CHAPTER 3 DOTTING YOUR I'S AND CROSSING YOUR T'S: ENSURING PROPER PAYMENT AND EXECUTION
| Jurisdiction | United States |
(May 2018)
DOTTING YOUR I'S AND CROSSING YOUR T'S: ENSURING PROPER PAYMENT AND EXECUTION
David B. Hatch
Holland & Hart LLP
Salt Lake City, UT
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ANGELA L. FRANKLIN is a Partner with Holland & Hart, LLP, in Salt Lake City, Utah. Angela is a Wyoming native and graduate of the University of Wyoming (B.S. Finance 1986; J.D. 1990). She is from a multi-generational oil and gas family that gives her a deep appreciation for the natural resources industries she serves. She has over 27 years' experience representing oil, gas, and mining clients in virtually all types of acquisition, divestiture, exploration, production, and financing upstream and mid-stream transactions. Angela has extensive experience with title examination of private, Federal, State, and Indian lands throughout the Rocky Mountain region and rendering drilling, division order, acquisition, and financing opinions. In addition, she advises clients in complex acquisition and divestiture transactions and prepares the transaction agreements. Angela counsels clients and prepares a variety of upstream and mid-stream agreements including farmout, exploration, joint operating, participation, pooling, and unitization agreements. She has extensive knowledge of federal exploratory units and all issues associated therewith. She assists clients' land and division order departments with all aspects of curative work, day-to-day operations, and leasing and conveyancing issues. She represents clients on matters involving well permits, spacing orders, force pooling, and field rules. Angela is admitted to practice in Wyoming and Utah and represents clients before the Interior Board of Land Appeals, Bureau of Land Management, Utah Board of Oil, Gas, and Mining, Utah School and Institutional Trust Lands Administration, and Wyoming Office of State Lands & Investment. She has received numerous recognitions, including, Best Lawyer in America Lawyer of the Year, Oil and Gas Law - Salt Lake City (2014), Best Lawyer in American, Oil and Gas Law (2007-2018), Mountain States Super Lawyer in the area of Energy and Natural Resources (2008-2017), and recipient of the "Best Published Article in an AAPL Publication" Award: American Association of Professional Landmen (2005). She is an active member of the Rocky Mountain Mineral Law Foundation (Trustee-at-Large (2005-2008; 2014-2016); Co-Chair, Oil & Gas Section, 54th Annual Institute (2008); Co-Chair, Mineral Title Examination Special Institute (2007)), American Association of Professional Landmen, Utah Association of Professional Landmen (President (1994-1995; 2004-2005), Chair, Oil and Gas Seminars (1995, 1996, 1998, 2005)). She has authored numerous papers and publications on behalf of the Rocky Mountain Mineral Law Foundation and the American Association of Professional Landmen on such topics as comparison on state laws on leasing, exploration and production, curative documents and tools, pooling issues, and communitization agreements. She is a regular contributor to her firm's The Oil & Gas Report blog at www.theoilandgasreport.com. Angela serves on the Board of Trustees of the Holland & Hart Foundation. She is also a regular volunteer for the Holland & Hart Foundation, United Way, Immune Deficiency Foundation, and Northern Utah Expanding Your Horizons conference for middle school girls interested in STEM careers (presenting the workshop, "Black Gold: Where is It?"). Angela and her husband are trying to adjust to the "empty nest" as their two children are now in college.
DAVID B. HATCH is an oil and gas title and transactional attorney in the Salt Lake City office of Holland & Hart. Dave has extensive experience with drilling title, division order, financing, and acquisition title opinions, leading the oil and gas title group in New Mexico. He provides efficient and reliable work on simple to complex issues involving federal, state, Indian, and private lands from the Bakken to the Permian. He also represents clients in all types of oil and gas transactions, including conducting due diligence, drafting and negotiating agreements, resolving issues, and getting deals to the closing table. Prior to joining Holland & Hart, Dave gained valuable experience and deeper understanding of issues from the client's perspective working as a landman for an independent oil and gas company. During that time, he gained broad exposure to workings of an upstream oil and gas company by running title in the county records, negotiating oil and gas leases and assignments, and managing the company's land database. Dave speaks frequently at industry conferences and enjoys providing client training to oil and gas land and legal departments. He is an active member of the Rocky Mountain Mineral Law Foundation and the American Association of Professional Landmen. He received his J.D. from University of Utah S.J. Quinney College of Law and B.A. in Business Administration from the University of Utah.
