CHAPTER 16 LEASE CLAUSE FLOW SHEETS
| Jurisdiction | United States |
(Jan 1994)
LEASE CLAUSE FLOW SHEETS
Pharo & Penkowsky, P.C.
Denver, Colorado
ROCKY MOUNTAIN MINERAL LAW FOUNDATION
SPECIAL INSTITUTE ON LAND & PERMITTING
I. INTRODUCTION
II. TYPES OF CLAUSES (LISTED)
III. CLAUSES DEFINED/GENERAL RULE OF APPLICATION
IV. VARIOUS STATES: CASE LAW PERTAINING TO CLAUSES
V. LIST OF CASES
VI. REFERENCES
The author would like to thank Cristyn Eddy for her assistance. Cristyn is a law student at the University of Denver and law clerk for Pharo & Penkowsky, P.C.
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I. INTRODUCTION
This article provides the landman with a basic reference to oil and gas lease clauses, general rules of application and case law that has developed in various states. Part II lists many of the common clauses found in oil and gas leases. Part III provides general definitions and some clause examples. Part IV lays out case law pertaining to lease clauses from various states and Part V is a list of the cases.
Although this article gives each clause a separate definition, it is important to remember that often the distinctions between clauses are subtle. In addition, several different terms may be available to describe the same clause. Also a given provision within a lease may contain several different clauses or elements of several clauses.
This article does not analyze all the clauses that may be found in an oil and gas lease nor does it provide all the case law concerning these clauses. For a more in depth understanding of lease clauses, one should consult the various treatises listed in Part V.
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II. OIL AND GAS LEASE CLAUSES
A. GENERAL CLAUSES
1. GRANTING
a. MOTHER HUBBARD
b. LESSER INTEREST / PROPORTIONATE REDUCTION / PRO RATA
c. SURRENDER
2. HABENDUM / TERM
a. THEREAFTER PROVISION
3. WARRANTY
a. SUBROGATION
b. NON-WARRANTY
B. SAVINGS CLAUSES
1. DELAY RENTAL / DRILLING
a. "UNLESS"
b. "OR"
c. NOTICE OF ASSIGNMENT OR CONVEYANCE
d. GOOD FAITH / NOTICE & DEMAND / NOTICE OF TERMINATION OR NONPAYMENT
e. RENTAL REDUCTION
2. DRILLING OR CONTINUOUS OPERATIONS / COMMENCEMENT
3. DRY HOLE
4. CESSATION OF PRODUCTION
a. PRIMARY TERM
b. SECONDARY TERM
5. REWORKING
6. THIRTY DAY / SIXTY DAY
7. SHUT-IN-ROYALTIES
8. FORCE MAJEURE
C. ADDITIONAL CLAUSES
1. POOLING
2. UNITIZATION
3. PUGH
4. EQUIPMENT REMOVAL
5. SURFACE DAMAGE
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III. GENERAL RULE/DEFINITION
A. GENERAL CLAUSES
1. GRANTING
The granting clause lists the rights that are granted by the mineral interest owner to the lessee. The clause grants the lessee the right to search for, develop, and produce oil and gas from the leased premises without imposing any obligation to do so. The granting clause must identify the size of the interest granted, the substances covered by the lease, and the land covered. Most granting clauses specifically indicate the uses permitted.
a. MOTHER HUBBARD/COVER ALL — In addition to a legal description of the property covered, where property descriptions may contain errors, the lessee may desire a Mother Hubbard clause. A Mother Hubbard clause is a back-up granting clause which covers lands missed by the granting clause.
This lease also covers and includes any and all lands owned or claimed by the Lessor adjacent or contiguous to the land described hereinabove, whether the same be in said survey or surveys or in adjacent surveys, although not included within the boundaries of the land described above.
b. LESSER INTEREST / PROPORTIONATE REDUCTION / PRO RATA CLAUSE — This clause reduces the payments to a lessor if the lessor's interest is less than that which she purported to lease. This clause protects the lessee from being required to pay extra for the same mineral interest.
If Lessor owns an interest in the land covered by this lease less than the entire and undivided fee simple mineral estate therein, then whether or not such less interest is referred to or described herein, all rentals and royalties herein provided shall be paid lessor only in the proportion which her interest bears to the whole and undivided mineral fee.
c. SURRENDER — Authorizes the lessee to surrender part or all of the leasehold under prescribed circumstances. Limitations may be placed upon the time of release, notice to the lessor, recording of the surrender, the necessity for payment of money or accrued rentals, configuration of the tracts that may be surrendered, and multiple exercise of the clause.
