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Negotiate a Drill or Penalty Time Frame in Lease?
In Negotiating a lease for a location in La Salle County, is it reasonable to negotiate a requirement to dill within a short period of time or pay a penalty. (ie. Drilling must commence within 9 months or pay a penalty of X dollars)? If so is it typical and what would the language look like?
Replies to This Discussion
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Permalink Reply by charles s mallory on -
I have never seen a lease with this type of wording. Normally, when you lease your minerals, the lease is for a specified term (3 - 5 years) and the lessee can commence drilling operations any time within that designated lease term. Most of these drilling companies drill wells based on a schedule which takes into consideration the expiration dates of leases.
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Permalink Reply by Buddy Cotten on -
Dear Mr. Gaines,
I negotiated two such leases in S. Texas, both of which close this week. Liquidated damages were $400 per acre for not satisfying the drilling requirement.
The language looks like::
"2.2 On or before expiration of XXX months from the date hereof, Lessee must have commenced actual drilling, completion, or reworking operations in accordance with the terms of this Lease and must prosecute the same with reasonable diligence or without further notice from or action by Lessor, Lessee will tender to Lessor, in the form of liquidated damages, the sum of $XXX.XX per net mineral acre as recited in Provision 1.2 hereinabove."
Play with this language at your own risk.
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Permalink Reply by Texas Tea on -
Buddy's exactly right. I just did one last week in La Salle County. It just depends on how big your tract is, and/or how much leverage you have as to whether or not the Lessee will actually accept it. Good Luck!
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Permalink Reply by Wade Caldwell on
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Actually, everyone is right. Typically, these clauses are not included because that is one of the issues that the lease term addresses. However, if you have enough acreage for multiple wells, and enough leverage, the clause Buddy mentions would make sense, with some changes. For example, if they are leasing land that has no exisiting well bores, then the completion and reworking language is not necessary.
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Permalink Reply by Buddy Cotten on
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Dear Wade.
You are spot on. The reason that language was included was that possibilities for re-entry and re completion exists on this rather large tract. It was at the Lessee's insistence. One of those situations where we both won. Even a re complete triggers the continuous drilling and development in the primary term.
Amazingly, I have done this 3 times this year, with two different Lessees.
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