CHAPTER 16 LEASE ISSUES FOR OPINION PURPOSES
| Jurisdiction | United States |
(Feb 2012)
LEASE ISSUES FOR OPINION PURPOSES
Sadler Law Firm LLP
Houston, Texas
JAMES W. ADAMS, JR. is a senior attorney in the Houston, Texas, office of Sadler Law Firm, LLP. With over 25 years of legal experience in the energy industry, Mr. Adams has assisted oil, gas, mineral and energy industry clients in a variety of transactions, including upstream and midstream matters, asset acquisitions and divestitures, corporate mergers and acquisitions, and litigation. He has extensive experience litigating property and energy-related disputes, as well as in other types of commercial litigation. Mr. Adams was named a LexisNexis Expert Commentator in 2008, and was admitted into SCRIBES, The American Society of Writers on Legal Subjects in 2003. He is a co-author and editor of the forthcoming legal reference volume Pennsylvania Oil & Gas Law and Practice (Geo. Bisel & Co. Publishing, projected publication 2012), and the author of Texas Forms, Legal and Business: Oil, Gas & Mineral and Environmental Law (Thomson-West 2004). He also authored Curing Title Defects in the United States, Chapter 12, THE LANDMAN'S GUIDE (Matthew Bender & Co., 1988) and Curing Title Defects, Chapter 78, TEXAS TRANSACTION GUIDE (LexisNexis, 2009). He served as lead author for the Rocky Mountain Mineral Law Foundation Journal (Vol. 48, No. 1) article Acknowledgment Law: A Compendium in 2011. Mr. Adams has published on energy, real property, litigation and corporate law. He is a frequent MCLE speaker and author for organizations such as the Rocky Mountain Mineral Law Foundation, the Energy & Mineral Law Foundation, West Group, CCH, Inc., Thomson-West Publishing, Matthew Bender & Co, and LexisNexis. He earned his B.S. from the University of Texas @ Austin, and J.D. from the University of Houston Law Center. He has taught law as an adjunct faculty member for U.C.L.A. since 2000.
Table of Contents
I. Introduction to Lease Issues for Opinion Purposes
A. Oil and Gas Leases: Brief Definition
B. Oil and Gas Lease is Not a Lease
C. Modern Oil and Gas Lease Forms
D. Oil and Gas Lease Provisions and Title Opinions
II. Primary Term
A. Definition
B. Sample Provisions
C. Selected Case Law
III. Leases Held by Production
A. Definition
B. Sample Provisions
C. Selected Case Law
IV. Pugh Clauses
A. Definition
B. Sample Provisions
C. Selected Case Law
V. Depth Limitations
A. Definition
B. Sample Provisions
C. Selected Case Law
VI. Entireties Clause
A. Definition
B. Sample Provisions
C. Selected Case Law
VII. Pooling Provisions and Limitations
A. Definition
B. Sample Provisions
C. Selected Case Law
VIII. Surface Restrictions, Drilling Obligations and Continuous Operations
A. Definitions
B. Sample Provisions
C. Selected Case Law
IX. Executive Rights
A. Definition
B. Sample Provisions
C. Selected Case Law
X. Delay Rentals and Shut-In Provisions
A. Definitions
B. Sample Provisions
C. Selected Case Law
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I. Introduction
A. Oil and Gas Leases: Brief Definition
An oil and gas lease is a grant of right to extract oil and/or gas from land. Black's Law Dictionary 972 (9th ed. 2009). Most state courts have determined that oil and gas leases are conveyances of an interest of the oil and gas in place (either fee simple determinable or a profit a prendre ["right of taking"--i.e., maybe lost by abandonment]) rather than mere licenses. These states include Montana, New Mexico, Oklahoma, Texas, Utah, and Wyoming. See The Federal Land Bank of Spokane v. Texaco, Inc., 820 P.2d 1269, 1272 (MT 1991); Terry v. Humphreys, 27 N.M. 564, 203 P. 539 (1922); Chase v. Morgan, 339 P.2d 1019, 1021 (Utah 1959); Boatman v. Andre, 44 Wyo. 352, 12 P.2d 370 (1932); Stephens County. v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290 (1923). Colorado courts appear to have been silent on the direct issue of whether an oil and gas lease habendum clause creates a fee simple determinable or a fee simple subject to condition precedent. California courts have held that an oil and gas lease containing a "thereafter" provision in the habendum clause creates a determinable fee in a profit a prendre. Dabney v. Edwards, 5 Cal. 2d 1, 12 (1935); Renner v. Huntington-Hawthorne Oil & Gas Co., 39 Cal. 2d 93, 98 (1952).
