How long is my oil & gas lease?

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Many mineral owners erroneously presume that the length of their lease is simply the number of stated years in the lease or the number of years stated in their cover letter from the leasing agent. This erroneous assumption often leads to the belief that the terms of the lease will be renegotiated at the end of the stated years when a mineral owner believes that they will be better situated to negotiate due to the existence of actual production of their minerals. The stated term is most often only the length of the primary term. Mineral owners should be concerned with the total length of the lease or the habendumclause describing the entire term of the lease inclusive of both the primary and secondary terms of the lease.

What is the habendum clause?

The habendum clause describes the entire length of the lease and it typically provides for both a primary term and secondary term. The specifics of a habendumclause may vary, but such clauses are generally along the following lines: “This lease shall be for a term of ___ years and so long as thereafter as oil and gas is produced . . .”

What is the primary term?

The primary term of a lease is typically the stated or fixed term of years for a lease. In Colorado, primary terms generally range from one to ten years. What is the length of the primary term in your lease? What length of time is typical in your area? The primary term permits the company to explore or drill for oil and gas without the obligation to do so during the primary term. The primary term is the maximum amount of time the company can assert lease rights to the property without taking any action to further the development of your mineral rights.

What is the secondary term?

The secondary term is the period for which rights are granted to the company so long as certain conditions are met. The secondary term is the term beyond the primary term that may or may not come to fruition. Most often the secondary term is the time period that the lease continues “so long as oil and gas is produced.” What language for the secondary term is on your lease? If no oil and gas is produced, then a lease may simply terminate at the end of the primary term; however, if oil and gas is produced then the secondary term may hold the lease for decades. How long has the secondary term been on your lease?

The Length of the Lease.

If you receive a lease offer, you should pay attention to both the primary term and the secondary term. You should also be cognizant of the habendum clause rather than simply the length of the primary term. While the lease is likely to remain in place for the primary term, also be cognizant that the secondary term may cause extension of the lease beyond the stated primary term.

Jenna H. Keller, Esq.

Attorney at Keller Law, LLC. (www.kellerlawllc.com)

Jenna H. Keller defends property rights and provides legal services to farmers, ranchers, rural property owners, and severed mineral interest owners in the areas of estate planning, natural resources (oil, gas, wind), real estate, and water.

The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.

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Jenna, do you see operators offering low rents to extend leases even if there is no production in the secondary term? Often, they're referred to as "Shut-in Royalty Clauses". I see it on a lot on old leases, but a hunch tells me they will get more popular in the low natural gas price environment we're currently experiencing.

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The continuing operations clause could also extend a lease for 6 months to a year and theoretically many years.

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Low payments on extensions of the primary term are a signficiant problem. It is often disadvantageous to agree to a lease term with an initial primary term followed by an extension of another primary term at the same price. They are either not going to renew anyways, or if they opt to renew, then it's likely that prices will have risen. Consider asking for double (or least something more) for the renewal price, or eliminate the renewal all together.

Clauses for shut-in royalties are also of concern. Terms on shut-in royalties are often overlooked by mineral oweners, but can have drastic consequences in years to come especially as natural gas prices remain low. Many clauses for shut-in royalties today allow a multitude of options for operators to hold a lease at minimal cost.

The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.

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Continuous drilling clauses are also another way to hold a lease. In Colorado, a request for a Pugh clause often yields a counter of a continous drilling clause which does little to protect large acreage owners.

The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.

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Jenna,

Thanks for your posting. Always interesting and educational.

Clint Liles

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Jenna, how much oil and gas have to be produced to justify holding the lease based on the secondary term, “so long as oil and gas is produced.” ?

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Mr. Williams,

Great question. First, it depends on the exact terms of the lease, and if you are in the negotiations stage you might consider adding to or revising the offered language. For example, you might consider revising to state, "so long as oil and gas is produced in commercial paying quantities." Second, the holding of the lease will depend on state law, but the phrase "so long as oil and gas are produced in paying quantities" is generally thought to mean that a profit is being made over operating expenses.

The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.

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At the end of a lease should the mineral rights holder notify the local county courthouse of the lease termination?

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Daniel, I think you would want the lessee to file a release of record in the event of the lease expiring/no production, the problem is if they no longer own it, they may not want to go to the slightest effort because there is nothing $ in it for them. You may want to have language in your lease that a release will be recorded by the lessee in the event of no production during the primary term of the lease or when continuing operations to obtain production cease after the expiration of the primary term, within 15 days or liquidated damages will accrue at the rate of $1,000 per day. Check with your lawyer for the specific language to be used, as I am not a lawyer. I think you could file an affidavit of no production with the county but that is a less than perfect curative. I have a friend that had a potential lessee interested in leasing her but the lessee wanted a release from the former lessee, who was still negotiating with her for alot less bonus and royalty and the former lessee did not want to provide the release. Even with such language I would not consider it worthwhile to sue the lessee until they were $100,000/100 days late and you could interest an attorney to take the case on contingency.

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Thank you for the reply. This is my first lease and felt that there should be a way to alert other interested parties that the current lease has expired. I will contact the land man who represented Samson and ask them to file with the courthouse. Dan

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Dan, if Samson will record a release, that would be best. If they will not, the affidavit of no production can be filed and it's better than nothing. I wish you good luck with your minerals and with Samson.

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Thank you, I will go directly to Samson Lone Star and ask that they record a release. Dan

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In Colorado, the CRS 38-42-104 can be helfpul in requesting a release of an oil and gas lease. The statute prescribes the release of an oil and gas lease within 90 days of forfeiture or release.

The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.

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Thank you! Dan

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What if the lease was in 1947 I think and was told it's still in effect because it's still producing so there is no bonuses or rents to us where do I get the leases copies I mean

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Copies of leases should be available through the county recorded documents. Depending on the county, especially if it's online, then you may be able to do some of the research yourself. Additionally, if it's still producing then you should be receiving some type of royalty in exchange for that lease continuing.

The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.