Top Ten Tips For Fee Oil and Gas Leases

Pooling Clause – Review the pooling clause to ensure that it is broad enough to allow pooling for the planned spacing unit, communitization and/or unitization. Some pooling clauses may include restrictive language that limits the size of certain units.

Pugh Clause and Continuous Drilling Operations – Determine whether any Pugh clause applies at the end of the primary term or after continuous drilling operations end. (Hopefully the latter!). The definition of continuous drilling operations can vary significantly; therefore, it is important to pay attention to the language in each lease to ensure that requirements are met to continue the lease.

Shut-In Clause – Review the shut-in clause to determine whether it is indefinite or restricted to a certain time period. Pay special attention to whether the shut-in clause restricts the type of well that is subject to the clause (i.e. gas only).

Initial Well Requirements – The lease may include a requirement for the operator to drill an initial well on or before a date that is still within the primary term. Failure to meet this obligation may terminate the lease.

Royalty Clause – Check the lease to see if costs such as gathering, compression and transportation are deductible when calculating royalty. These deductions can make a big difference, so the royalty rate is not the only important part of the royalty clause.

Warranty Clause – Often warranty clauses are stricken to protect the mineral owner from liability if a title defect is discovered. If the clause is restricted or stricken and the mineral owner were to acquire additional interests after the lease (e.g. after-acquired title) the lease may not cover those interests.

Notice Requirements – Review the lease to determine when notice is required; for example, notice may be necessary prior to development, prior to filing an application with a state agency, prior to assigning the lease to a third party, or in other instances.

Additional Benefits – Oil and gas leases can include language that allows for seismic activity, specific surface use or restrictions, limited access during certain seasons, or grants of easements.  If the lessee anticipates any unique situations, they should adequately address those issues in the oil and gas lease to avoid additional costs and future negotiations.

Judicial Ascertainment Clause – A judicial ascertainment clause is often favorable to a lessee and allows a lessee the opportunity to comply with any judicially determined breach of an implied covenant before a lease is forfeited or canceled based on those grounds.

Name of Lessor – Insure that the name of the lessor is complete and correct as record title is held, and add explanatory information if the lessor is not the record owner. For example: (i) XYZ corporation, a Colorado corporation; (ii) XYZ, LLC a Colorado limited liability company; (iii) Joanne Doe, a married woman dealing in her sole and separate property; (iv) John Doe, individually as an heir of Margaret Doe, deceased; (v) Joanne Doe aka Joanne S. Doe aka Joanne Susan Doe; (vi) First National Bank of Denver, Trustee of the John Doe Revocable Trust dated June 27, 2002; (vii) First National Bank of Denver, Personal Representative of the Estate of Margaret Doe, deceased.

FOR ADDITIONAL INFORMATION ON FEE LEASING PLEASE CONTACT:

Tom McKee:  tmckee@wsmtlaw.com

Sheryl Howe:  showe@wsmtlaw.com

Scott Turner:  sturner@wsmtlaw.com

Chelsey Russell:  crussell@wsmtlaw.com

Jeffrey Flege:  jflege@wsmtlaw.com