When entering an oil and gas lease agreement, it’s crucial that mineral owners protect their interests. Certain clauses may be included in the lease to safeguard the owner’s rights, ensure fair compensation, and limit potential damages to the property. Below we explain various clauses you may come across in an oil and gas lease:
- Royalty Clause: This clause outlines the percentage of production revenue that will be paid to the mineral owner. Make sure the percentage is clearly defined, and verify if it’s based on gross proceeds or net proceeds.
- Pugh Clause: A Pugh clause, also known as a “freestone rider,” separates the lease into separate tracts for the purpose of maintaining the lease. It can prevent the entire property from being tied up by a lease if only a portion of the land is producing or included in a drilling unit.
- Delay Rental Clause: This clause requires the lessee (usually an oil or gas company) to make payments to the lessor (the mineral owner) during the primary term of the lease, to keep the lease valid even if drilling or production has not begun.
- Shut-in Royalty Clause: This clause ensures that the mineral owner receives payment when a well is not producing, but could (and likely will) produce in the future. It’s often used when the well is temporarily closed, or “shut-in.”
- Habendum Clause: This clause defines the term of the lease. It usually includes a “primary term” of a few years, during which the oil and gas company must begin production, and a “secondary term” that continues as long as the land is producing oil or gas.
- Warranty Clause: This clause should be carefully examined or avoided. If it’s included, the mineral owner warrants they own the mineral rights and could be held liable if that turns out to be incorrect. It’s best not to warrant anything you’re not absolutely sure about.
- Damage Clause: This clause outlines how much the oil or gas company must pay if their operations damage the property. This can include damages to the surface of the land, water sources, livestock, crops, etc.
- Indemnity Clause: This clause ensures that the lessee will protect the lessor from any legal actions or liability arising from the activities of the lessee or their subcontractors. It safeguards the lessor from bearing any costs or damages related to the lessee’s operations.
- Environmental Protection Clause: This clause specifies that the oil and gas company will adhere to all relevant environmental laws and regulations. It can also include stipulations for the cleanup of environmental damage and restoration of the land after the lease ends.
- Depth Severance Clause: This clause will release specific formations or deep rights on lands covered by the lease back to you after the primary term of your oil and gas lease has expired.
- No Deductions Clause: This clause is supposed to prevent your lessee from deducting the costs they incur in transforming your share of the raw marketable materials they bring to the surface into marketable condition.
- Consent to assign language: Requires lessor to obtain consent from lessee prior to assignment of oil and gas lease to any third party.
Including these clauses in an oil and gas lease agreement can help protect the rights and interests of mineral owners. However, every situation is unique, and it’s always best to seek legal counsel or advice from industry experts before signing any lease agreement. Have questions? Contact Valor today!
The information provided by Valor in this blog is for general informational purposes only, not to provide specific recommendations or legal or tax-related advice. The blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.