I. Introduction1
The most often overlooked facets of drafting and negotiating an oil and gas lease are the details of getting the right individuals to execute the lease and ensuring the lessor is properly paid. After all, an oil and gas lease signed by an individual without authority is generally not valid and not making payments on time or in the correct amounts can have a significant impact on the lease. Although the lease provisions covering these issues are not typically a significant part of the negotiation, understanding their function and what is required by the parties is an important part of the leasing process.
II. Required Payments under Oil and Gas Leases
A. How It All Began
The first commercial well drilled in the United States was under a fixed, long-term lease (i.e., no habendum clause) dated December 30, 1857.2 This type of lease form proved to be less than ideal. While it gave the lessee (i.e., the operator) a relatively long period of time to develop the leased lands, it did not permit the lessee to maintain the leased lands past its primary term even with actual production. Furthermore, the courts began implying a duty on lessees to develop the leased lands.3 For the lessor (i.e., the mineral owner), it was less than ideal because the lease payment was usually nominal and the lessor would not begin receiving royalty payments until production was attained.
Generally, the goals of the lessor and the lessee have been consistent over time. Lessees desire to use the least amount of capital to maintain the largest interest for the longest time with the ability to develop the leased lands according to their own schedules. On the other land, lessors desire to obtain the highest amount of royalties from their interest and to be otherwise compensated while the lands are not being developed. Over time, these goals are what have shaped the modern structure of the fee oil and gas lease: shorter primary terms with a habendum and other "savings" clauses.4
B. Delay Rentals: Or vs. Unless and Paid-Up Leases
In light of the implied covenant to develop the leased lands, one of the first major changes to the common lease form was the implementation of delay rentals. The election to pay delay
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rentals is still found in lease forms today and deciding between delay rentals and a paid-up lease is one of the first decisions to make when negotiating a lease. The term "delay rentals" is derived from the concept that the lessee must commence operations on the leased premises before the first anniversary of the lease or pay a delay rental to defer the lessee's implied covenant for another year. Delay rentals typically come in the form of "or" clauses, which are more common in California and the Appalachian states, and "unless" clauses, which are more common in the Rocky Mountain states. Paid-up leases are commonly encountered in all of the oil and gas producing states.
1. "Or" Delay Rentals
Initially, the "or" clause appeared, which provides that the lessee may commence drilling operations or pay a delay rental. Consider the following example:
Lessee agrees to commence a well on said lands within one year from the date of this lease, or pay Lessor $1.00 per acre, per annum, payable in advance until a well is commenced or this lease is surrendered....
This type of delay rentals clause creates an express lease covenant for the lessee to commence drilling operations for a well within a specified period of time or pay rentals. Because it is structured as an affirmative action, if the lessee does not perform either option, the lessee is typically liable for damages: an amount equal to the delay rentals.5 Thus, the "or" clause does not provide an out for the lessee. If the covenant is not performed, the lease continues in effect unless surrendered by the lessor. This result, of course, led to the "unless" clause, which added the option for the lessee to terminate the lease at any time.6
2. "Unless" Delay Rentals
Unlike the "or" clause, the "unless" clause does not create an express lease covenant. Consider the following examples:
If no well is commenced on said land on or before one year from the date hereof this lease shall terminate as to both parties unless the lessee on or before that date shall pay or tender to the lessor the rentals specified herein.
If operations for the drilling of a well for oil or gas are not commenced on said land on or before one year from this date, this lease shall terminate as to both parties, unless the lessee shall, on or before one year from this date, pay or tender to the lessor or for the lessor's credit in [name of bank] or its successors. . .the sum of _____, which shall operate as a rental and cover the privilege of deferring the commencement of operations for the drilling or a well one year from said date.
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This type of delay rentals clause does not make the lessee...
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