Title Toolkit: Leasing from life tenants in Ohio

Blog Post
This post is the first in our new Title Toolkit series, where we hope to shed light on some of the murkier and less-well-understood areas of oil, gas and mineral title throughout the Appalachian Basin. Throughout this series, we will address issues affecting oil and gas producers and land professionals in Ohio, Pennsylvania and West Virginia with straightforward analysis and practical solutions. We hope you find this series informative and stay tuned as we add new topics each month. 

Fairly often, we encounter a situation where a property owner has already conveyed her property to others and reserved a life estate interest in the property to herself. Sometimes, all of the parties – the life tenant(s) and remaindermen – execute a lease together, leaving no doubt all of the interest in the property is covered by the lease. Other times, some confusion as to which party should be leased leads the producer to secure a lease from only one party or the other. But which is the best approach? 

First, it is important to distinguish between a deed reserving a life estate, which grants to the remainderman all of the interest in the land subject only to the life tenant’s right to posses the land during her life, and a Transfer on Death Deed or Transfer on Death Designation Affidavit, which merely identify the party to which the property will be transferred at some future date. Ohio Rev. Code § 5302.23(B)(4) provides that the designation of a transfer on death beneficiary has no effect on the present ownership of real property, and a person designated as a transfer on death beneficiary has no interest in the real property until the death of the owner of the interest. Thus, an oil and gas lease executed by the owner, but not the death beneficiary, is valid.

In contrast, the remainderman whose interest is subject to a life estate does have a present interest in the property. A life tenant has the right, during her life, to occupy and use the property, but may not convey it to another party or otherwise encumber it for longer than the duration of her own life, because to do so would run counter to the interests of the remainderman. Similarly, a remainderman may not violate the rights of the life tenant by unilaterally occupying and disposing of the property in violation of the life tenant’s rights. 

A life tenant also may not commit waste on the property, which would adversely affect the value of the remainderman’s interest. If I own a fee simple interest in land, with no other parties holding any interest or liens, I may commit waste without having to answer to a third party. Certainly, many industrial and agricultural activities leave land in a less-valuable state due to the removal or deposit of certain materials. However, when another party, such as a bank holding a mortgage, has an interest in the value of my land, I generally may not diminish the value of their interest by diminishing the value of the land itself. In some instances, the definition of “waste” may include exploration for oil and gas insofar as removing valuable materials from the land arguably reduces its value. It is from this perspective that we must look at the question of who must execute a lease.

The argument that a life tenant may not execute an oil and gas lease without the remainderman has substantial support in the law of waste, as a life tenant would effectively be converting the value of the remainderman’s property to cash without his consent, and probably without fairly compensating him. Ohio courts have addressed the issue along these lines. In Fourth & Central Trust Co. v. Woolley, 31 Ohio App. 259, 165 N.E. 742 (1st Dist. 1928), the First District Court of Appeals held that a life tenant commits enjoinable waste by unilaterally entering an oil and gas lease and collecting all royalties, and in Foster v. Foster, 1980 WL 353971 (5th Dist. 1980) the Fifth District Court of Appeals held that a life tenant may only execute an oil and gas lease if the instrument creating the life estate expressly provides that right. However, whether a life estate owner may execute an oil and gas lease without the consent of remaindermen is an issue that has not been determined or resolved by the Ohio Supreme Court. 

At least until the Ohio Supreme Court rules on this issue, a company seeking to lease property owned by a life tenant and a remainderman must lease both in order to be sure their lease is valid and that their operations cannot be enjoined by the non-executing party. We will update this post in the event that Ohio courts offer any additional clarification of this issue. 
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