In simple terms, an oil and gas lease forfeiture is a right to end the oil and gas lease if the lessee fails to adhere to the terms of the contract. In most cases with oil and gas well drilling, it is a failure to pay royalties, but the agreement can be breached in some other manner.
Can a Lease Be Forfeited Due to Lack of Production?
Normally, a lease is signed for a fixed primary term, usually one to five years in duration. During that time the landowner cannot lease the oil and gas rights to someone else.
A more indefinite secondary term is implied as long as the lease is profitably producing. But if the well is never drilled in the primary term, the secondary term never begins and the lease ends. When the lease expires, it is void and the landowner is free to sign a lease with another party.
It is especially important to define the secondary term properly in the lease. It is much better to say the oil and gas lease will continue so long as oil and gas is being produced in paying quantities rather than the lease will continue as long as oil and gas is capable of being produced from a well on the subject premises in the judgment of the lessee.
What are Paying Quantities?
The courts have not established a firm cutoff, but zero production is not a paying quantity. Small royalties on meager production may be considered paying quantities, but a true royalty is correlated to the production of the property. It is the payment for the landowner’s percentage of the product sold.
It is acceptable to stop production for a reasonable amount of time for a good reason, but not for several years. Continuous production is what the courts look for and a court may declare a lease terminated if a long period elapses with no oil or gas production.
What is a Delay Rental? Is it the Same as Being Shut In?
Many Ohio oil and gas leases provide for a rental payment on the land while they delay drilling – hence payment of “a delay rental.” This is only done during the primary term of the lease. Some have tried to draft delay rental clauses that last indefinitely. Courts have recently held that these are invalid.
Gas producers usually have a “shut in” clause written into the lease. It is not quite the same as a “delay rental.” This clause allows the lessee to send a “shut in” payment to the landowner to allow the lease to continue if the gas cannot be sold at a profit. These payments generally apply only to gas leases. The lessee pays a small rate per acre per year, but the clause must have a time limit or it gives the lessee an indefinite right to hold property.
The holder of the lease should also be able to establish the well is capable of producing in paying quantities. If it cannot, the “shut in” clause should not be used and the lease should be terminated.
If you have questions about oil and gas leases in Ohio, please contact us for a free consultation by calling 1-888-534-4850 or send us a website message.