Ohio Supreme Court decision further clarifies common law distinction between reservation and exception | Steptoe & Johnson LLC

On February 15, 2022, the Supreme Court of Ohio released its decision in Peppertree Farms, LLC, et al. v. Thonen, et al., providing further clarity on the common law distinction between a “reservation” of a right of ownership and an “exception” to a transfer. The Court found that the deeds creating the separate oil and gas rights contained an exception of said rights to transfer of ownership, instead of a reservation of said rights which would have required words of inheritance prior to March 25, 1925.

On March 25, 1925, the General Assembly repealed the common law distinction between a reservation and an exception that words of inheritance were no longer necessary to retain or convey an absolute fee simple interest in land. However, prior to March 25, 1925, words of inheritance were required to create a fee simple interest in an estate reservation or transfer. Otherwise, the reserved or transferred interest was limited to that of a life estate and the interest was extinguished on the death of the beneficiary. If the interest created was an exception rather than a reservation, then no word of inheritance was needed to create an estate in fee simple.

In Peppertree, the severance language at issue appeared in two pre-1925 deeds, and as such the courts were called upon to determine whether the interest created was a reserve or an exception, resulting in either a life estate or a fee simple. interest, respectively. In 1916, WT and Katherine Fleahman conveyed two parcels of land in Monroe County, Ohio, to WA Gillespie, using the following language of separation: “The grantor WT Fleahman excepts and reserves from this deed one half of the royalty of the oil and gas under the real estate described above” (hereinafter referred to as the “WT Fleahman Interest”). Mary Fleahman subsequently acquired the interest from WA Gillespie and signed a deed in 1920 stating that “the 3/4 of the Oil Royalty and one-half of the Gas are hereby reserved and form no part of this transfer” (hereinafter referred to as the “Mary Fleahman Interest”). Mary Fleahman then ceded three quarters of her oil and gas rights to WT Fleahman. The Stark County Court of Common Pleas held that the language in both deeds constituted reservations rather than exceptions and therefore words of inheritance were necessary to create a fee simple interest. The Fifth District Court of Appeals upheld, stating that “[b]The two reservations explicitly indicate that the licensors reserved interests to themselves, and were not content to exempt them from the concession. The Mary Fleahman interest and the WT Fleahman interest created new separate oil and gas interests.

On appeal, the Ohio Supreme Court disagreed with the lower courts and held that the language in both acts constituted an exception rather than a reservation. The Court said that since the oil and gas already existed at the time of the conveyance, a fee simple title existed in the unearned oil and gas royalties that the settlors could exclude from the conveyance of the real estate. The assignments did not create the oil and gas royalty, but rather excluded or withheld that interest from the operation of the assignment, thus constituting an exception. The settlors owned a fee simple interest which was hereditary and therefore the words of inheritance were not required to retain more than a life estate in the interest excluded from oil and gas royalties. Further, in response to Peppertree’s assertion that WT Fleahman and Mary Fleahman retained an interest only in oil and gas royalties which are personal property interests and therefore the reservation of the same created new ownership, the Court again disagreed and held that at the time that WT Fleahman and Mary Fleahman each disposed of ownership, they owned an existing real estate interest in unearned royalties from oil and gas production . This interest could rightly be severed from both the surface and the mining estate and therefore their ownership rights in the partial oil and gas interest were absolute. As such, the Court held that WT Fleahman’s interest and Mary Fleahman’s interest were not life estates and did not terminate upon their respective deaths.

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