Business Law Articles
By: Paul R. Yagelski, Esq.
The primary or initial term of your oil and gas lease; e.g., the first five, seven, or ten years of your lease, is about to expire and you are unhappy with your lease. You may not be getting the royalties that you expected. Whatever the reason, you begin to ask yourself whether you can get rid of or terminate your oil and gas lease.
Whether you can do so depends on a number of factors.
To answer your question, the first place that you must go is to the lease itself, particularly two provisions. Although the lease as a whole must be reviewed, there are two provisions in an oil and gas lease which must be looked at first, as they are of paramount importance in answering your question. These are the habendum clause and the extension of term clause.
In every oil and gas lease, there is a habendum or term clause, which sets the term or length of the lease. In all oil and gas leases, there are two terms: a primary term and a secondary term. The primary term is the initial term of the lease, and it is for a set amount of years. For example, the primary term can be three, five, seven, ten years, or more from the signing of the lease. After the expiration of the primary term, there is a secondary term. The secondary term extends the term of the lease, and it can extend the term indefinitely.
In addition to the habendum clause, there is also an extension of term clause. This clause is normally separate from the habendum clause. In general, it provides that prior to the end of the primary term, the oil and gas lease can be extended for another term of equal length to the primary term upon the payment of a bonus in the same amount that the landowner received at the time of the signing of the lease. Accordingly, it is possible that the oil and gas company may have done nothing under your lease, other than pay you a bonus. If so, if there is an extension of term clause in your lease, the oil and gas company may decide to pay the amount set forth in the extension of term clause. If the extension of term payment is made, then the lease would be in effect for an additional primary term or for the same length of time as the initial term of the lease.
If the oil and gas company has not extended the primary term of your lease by complying with the extension of term clause or if there is no extension of term clause in your lease, and not all oil and gas leases have such a clause, the lease’s term can still be extended by the oil and gas company’s compliance with certain provisions in the habendum clause.
Some landowners are under the impression that when the primary term ends, the lease expires or is terminated. This may not be the case, and frequently, it is not. In order to determine whether the lease has expired or been terminated at the end of the primary term, the habendum clause must be reviewed along with the circumstances at the time, or what has or has not occurred regarding the development of the oil and gas rights that you have leased, in order to determine if your lease has been extended into its secondary term.
The secondary term is triggered by the occurrence of certain events, which are specified in the habendum clause. A few examples of language, which would trigger the secondary term and extend the lease, would be language that states or indicates that the term of the lease after the expiration of the primary term will continue:
- as long thereafter as there are wells on the leased premises producing oil and gas,
- for as long as there are wells producing oil and gas in paying quantities from the leased premises or from lands pooled or unitized therewith,
- for as long thereafter as the leased premises or lands pooled or unitized therewith are operated in the search for, drilling for, or production of oil and gas,
- for as long as any well is located on the premises and/or premises pooled or unitized therewith and is deemed by lessee to be capable of producing oil and gas in paying quantities,
- as long thereafter as the leased premises shall be operated by lessee or otherwise maintained in full force and effect pursuant to other provisions in the lease.
The aforesaid are only a few examples of provisions, which could extend your oil and gas lease beyond its primary term. In other words, if the provisions of any of the aforesaid clauses or similar clauses are complied with, your lease can be extended beyond its primary term, whether the primary term is three, five, seven, ten years, or longer. If the lease is extended into the secondary term, the lease would continue for as long as the oil and gas company complies with the extension language in the habendum clause.
In conjunction with the language of any extension of term clause and the language of the habendum clause, the provisions of the lease as a whole also need to be reviewed in order to ascertain whether there are any other provisions in the lease, which would extend the lease. Such a clause may be a shut-in clause under which an oil and gas well is shut in due to any number of circumstances; e.g., lack of market or transportation facilities. A shut-in clause normally provides for the payment of a nominal amount to the lessor in order to extend the lease during the time that the well is shut-in. Another provision that may extend the lease is a force majeure clause. Under such a clause, if there is a natural disaster, strike, or some other enumerated occurrence, the lease can be extended during the time period of such event and possibly longer.
The bottom line is that if you have a question as to whether you can get rid of your lease or whether it has expired or been terminated, the lease needs to be reviewed. Any one of the aforesaid provisions can possibly extend your lease. If you believe that your lease has expired or been terminated, there are procedures under the Recording of Surrender Documents from Oil and Natural Gas Lease Act that a lessor can follow to have a surrender document filed. (See the Rothman Gordon oil and gas article, entitled, “Legislative Developments Affecting Landowners”).
If you feel that your lease is about to expire, has expired, or been terminated, we would strongly suggest that you consult with an oil and gas attorney in order to get an opinion as to whether this has occurred. Do not assume that because the stated number of years in your lease, whether three, five, seven, ten, or otherwise, has passed that your lease is over. If you do, and the lease has not expired or been terminated, this could possibly lead to adverse consequences to you.
For more information about Rothman Gordon, please visit the International Society of Primerus Law Firms.