Login | June 09, 2026
Experts advise doing ‘due diligence’ before signing away oil and gas rights
SHERRY KARABIN
Legal News Reporter
Published: February 10, 2012
As the boom in oil and gas development in northeast Ohio continues to increase, more landowners are likely to be given offers for oil and gas rights that seem too good to refuse.
But some attorneys say jumping into lease or sale agreements too quickly can be disastrous for the current landowner and future generations who inherit the property.
“There are huge amounts of money changing hands with these transactions, and people claiming all sorts of expertise in this area are coming out of the woodwork to make a profit,” said Alan Wenger, chair of the oil and gas law practice group at Harrington, Hoppe & Mitchell, Ltd. in Youngstown.
“It’s very much like the wild west. I’m getting calls from people who say they’re being threatened and are scared that if they don’t sign these agreements their property will be taken or contaminated,” said Wenger, who primarily represents landowners.
While the development boom began in Pennsylvania, it quickly spread west into Ohio, where the Utica shale layer is the focus along with the western fringes of the Marcellus shale strata.
Horizontal hydraulic fracturing or fracking as it’s known has allowed companies to develop underground shale layers. The technology is relatively new and has generated a lot of controversy among officials and landowners, with some focusing on the potential of job creation, and others fearful of damaging the environment, including contaminating the water supply. A series of small earthquakes in the Youngstown area, has only added fuel to the debate, with some arguing that more studies need to be done on hydraulic fracturing and the creation of injection wells to dispose of wastewater, before things move forward.
The Summit County Farm Bureau is holding a seminar on February 13th at the Copley Community Center that will give members and residents a chance to ask questions about these and other issues. Dale Arnold, director of energy, utility and local government policy for the Ohio Farm Bureau Federation and representatives from the Ohio Department of Natural Resources (ODNR) Division of Oil and Gas will be discussing what people should expect once they sign a lease and how ODNR monitors the drilling process.
“It’s easy to see the bonus to signing a lease, but landowners really need to decide whether this is something they want to do with their property first,” said Nick Kennedy, organization director for the Ohio Farm Bureau Federation, which represents Summit, Columbiana, Portage, and the Stark farm bureaus.
.
“Once they make that decision then they need to do their due diligence to be sure they get the best deal, especially since many of these landowners are older and will undoubtedly be passing the property on to future generations.”
Wenger said potential lessors need to “take a step back,” and should not feel pressured “to jump on the band wagon. The oil and gas has been there for hundreds of thousands or millions of years and it is not going anywhere. Prices may fluctuate, but in the long term they will be stabilize.”
He said, among other things, jumping at the first offer could result in a less profitable deal.
“I met with an older couple recently who leased their land for $5 an acre, while their neighbor got $6,000 an acre. They obviously felt they were misled.”
He advised neighbors to speak with one another, and seek out materials being circulated by organizations like the Ohio Farm Bureau Federation. Wenger said landowners should also consult an attorney before signing anything.
“Contracts vary in the way royalties are determined. There is more to it than just the upfront bonus,” said Wenger. “You want to find out whether the cost of production will be deducted from the royalties, and this can be negotiated.”
Robert Rea, director of the Columbiana County-based nonprofit organization, Associated Landowners of the Ohio Valley, and owner of the for-profit Salem-based Buckeye Mineral Development LLC, said lessors must also take care to ensure that production levels are being reported accurately.
“There are no independent agencies overseeing the oil and gas industry,” said Rea, whose organizations represent the seller’s interests. “One of the things Buckeye Mineral Development does is to oversee the royalty management part of the lease to ensure that landowners are really getting what is due them.”
Rea and Wenger said lessors need to examine water clauses in their agreements.
“They are not all created equal,” said Wenger.
“If you have an old lease it might contain a free water clause,” said Rea. “This allows a driller access to free water while he is installing the drilling unit. This language should be amended to require payment for the water.”
In addition, they warned landowners to be careful not to fall into a trap known “HBP or Held By Production.”
“What this means is that because you have part of your acres in a producing unit, you cannot enter the remaining acres into a new lease,” said Rea. In some cases, this can affect a neighbor’s property as well.
“I know of one instance where one acre out of 72 was leased,” said Wenger. “A royalty check was issued for a few cents each year, and under the language of the lease, nothing could be done with the rest of the property.”
Rea said for those whose leases were signed years ago, it could be unclear how far reaching the HBP clause really is.
“Thirty or 40 years ago, drilling units were much smaller,” said Rea. “Now because of technology they can be as large as 1,200 acres, so it could potentially affect even more of a lessor’s property. The state still has not set a maximum acreage level for drilling units.”
In addition, Rea said the very nature of the lease acquisition industry has changed. “In the past, oil and gas developers would have people on their staff go out and acquire leases, and the lessor would likely be signing with an Ohio company or at least one with offices located in the region.
“In 2010, we began seeing developers contracting leasing agencies, and a number of independent brokers entering the market. These brokers acquire leases and then sell them to a big operator. As a result, there are dozens of people serving as brokers representing the buyer’s interest, so sellers need to make sure they have an advocate representing their interests.”
As Akron tax attorney and certified public accountant, Terri Brunsdon, pointed out, landowners also have to consider the tax ramifications of leasing.
“I have received calls from people after executing a lease of their mineral rights. For taxes, a lease payment is treated differently from a royalty payment on a producing well,” said Brunsdon, who runs the Brunsdon Law Firm in Akron. “The lease is for the ‘right to drill’ sometime in the future and is considered a rental payment. On the other hand, royalty payments flow from the removal of minerals, thus a taxpayer is permitted to deduct depletion expense from the income.
“An individual taxpayer receiving a lease payment often has few, if any, expenses to offset this income. In addition, the taxpayer has usually already signed the lease when seeking advice, thus leaving little options for tax planning.”
Brunsdon said one way to reduce the tax impact after signing the lease is by contributing as much as possible to a retirement plan.
However, she said, “the better thing would be to seek tax and legal advice prior to executing a lease. At that point, more planning opportunities exist such as structuring the lease to defer a portion of the payment to the following year. Given the significant amount some taxpayers are realizing on their mineral rights, it seems wise to invest a little upfront in tax and legal advice.”
Wenger said landowners should also be careful about consultants who are selling “devices claiming to avoid or lower tax expenses from bonus payments. If it sounds too good to be true, it probably is.”
Those interested in attending the Summit County Farm Bureau seminar at the Copley Community Center on February 13th are asked to call 1-800-654-5158 and make a reservation. The seminar is free, but those running the event need to know how many people will be attending. The community center is located at 1278 Sunset Drive. The seminar starts at 6:30 p.m., but the doors open at 6 p.m.