National Institute of Justice Law and Legal Definition

The National Institute of Justice (NIJ) is a federal agency established under the U.S. Department of Justice. The NIJ is a component of the Office of Justice Programs. This agency performs research and evaluations of certain specific crimes. It evaluates all type of crimes, from the traditional to the most modern. For example, it evaluates traditional crimes such as child abuse, and emerging cyber crimes. NIJ is the research, development and evaluation agency of the U.S. Department of Justice.

Subject: Oil, Gas, and Minerals

Oil and Gas Lease

A oil and gas lease is a contract between a mineral owner, and a company or working interest owner designed to secure production of oil, gas, or both in paying quantities. The mineral owner is called the lessor, and the working interest owner is called the lessee. In an oil and gas lease, the lessor grants the lessee the right to explore, drill and produce oil, gas and other minerals for a specified primary term and as long thereafter as oil, gas or other minerals are being produced in paying quantities. Pursuant to the lease, the lessee gets a working interest in the leased premises. These lease agreements should be recorded at the Recorder of Deeds office of the county where the leased tract is located.

An oil and gas lease aims to make the mineral estate profitable to both parties through exploration, development, and production of resources located in the leased premises. Such leases are ordinary leases of property. The consideration received from a mineral lease is considered rent. A mineral lease conveys an interest in real property and it does not create the ordinary relation of landlord and tenant. An oil and gas lease is a ‘grant in praesenti’ of oil and gas to be captured from underneath the land during the term of the lease and for the period until the substances are not found. Ordinarily, mineral leases do not create a fiduciary relationship between the lessor and lessee. Mineral leases are purely contractual in nature.

Courts consider the law of the place of the leased property while determining the validity and effect of a gas and oil lease. Parties to a lease often insert whatever provisions they deem proper in a oil and gas lease. This is because there is no standard reliable lease form.

The right to execute an oil and gas lease on particular lands is designated as the executive power or executive right. It remains as an interest in property even when it is severed from the other rights or attributes incident to the mineral estate. An oil and gas lease can be considered a hybrid property interest. For some purposes it can be considered a personal property and for other purposes it can be treated as real property. Under an oil and gas lease, the lessee holds the dominant property and the lessor holds the servient property. .

When an oil and gas lease is executed, the lessor does not transfer title to the oil under his/her land. This is because it is an interest in real estate. The lease provides an exclusive right to the lessee to explore and reduce the oil to the lessee’s possession when it becomes the lessee’s personal property. An interest in an oil and gas lease grants the lessee the right to remove minerals from the land. A mineral lease grants the lessee the right to explore for and produce oil and gas. It also gives the lessee the right to conduct seismic exploration to determine the presence of subsurface trapping mechanisms favorable to oil and gas production.

A person owning title to an oil and gas property can perform all acts necessary to discover and produce such minerals. The title holder will also have the right to lease and dispose of such oil and gas and to receive bonuses and delay rentals. A fee holder has an interest to give a valid oil and gas lease. An easement holder does not possess the interest to confer the rights comprised within an oil and gas lease.

The landowner or the lessor in an oil and gas lease retains: the right to the surface; a reversionary interest in any oil remaining after the termination of the lease; and a right to royalties on oil produced by the lessee during the term of the lease. The lessor also has the right to independently convey or assign such interests.

Clauses in an Oil and Gas Lease

An oil and gas lease normally contains clauses defining the rights and obligations of the lessor and lessee, the term of the lease, and termination of the lease. Apart from these there are other clauses that are seen in oil and gas leases. Some of them are discussed below.

A Habendum Clause is a clause that is seen in oil and gas lease. This clause defines the type of interest and rights to be enjoyed by the grantee or lessee. An express covenant to protect against drainage can be provided in a lease deed. The parties to an oil and gas lease may provide that performance under the lease is excused where the lessee has made timely rental payments. Some leases include a clause called a judicial ascertainment clause. This clause declares that the lease is not to be terminated or cancelled or forfeited for failure of the lessee to perform implied obligations until the existence of such failure is judicially ascertained.

Yet another clause that is seen included is the notice and demand clause that requires the giving of a notice of breach of a lease provision and the making of a demand for the performance of the provision as prerequisites to a legal action based on the breach. The acreage selection clause is a clause that is seen in some oil and gas lease. This clause permits the lessee to extend the lease on certain acreage selected by him/her after the completion of a survey.

The entirety clause which is seen in oil and gas lease is an agreement that if the mineral interest under the leased premises is owned by a number of different persons, the royalty will be treated as an entirety, with the separate owners participating. Such a clause binds the lessor, the lessee, and all persons holding under them so that the acceptance of a conveyance subject to an oil and gas lease implies an agreement by the grantee to the application of an entirety clause in the lease. Generally, oil and gas leases provide for free gas for a dwelling on the leased premises. This right is transferable and assignable as any other property interest. Free use of water is a provision in a gas and oil lease. This clause entitles the lessee to the free use of water produced on the land. Such a lease deed gives the lessee free use of water from the land, except water from the lessor’s wells, for all operations under the lease. However, it does not entitle the lessee to use water from the private pond or tank of the lessor but entitles him/her to use only water produced by the lessee.

