Ohio Supreme Court Decision Provides Further Clarity on the Common Law Distinction Between a Reservation and an Exception

On February 15, 2022, the Supreme Court of Ohio issued its decision in Peppertree Farms, L.L.C., et al. v. Thonen, et al., providing further clarity on the common law distinction between a “reservation” of a property interest and an “exception” to a conveyance. The Court concluded that the deeds creating the severed oil and gas rights contained an exception of said rights from the transfer of the property, instead of a reservation of said rights that would have required words of inheritance prior to March 25, 1925.

On March 25, 1925, the General Assembly abrogated the common law distinction between a reservation and an exception whereby words of inheritance were no longer required to retain, or pass on, a fee-simple absolute interest in land. However, prior to March 25, 1925, words of inheritance were required to create a fee-simple interest in a reservation or conveyance of an estate. Otherwise, the interest reserved or conveyed was limited to that of a life estate and the interest expired upon the death of the interest holder. If the interest created was an exception, rather than a reservation, then no words of inheritance were required to create a fee-simple estate.

In Peppertree, the severance language at issue was contained in two deeds made prior to 1925 and, as such, the courts were called to determine whether the interest created was a reservation or an exception, resulting in either a life estate or a fee-simple interest, respectively. In 1916, W. T. and Katherine Fleahman conveyed two tracts of land in Monroe County, Ohio, to W. A. Gillespie, using the following severance language: “Grantor W. T. Fleahman excepts and reserves from this deed the one half of the royalty of the oil and gas under the above described real estate” (hereafter referred to as the “W. T. Fleahman Interest”). Mary Fleahman then acquired W. A. Gillespie’s interest and executed a deed in 1920, stating, “the 3/4 of oil Royalty and one half of the gas is hereby reserved and is not made a part of this transfer” (hereafter referred to as the “Mary Fleahman Interest”). Mary Fleahman then conveyed three-fourths of her rights to the oil and gas to W. T. Fleahman. The Stark County Court of Common Pleas held that the language contained in both deeds constituted reservations rather than exceptions, and therefore words of inheritance were required to create a fee-simple interest. The Fifth District Court of Appeals affirmed, stating that “[b]oth reservations explicitly indicate the grantors were reserving interests unto themselves, not merely excepting them from the grant. The Mary Fleahman Interest and the W. T. Fleahman Interest created new, severed oil and gas interests.”

On appeal, the Supreme Court of Ohio disagreed with the lower courts and held that the language contained in both deeds constituted an exception rather than a reservation. The Court stated that because the oil and gas was already in existence at the time of the conveyance, a fee simple property interest existed in the unaccrued oil and gas royalties that the grantors could except from the transfer of the real estate. The conveyances did not create the oil and gas royalty interest, but rather excluded or withheld said interest from the operation of the conveyance, thereby constituting an exception. The grantors owned a fee-simple interest that was inheritable and, therefore, words of inheritance were not required to retain more than a life estate in the excepted interest in the oil and gas royalties. Furthermore, in response to Peppertree’s assertion that W. T. 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 property rights, the Court again disagreed and held that, at the times that W. T. Fleahman and Mary Fleahman each conveyed the property, they owned an existing real-property interest in unaccrued royalties from the production of oil and gas. This interest could properly be severed from both the surface and the mineral estate and, therefore, their property rights in the partial interest to the oil and gas were absolute. As such, the Court held that the W. T. Fleahman Interest and the Mary Fleahman Interests were not life estates and did not terminate on their respective deaths.

If you have questions about how this decision may affect your business, please contact one of the authors.