Under Ohio Law, Do Oil and Gas Brokers Need a Real Estate Broker’s License?

In Wellington Res. Group LLC v. Beck Energy Corp., 2013 U.S. Dist. LEXIS 134838, the U.S. District Court for the Southern District of Ohio considered whether a landman or broker must have a real estate license to buy or sell oil and gas properties.  The facts in Wellington arise from a nightmarish set of facts  for a broker in any new shale play state: set up a very large acreage acquisition, and then be denied your commission under a rudimentary law that conflicts with the way that you’ve been doing business for years.  In Ohio, as in any new shale state, it’s important to educate yourself of not only the laws surrounding oil and gas (Dormant Mineral Act, etc.), but also those that could govern your profession as landmen.

In Wellington, Transact Partners International, LLC (“Transact”) was approached by Wellington Resource Group, LLC (“Wellington”) in October 2010.  Wellington represented Beck Energy Corp. (“Beck”) relating to the potential sale of oil and gas assets.  Wellington showed Transact the assets owned by Beck, which included oil and gas leases, oil and gas wells, and related assets in Monroe, Belmont, and Noble Counties in Ohio.  Transact and Wellington agreed to enter into a co-brokerage agreement, whereby if Transact was successful in presenting a ready and willing purchaser, and that purchaser completed the purchase of the Beck Assets, then Transact would receive 2% of the total transaction price as compensation.  In a separate written agreement executed in February 2011 between Wellington and Beck, Wellington agreed to provide Beck with prospective purchasers for oil and gas leases that Beck owned.

After an initial unsuccessful attempt, Transact contacted XTO Energy, Inc. (“XTO”), which expressed interest in the Beck Assets.  Several meetings and telephone conferences occurred between XTO, Wellington, and Beck.  In August and September 2011, Transact sought information from Wellington regarding the XTO-Beck negotiations, at which time he was informed that Beck had requested that all communications run through Wellington.  Several weeks later, Wellington informed Transact that it too had been shut out of the Beck-XTO negotiations. Wellington Res. Group LLC, at *8.

In November 2011, Beck and XTO executed a purchase and sale agreement for the Beck Assets, and in December Beck executed the Assignments and Bills of Sale conveying the Beck Assets to XTO.  The purchase price was $84,961,346.00.  Id.  Following the Beck-XTO deal, Transact inquired as to the 2% transaction fee, and Wellington’s attorney informed Transact that they would not pay and that Wellington did not consider Transact’s claim for payment of the transaction fee to be “valid.”  Subsequently, litigation ensued between the parties.

The litigation focused on Beck’s assertion that because Transact was not a duly licensed Ohio real estate broker, the Ohio Revised Code barred recovery for compensation for transaction. The Court described Beck’s argument as following four steps:

“(1) oil and gas leases are included within the meaning of ‘real estate’ as defined by O.R.C. §4735.01(B); (2) any person that sells, purchases, lists, offers, or negotiates the sale of ‘real estate’ for a commission is a ‘real estate broker’ under §§4735.01(A) and 4725.01(H); (3) a ‘real estate broker’ must be licensed in Ohio, pursuant to §4735.02(A); and (4) no right of action can accrue to, and no compensation can be collected by, real estate brokers who are unlicensed, under §4735.21(A).”

Wellington Res. Group LLC, at *14-17.

Ohio Rev. Code § 4735.01(B) provides: “[r]eal estate includes leaseholds as well as any and every interest or estate in land situated in this state, whether corporeal or incorporeal, whether freehold or nonfreehold, and the improvements on the land, but does not include cemetery interment rights.” Although, Beck’s arguments focused on statutory language, the Court disagreed.  The Court explained that “Beck’s tidy argument focused as it is on statutory language, ignores the fact that in practice, oil and gas leases have not historically been considered interests in land in Ohio.” Id., at *17.

In rejecting Beck’s argument, the Court considered even the earliest oil and gas cases in Ohio and concluded that Ohio courts consistently have treated oil and gas leases as different from an interest in real property.  For example, in Herrington v. Wood, 3 Ohio C.D. 475, 6 Ohio C.C. 326 (C.C. Ohio 1892), the court explained that an oil and gas lease “is not strictly a lease, but a license coupled with a conditional grant, conveying the grantor’s interest in the gas well, conditioned that gas and oil is found in paying quantities.”  Similarly, In re Frederick Petroleum Corp., 98 B.R. 762, 766 (S.D. Ohio 1989), after a thorough examination of Ohio case law, Frederick concluded that “an oil and gas lease is regarded under Ohio law as being more than a mere rental of the land for a specified term such as would be involved in a traditional lease.”  Id. at 766.

Next, the Court in Wellington, looking to authority from the Ohio Supreme Court, considered the decision in Back v. Ohio Fuel Gas Co., 160 Ohio St. 81, 113 N.E. 2d 865, 866-67 (Ohio 1953), where the Ohio Supreme Court stated:

“[p]ossession of oil and gas, having as they do a migratory character, can be acquired only by severing them from the land under which they lie, and in effect the instrument of conveyance in the instant case is no more than a license to effect such severance. The very sale of oil and gas, separate and apart from the real estate surface, constitutes, in law, a constructive severance such as occurs in the case of sale of standing timber or growing crops.”

After considering the history of Ohio case law, including Frederick and Back, the Court in Wellington opined that the Ohio Supreme Court would still hold that oil and gas leases are not part of the real estate in Ohio.  The Court explained:

“In essence, this Court reaffirms its prior conclusion in Frederick, where it stated that ‘Ohio courts, if given the opportunity to do so, would characterize the property interests being involved [here] as being like or similar to the interest recognized under Oklahoma law,’ and common to many oil-producing states, and hold that oil and gas leases are not a grant of real property.”

Id. at 26 (citing Frederick, 98 B.R. at 766).

Therefore, because oil and gas leases are not interests in real property, a person negotiating the sale of same need not be a licensed real estate broker in the State of Ohio.  In further support that of its conclusion that an oil and gas broker need not be a licensed real estate broker, the Court addressed a topic very familiar with landmen today: the licensure of landmen (see, e.g.: here and here).  Noting that the Ohio legislature is currently considering H.B. 493, which would give the Chief of the Ohio Division of Oil and Gas Resources Management authority to regulate “land professionals,” requiring registration with the Division.  The Court explained the introduction of legislation to regulate land professionals is additional evidence that land professionals do not fall within other statutory schemes, including licensure of real estate brokers.