Some leases include a dry hole clause. This clause provides that when the first well drilled is a dry hole, and a second well is not commenced within a specified period from the expiration of the last rental period for which rent has been paid, the lease is to terminate. However, if the lessee pays the rent on or before expiration of a specified period the lease will not terminate.

Duration

Usually, an oil and gas lease runs for a definite term of years, as agreed between the parties. The lease has two distinct periods of duration. They are: a. definite/primary term, and b. subsequent term. A definite term is for the exploration and the production of gas and oil. Some types of leases, for example, completion lease requires the drilling of a well to be completed during the primary term in order to extend the life of the lease. The subsequent indefinite term provides a lease to continue as long as the production of oil or gas in paying quantities continues, known as thereafter term. As long as the lessee pays the annual rent, the lease remains in effect. This definite period of time is called the primary term. When a company fails to start production, the lease expires after the primary term. When the company starts drilling for oil and gas, the lease will remain in effect past the primary term. An oil and gas lease containing a thereafter clause can be extended beyond the primary term by the drilling of a producing well within that term.

Termination

Generally, the termination of a lease is based on the termination clause or the language used in the lease document as it is critical in resolving issues. An oil and lease terminates automatically:

a. When lessees fails to discover gas or oil within the primary term; or

b. When lessees fails to produce oil or gas within the particular period provided in the lease.

The lease may also be terminated if the lessee fails to make timely rental payments.

An oil and gas lease can terminate during its primary or secondary term. Termination during the primary term arises from the failure of the operator to pay delay rentals as required by the lease. A lease terminates during the secondary term:

a. when there is a failure to tender shut-in royalties when due;

b. when there is a cessation of production and operations;

c. when there is a breach of the implied covenant to reasonably develop the leased premises; or

d. when there is a failure to produce in paying quantities;

A suit for the breach of an implied covenant can also terminate a lease. When a lease terminates by its own terms, it cannot be ratified or revived. However, a lease allowing a lessee to remove its equipment at any time allows the lessee to discontinue production when it becomes unprofitable. In such a situation, the lease does not require the lessee to drill the well until the exhaustion of production.

Different Types of Oil and Gas Lease

Oil and gas leases can be divided into commence leases and completion leases. A commence lease is an oil and gas lease in which drilling a well must commence during the primary term, and the drilling operation must be carried out with reasonable diligence for the lease to become valid. Whereas, a completion lease is a type of oil and gas lease in which drilling a well must be completed during the primary term of the lease to extend the life of the lease.

Oil and gas lease can also be classified as: ‘drill or forfeit’ lease and ‘drill or pay’ lease. A ‘drill or forfeit’ lease is a lease which requires the lessee to drill a well on the leased premises within a specified time. If the lessee does not drill the well within the specified period, s/he/it loses or forfeits the lease. A ‘drill or pay’ lease is a lease which requires the lessee to drill well on the leased premises within a specified time, or pay delay rentals to the lessor. Normally, such lease is not forfeited or terminated by the failure to comply with its terms. However, on the failure to drill or commence drilling as required, the obligation to pay rental becomes absolute as an alternative requirement. In certain types of leases, if no well is commenced on the leased land on or before a specified date, the lease is to terminate as to both parties “unless” the lessee on or before that date pays or tenders to the lessor a specified sum of money. This is described as an ‘unless’ lease or a ‘wildcat’ lease. A top lease is an oil and gas lease that operates only if the preexisting lease is expired or terminated

In Roberson v. Pioneer Gas Co., 173 La. 313 (La. 1931), the court held that whenever a landowner accepts a share of the delay rentals, the person ratifies the oil and gas lease that includes his/her land but was executed by someone else. Where delay rental payments are accepted by an agent of the lessor, the oil and gas lease will be valid, even if a lease agreement has never been properly delivered to the lessor.

Notice and Demand Clause

If Lessor considers that the express or implied covenants of this lease are not at any time being complied with, Lessor shall notify Lessee in writing of the facts relied upon as constituting a breach of any express or implied covenants or obligations of Lessee hereunder and Lessee, if in default, shall have sixty (60) days after receipt of such notice in which to commence compliance with its obligations hereunder. Failure on the part of the Lessee to commence efforts to rectify any such breach, to exercise diligence to remedy any such breach shall cause this lease to terminate as to the portion thereof affected by such breach; provided that if the Lessee, in good faith, disputes any alleged grounds of breach set forth in such notice, Lessee may within the 60-day period, file suit questioning whether it has in fact breached the express or implied covenants of this lease, thereby staying any forfeiture during the pendency of such action.