Lessee may at any time execute and deliver to Lessor a release covering any portion of the above described premises and thereby surrender this lease as to such portion and be relieved of all obligations as to the acreage surrendered, and thereafter the rentals payable hereunder shall be reduced in the proportion that the acreage covered hereby is reduced by said release.
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2. HABENDUM / TERM
The habendum or term clause sets the period of time that the rights given in the granting clause will extend. Most habendum clauses provide for a primary and secondary term. The primary term is a fixed term of years during which the lessee has the right, without any obligation, to operate on the premises. The secondary term is the extended period of time for which rights are granted to the lessee once production is obtained. The lease expires if production is not obtained before expiration of the primary term.
This lease shall be for a term of 5 years from this date, called the primary term, and as long thereafter as oil or gas are produced in paying quantities.
a. THEREAFTER PROVISION — Introduces the secondary term of the habendum clause. This provision continues the lease beyond the fixed or primary term so long as oil or gas is "produced" from the land. The word "produced" generally means in "paying quantities." Paying quantities means that enough oil is produced to pay a profit to the lessee over operation expenses, though it may never repay the cost of drilling and equipping the well.
3. WARRANTY
The warranty clause acts as a covenant of title by the lessor. The warranty, coupled with a subrogation clause, is the only covenant of title customarily included in oil and gas leases.
Lessor hereby warrants and agrees to defend title to the lands herein described.
a. SUBROGATION — A clause subrogating the lessee to any lien upon the leased premises which the lessee elects to discharge in whole or in part. (Subrogation is the substitution of one person in the place of another to a lawful claim, demand, or right). This clause gives the lessee the right to protect his interest by paying encumbrances on the property by "stepping into the shoes" of the former creditors. The warranty clause and the subrogation clause read together:
Lessor hereby warrants and agrees to defend the title to the land and agrees that lessee, at his option, may discharge any tax, mortgage or other lien upon the land, either in whole or in part, and in event lessee does so, it shall be subrogated to the lien with the right to enforce same and apply rentals and royalties accruing hereunder toward satisfying same.
b. NON-WARRANTY CLAUSE — Requires the lessee to bear the burden of determining title or interests in the land or minerals.
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B. SAVINGS CLAUSES
1. DELAY RENTAL / DRILLING
The clause provides for the payment of delay rentals to keep a lease alive during the primary term despite no production or drilling operations. The delay rental clause ensures that the lessee has no obligation to drill during the primary term by negating any implied obligation to test the leasehold. Two variations of this clause exist: the "unless clause" and the "or clause."
a. "UNLESS" — Under the "unless" clause, the lease automatically terminates unless a well is commenced or delay rentals are paid prior to a specified date.
If operations for the drilling of a well for oil and gas are not commenced on said land on or before (date), this lease shall terminate as to both parties, unless the lessee shall on or before said date pay or tender to the lessor...the sum of (amount), which shall operate as a rental and cover the privilege of deferring the commencement of operations for drilling for a period of one year.
b. "OR" — Under the "or" clause, the lessee must either commence drilling or pay rentals or surrender the lease. It does not cause the lease to terminate automatically if the lessee fails to commence drilling operations or pay rentals. It imposes an affirmative duty upon the lessee to pay delay rentals.
c. NOTICE OF ASSIGNMENT — When a lessor's interest is sold and no lease clause pertains to such transfer, the lessee must determine the owner of the delay rentals. If the payments are made to the wrong person, the lease terminates. Thus, it benefits the lessee to secure a notice of assignment clause which requires the lessor to notify the lessee of any assignments so that the lessee will make delay rental payments to the correct person.
The rights of either party hereunder may be assigned in whole or in part, and the provisions hereof shall extend to their heirs, successors and assigns; but no change or division in ownership of the land, rentals or royalties, however accomplished, shall operate to enlarge the obligations or diminish the rights of Lessee; and no change shall be binding on Lessee until thirty (30) days after Lessee shall have been furnished by registered U.S. mail at Lessee's principal place of business with a certified copy of recorded instrument or instruments evidencing same.
d. GOOD FAITH / NOTICE AND DEMAND / NOTICE OF NONPAYMENT — Provides that the lease will not expire by reason of nonpayment of rentals where there has been a good-faith effort to pay it until
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after notice of default has been given and opportunity afforded to pay the rental.
e. RENTAL REDUCTION
Provides that the lessee is obliged to pay rentals during the primary term despite the fact that drilling operations...
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