Ohio Landmen Subject to Real Estate Broker Statutes?

Recently, Ohio’s Seventh District Court of Appeals issued its decision in Dundics v. Eric Petroleum Corp., 2017-Ohio-640 (7th Dist.). In the decision the court said that many activities performed by oil and gas landmen fall within the purview of Ohio’s real estate broker statutes, being Ohio Revised Code section 4735.01, et seq. This decision has potentially far-reaching consequences for landmen working in the State of Ohio.

In Dundics, Thomas Dundics and IBIS Land Group, Ltd. (Appellants) entered into an agreement with Eric Petroleum Corporation and Bruce Broker (Appellees). Under the agreement, Appellants agreed to identify property owners and to negotiate and execute gas leases with those owners. In exchange, Appellees agreed to pay a commission of $10.00 per leased acre and provide a one percent working interest in all wells placed on the leased acreage. In their lawsuit, Appellants asserted that they performed the agreed-upon services, but Appellees failed to provide an accounting or pay the agreed-upon compensation.  Thus, Appellants filed a complaint against Appellees for: (1) breach of contract; (2) conversion; (3) fraud; (4) unjust enrichment; and (5) quantum meruit.

In response, Appellees filed a motion to dismiss for failure to state a claim because, among other things, Appellants were not licensed real estate brokers, as is required by Ohio Revised Code section 4735.21 in order to bring this claim. A hearing on the motion was held before a magistrate, and the magistrate found that Appellants were required to have a real estate broker’s license in order to perform the alleged services under Ohio Revised Code section 4735.21. Therefore, the magistrate dismissed Appellants’ complaint.

Appellants filed objections to the magistrate’s decision, but the trial court overruled the objections. Appellants subsequently appealed that ruling. On Appeal, the issue in the case was whether a third person, with some exceptions, who uses his or her skills to bring together landowners with those engaged in extracting oil and gas from below the surface needs to have a real estate broker’s license in order to maintain an action for compensation for those services, as required by Ohio Revised Code section 4735.21.

Ohio Revised Code section 4735.01, et seq., establishes the rules and regulations for those acting as real estate brokers. Section 4735.01 defines “real estate broker” as “any person…who for another, whether pursuant to a power of attorney or otherwise, and for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of received or collecting a fee, commission, or other valuable consideration does any of the following: (1) Sells, exchanges, purchases, rents, or leases, or negotiates the sale, exchange, purchase, or leasing of any real estate…(7) Directs or assists in the procuring of prospects or the negotiation of any transaction, other than mortgage financing, which does or is calculated to result in the sale, exchange, leasing, or renting of any real estate.”

Section 4735.01(B) defines “real estate” to include “leaseholds as well as any and every interest in land situated in this state, whether corporeal or incorporeal, whether freehold or nonfreehold, and the improvements on the land….” Section 4735.02 requires real estate brokers to obtain licenses in order to perform the acts set out above. And, under section 4735.21, a person acting as a real estate broker cannot bring a cause of action for compensation for those services rendered unless they are properly licensed.

In this case, if the Appellants negotiating and executing oil and gas leases on behalf of another person constitutes negotiating the sale, exchange, or leasing of “any real estate,” then they must be properly licensed in order to bring a valid claim for compensation for those services. Thus, the determinative question is whether an oil and gas lease affects interests in “any real estate.”

The Seventh District Court of Appeals held that: (1) an oil and gas lease does affect interests in real estate; (2) that the conduct of the Appellants in negotiating and executing oil and gas leases required a real estate broker’s license; and (3) because Appellants were not properly licensed, their cause of action was properly dismissed. The court reasoned that regardless of whether an oil and gas lease is described as a license, lease, fee simple determinable estate, or something else, “any instrument affecting oil and gas necessarily affects the surface rights as well, either in terms of the right to access the surface for transportation, drilling, etc., or because it affects the value of the surface rights.” Therefore, oil and gas leases affect real estate, and engaging in the negotiation, execution, or exchange of oil and gas leases on behalf of a third party requires a real estate broker’s license.

This case is now controlling law in Ohio’s Seventh District Court of Appeals, which includes Belmont, Carroll, Columbiana, Harrison, Jefferson, Mahoning, Monroe, and Noble Counties. Thus, any person engaged in the activities discussed in Ohio Revised Code section 4735.01 on behalf of a third party, including the sale, exchange, purchase, rent, or lease, or negotiation of such sale, exchange, purchase, or lease of any real estate, including oil and gas leases, must obtain a license as a real estate broker and comply with the regulations governing real estate brokers in the State of Ohio.

In comparison, West Virginia’s Real Estate License Act includes a statutory exception whereby the practice of real estate brokerage does not apply to “[a]ny person acquiring or disposing of any interest in timber or minerals, or acquiring or disposing of properties for easements and rights-of-ways for pipelines….” W.V. Code § 30-40-5(c)(7). This appears to be a sufficiently broad exception to include most or all landmen from the real estate brokerage statutes.

Pennsylvania, on the other hand, has a statutory exception that is similar to the Ohio statute. This is an exception from the practice of real estate brokerage for “officers or employees or a partnership or corporation whose principal business is the discovery, extraction, distribution or transmission of energy or mineral resources….” 63 Pa.C.S. § 455.304(3). Thus, while most landmen in Pennsylvania are not licensed real estate brokers, the question of the statute’s applicability appears to be open.

This Ohio decision ushers in a significant change that will affect many landmen in the oil and gas industry, and the Burns White Energy Group will be monitoring the continued jurisprudence related to the issue moving forward.