Conversely, Kansas courts have stated that an oil and gas lease is a mere license which allows the lessee to enter onto the land to explore for and extract oil and gas. Burden v. Gypsy Oil Co., 141 Kan. 147, 40 P.2d 463 (1935).
B. An Oil and Gas Lease is Not a Lease
An oil and gas lease is usually not a "lease" as analyzed under common law, but rather is usually viewed as a fee simple determinable grant with a possibility of reverter. See Black's Law Dictionary 972 (9th ed. 2009). This early misnomer has been addressed in various court decisions which will not be discussed herein. Nevertheless, even today, many courts have had trouble analyzing exactly what an oil and gas lease is. For example, in 1969, the Pennsylvania Supreme Court stated
"the traditional oil and gas 'lease' is far from the simplest of property concepts. In the case law oil and gas 'leases' have been described as anything from licenses to grants in fee..."
Brown v. Haight, 435 Pa. 12, 15, 255 A.2d 508, 510 (1969).
Oil and gas leases rank amongst the most complicated of legal instruments. Courts frequently state that oil and gas leases are to be interpreted as both a title document and as a contract. For the land professional, this means that both real estate
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law and contract law principles apply in the interpretation of oil and gas leases. Although a thorough discussion of interpretation of lease language is beyond the scope of this paper, it should be borne in mind that what at first appears to be "simple" lease language frequently, upon research of applicable court decisions, becomes into a byzantine labyrinth of conflicting, frustrating and confusing legal interpretation.
C. Modern Oil and Gas Lease Forms
Early oil and gas leases found in the public records of the oil producing states constitute an amazing variety of types and formats. Some appear to be deeds for entire mineral estates, some appear to be grants of various royalty estates, some appear as mortgages with rights of reverter, and some are simply short term leases of rights, which grant no more rights than a lease for a modern apartment. Some early oil and gas leases were so-called "no term" leases, i.e., leases which could be kept indefinitely by the mere payment of delay rentals.
Generally, modern oil and gas lease forms may be categorized into two distinct families: (1) lessor-generated forms, and (2) lessee-generated forms.
By far the majority of oil and gas lease forms are lessee generated. Lessee-generated forms obviously are scrivened by sophisticated energy company personnel (or their hopefully sophisticated legal representatives), and contain lease language slanted in favor of those same energy companies. In the mid-continent area, the most common oil and gas lease is the so-called "Producers 88" lease. See Williams & Meyers, Manual of Oil and Gas Terms 545 (13th ed. 2006). A detailed discussion of such leases is not included herein.
Lessor-generated forms are scrivened by landowners and their increasingly competent legal counsel. The advent of the internet era has made available numerous websites, blog sites, and related 21st century communication technology which enable even the least knowledgeable lessor to be informed as to lessor-favorable lease language and lessor rights. See, e.g., http://www.marcellusshale.saulnews.com. Lessor-generated forms can be nearly child-like in their simplicity, or contain lease provisions which rival those contained in oil, gas and mineral grants obtained from foreign governments. The author has personally examined lessor-generated forms as long as 175 pages; other lessor-generated forms examined by the author have been as short as one page. Again, it is beyond the scope of this paper to discuss all of the varied lessor-generated lease forms.
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D. Oil and Gas Lease Provisions and Title Opinions
The most common oil and gas lease issues to be considered when rendering a title opinion are as follows:
1. Primary term;
2. Leases held by production ("HBP" leases);
3. Pugh clauses;
4. Depth limitations;
5. Entireties clauses;
6. Pooling provisions and limitations;
7. Surface restrictions, drilling obligations and continuous operations;
8. Executive rights; and
9. Delay rental and shut-in provisions.
This paper will examine these common issues, including sample languages and provisions, sample comments and requirements from title opinions, and selected case law.
II. Primary Term
A. Definition
The primary term of an oil and gas lease is that "...period of time during which a lease may be kept alive by a lessee even though there is no production in paying quantities by virtue of drilling operations on the leased land or the payment of rentals." See Williams & Meyers, Manual of Oil and Gas Terms 803 (13th ed. 2006). The primary term is usually stated for a fixed term of months or years, and sometimes at a date certain, e.g., "March 10, 2013."
The habendum clause of a typical modern oil and gas lease grants the land for a primary term "and so long thereafter" as oil or gas is produced [see Sample Provisions section below for typical language]. After the expiration of the primary term, the oil and gas lease usually can be kept alive only by production in paying quantities, absent some savings clause in the lease, such as a shut-in gas well clause, drilling operations clause or continuous drilling operations provision. In North Dakota, for example, the primary and sometimes the secondary term of the lease may be extended contractually by (1) drilling operations provisions, (2) shut-in provisions, (3) dry hole provisions, (4) cessation of...
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