A Guide to the Examination of a Recorded Oil and Gas Lease
When drafting a drilling and division order title opinion, one of our first steps is to analyze any applicable Oil and Gas Leases covering the lands in question. Oil and Gas Leases can be long, complex documents, but with this approach, you will be able to tackle an Oil and Gas Lease as easy as Von Miller tackles a quarterback.
This guide highlights and explains the various provisions typically found in an Oil and Gas Lease, including, but not limited to, the following:
A. The recording information includes the Reception Number, Number of Pages, Date and Time, Recording Fee, and County Recorders Information. The Reception Number corresponds to the County in which the lease was recorded and provides a mechanism to locate and identify the lease. You will also see the date and time at which the lease was recorded, which is important when looking at issues involving notice.
B. This is the date of the lease, also known as the effective date of the lease. This date may differ from the date the lease is signed.
C. The Lessor is the mineral owner as of the effective date.
D. Lessee is the producer as of the effective date.
E. The Granting Clause spells out the rights that the mineral interest owner, the Lessor, grants to the Lessee. This includes the size of the interest granted, the substances covered by the grant, and lands covered by the grant.
F. The legal description should describe the lands covered with particularity. This can take the form of a single lot located in a subdivision, or a large swath of land described in metes and bounds. It is important to make sure the legal description matches the lands you are working on, and note any possible limitations in depths covered by the lease. On this example, the legal description references to an Exhibit “A”, which provides a detailed description of the leased premises.
G. The Mother Hubbard Clause, which is not found in all Oil and Gas Leases, is intended to protect lessee against inaccuracies in the legal description by providing a more inclusive description.
H. The Habendum Clause includes the Primary Term, which is a fixed term of years during which the lessee has the right, without any obligation, to operate on or below the premises. There is also the Secondary Term, which gives the lessee the right to hold a lease as long as oil or gas is being produced from the leased premises in an economically viable manner.
I. The Continuous Operations provision allows a lessee to commence a well before the end of the Primary Term, abandon it after the end of the Primary Term, and continue to hold the lease by starting another well within a specified number of days.
J. The Paid-Up provision means that the lessee has paid the lessor for the right to maintain the lease during the Primary Term, prior to production. If a lease is not “Paid-Up”, then lessor will receive periodic payments in the form of delay rentals.
K. The Royalty provision is the main provision in an Oil and Gas Lease that provides for compensation for a lessor once production has occurred.
L. The Shut-In Royalty provision provides that the lease will be maintained if a well capable of producing is “Shut-In”. The effect of this provision is to provide for a substitute for production under the Habendum clause.
M. The Lesser Interest clause permits a lessee to reduce lease benefits to the lessor to the extent that lessor owns less than the full mineral interest described in the lease.
N. The Assignment clause gives lessor or lessee right to assign the lease, with its benefits and burdens, to a third-party.
O. The Pooling provision typically gives lessee power of attorney to pool the lessor’s interests. The provision modifies the habendum clause by providing that production or operations anywhere in the unit formed will be considered to be production or operations on the leased premises.
P. The Force Majeure clause, which literally means “superior force”, enables the lessee to preserve the lease when circumstances beyond its control prevent it from operating or producing.
Q. The Subrogation clause empowers the lessee to protect its interest by paying taxes or mortgages encumbering the property and then essentially “stepping into the shoes” of creditors.
R. The Option to Extend provision, which is not found in all Oil and Gas Leases, gives the lessee an option to extend the Primary Term of the lease for additional period of time.
S. The Signature of the lessor is essential to any Oil and Gas Lease. Generally, only the Lessor will sign an Oil and Gas Lease. Without a signature by the Lessor, the lease will not be binding on the Lessor.
T. The Reservation provision, which is not found in all Oil and Gas Leases, enables a lessor to reserve certain rights in the leased premises.
U. The Pugh Clause provision, which is not found in all Oil and Gas Leases, modifies the usual pooling language to provide that drilling operations on or production from a pooled unit will not preserve the whole lease.
V. The Non-Surface Occupancy provision is another special provision not found in all Oil and Gas Leases. This provision can limit the lessee’s right to enter or conduct activities on the leased premises.
W. A notary acknowledgment attests to the authenticity of the party signing the document.
Although this is not an exhaustive list of provisions found in an Oil and Gas Lease, this approach will nonetheless provide you with a great tool to use whether you’re drafting, reviewing or analyzing an Oil and Gas Lease.
Please contact our firm to learn more about our practice and how we can help your company with your title needs.