’Connor and Justice Melody J. Stewart joined Justice Brunner’s opinion.

In a concurring opinion, Justice Michael P. Donnelly agreed with the portion of Justice Brunner’s opinion finding the transfer restriction was valid and the commission could seek an injunction to prevent oil and gas exploration on the grant-purchased land. Justice Donnelly noted the lead opinion addressed a separate issue regarding a “use restriction” on the property. Since the parties in the case did not argue the use restriction’s validity when the case reached the Supreme Court, he stated the issue was not necessary to decide.

In a dissenting opinion, Justice R. Patrick DeWine wrote that the transfer restriction was invalid. He explained that historically Ohio has not permitted absolute transfer restrictions on land, because they go against the public policy that land should be freely transferable. Justice DeWine also admonished the lead opinion for questioning the validity of the use restriction, pointing out that the parties did not dispute that the use restriction was valid.

Justices Sharon L. Kennedy and Patrick F. Fischer joined Justice DeWine’s dissent.

Land Preserved, Restrictions Required
In 2000, Ohio voters approved a constitutional amendment allowing the state to create a bond fund for making grants to revitalize and preserve natural spaces. The amendment allowed local communities to receive grants to conserve and clean up natural areas, open spaces, and agricultural lands.

The amendment allowed the General Assembly to adopt laws to implement it. The legislature created the Clean Ohio Conservation Fund and authorized the public works commission to administer the fund by establishing policies that encourage the “long-term ownership and long-term control” of properties eligible for Clean Ohio grants.

In 2005, the Guernsey County CDC applied for a Clean Ohio grant for its Leatherwood Creek Riparian Project. The CDC sought to purchase about 228 acres of property in neighboring Belmont County to create a “green corridor” connecting natural areas along Leatherwood Creek in Belmont and Guernsey counties.

The commission approved the grant in 2006, and the CDC signed a 17-page agreement that required certain restrictions in the CDC’s land purchase from the previous owners. The CDC acquired the land in 2007 and recorded the deed in Belmont County with the commission’s required deed restrictions.

The restrictions included a “use and development” restriction that indicated the property would not be developed “in any manner that conflicts with the use of the Premises as a green space park area,” that only current structures could be maintained on the land, and that “no new structures will be built on the premises.”

The deed also contained a restriction on the transfer of property that specified the CDC could not “sell, assign, transfer, lease, exchange, convey, or otherwise encumber” the property without the prior consent of the commission.

Drilling Rights Sold Without Consent
After acquiring the land, the CDC engaged in transfers and assignments of the mineral rights under the purchased acreage. It first entered an oil and gas lease in 2011, and that lease was acquired in 2012 by Gulfport Energy Corporation. In 2013, the CDC sold the mineral rights for most of the grant-funded land to Siltstone.

The CDC argued that it believed it could transfer the mineral rights without violating the commission restrictions because the change in the use and ownership of the subsurface mineral rights did not affect the use of the property as a green space. The oil drilling companies employed a horizontal drilling technique and entered the subsurface without creating any structures on the Leatherwood Creek property, the CDC noted.

The CDC also believed the surface property rights were separate from the subsurface mineral rights and that it could transfer the mineral rights without violating the deed’s transfer restrictions.

Gulfport became aware of the deed restrictions, and in 2015, it stopped paying royalties to Siltstone. Siltstone sued the CDC in Belmont County Common Pleas Court and sought a court order declaring it owned the mineral rights under the land and was entitled to royalty payments from Gulfport.

The Public Works Commission was named in the lawsuit, and argued that the CDC was not authorized to sell the mineral rights. The commission counterclaimed for an injunction to stop the oil and gas exploration under the land and asked the court to nullify the transfer agreements.

The trial court ruled the commission did not have the authority to seek an injunction and that the CDC did not violate the transfer agreements. The commission appealed to the Seventh District Court of Appeals.

The Seventh District reversed the trial court, finding the use restrictions only apply to the surface property and were not violated by the agreements, but the transfer restrictions apply to the surface and subsurface lands.

Siltstone, the CDC, and other oil and gas companies with interests in the property appealed to the Supreme Court, which agreed to hear the case.

Supreme Court Analyzed Restrictions
While no party argued the CDC violated the use restriction, Justice Brunner explained that in the Supreme Court’s 2019 Browne v. Artex Oil Co. case, the Court ruled that an oil and gas lease affects both the mineral and surface rights of a property. She wrote the Court need not evaluate the transfer restriction separately, as if it had no relation to the use of the property as a green space park area.

The lead opinion noted that Ohio law generally disfavors deed restrictions that prevent the transfer of land. However, the Court also noted that is also has upheld the rights of parties to freely enter into contracts with mutually agreed upon restrictions.

The oil and gas companies argued that restrictions in contracts cannot violate public policy. They maintained the agreement between the CDC and the commission violated the public policy that encourages oil and gas production.

The opinion stated the restrictions in the deed are used “to ensure that the Leatherwood Creek Riparian Project reaches fruition and fulfills its purpose.” The Court noted the public policy enacted by the people of Ohio in approving the Clean Ohio fund was to preserve property and if the CDC did not wish to agree with the grant requirements it could have sought funding elsewhere for the project.

The lead opinion noted it is “unlikely that voters approved the constitutional amendment creating the program intending that a grant recipient could stray from the project purpose of conservation or preservation.” If so, the “the Clean Ohio fund would be reduced to nothing more than a financing program not tied to conservation or preservation at all,” the lead opinion stated.

The deed restrictions validly support the public purpose of preserving the land, and the transfer restriction is not an “absolute” restriction on its ownership, the Court stated. The restrictions allow for transfers of the property with the commission’s approval, which made it a reasonable limit on the property’s use, the Court concluded.

Transfer Restriction Unreasonable, Dissent Maintained
In his dissent, Justice DeWine wrote that Ohio follows centuries of case law that prohibits the restraint on “alienation” of land, and allows property to be freely sold or transferred. Citing England’s King Edward I and the “statute of Quia Emptores in 1290,” he wrote that absolute restraints on alienation are considered to be “repugnant” and invalid.

The dissent stated that the commission’s deed restriction is absolute, making it problematic because it "prohibits all transfers to anyone for all time." The dissent disagreed with the lead opinion that the clause allowing transfer with permission allows for flexibility, because the Public Works Commission could withhold that permission “arbitrarily.” Justice DeWine noted that many invalidated deed restrictions included such clauses.

The dissent stated that Ohio courts have never approved a perpetual, absolute restriction on the transfer of property for “public purposes,” but noted that the Court has approved perpetual use restrictions. The use restrictions in the commission’s grant that require the surface be forever preserved as green space are sufficient to protect the goals of the Clean Ohio fund and are undisputedly valid, the dissent stated. However, the transfer restriction served no purpose not already served by the use restriction and should be invalidated, the dissent concluded.

2020-0031. Siltstone Resources LLC v. Ohio Pub. Works Comm., Slip Opinion No. 2022-Ohio-483.

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