01
What a lease grants
An oil and gas lease grants rights in the minerals themselves.
An apartment lease gives a tenant temporary possession while the landlord keeps ownership. An oil and gas lease works differently. The mineral owner (the lessor) grants the oil company (the lessee) the right to explore for, develop, and produce the minerals, and to take the production subject to the lessor's royalty, for as long as the lease lasts.
What the lessee receives is called the working interest: the right to develop, burdened with all the costs. What the lessor keeps is the royalty and a future interest: if the lease terminates, the lessor again holds the full mineral estate.
States describe the lessee's interest differently. For title purposes the effect is similar everywhere. The lessee may drill and must pay the lessor, and the lease ends on its own terms.
02
Primary & secondary term
The habendum clause from Topic 02 ("to have and to hold") states how long the grantee holds the interest. In a deed it usually just confirms the grantee takes the fee. In a lease it sets how long the lease lasts. A typical version:
"This lease shall be for a term of three (3) years from this date (the 'primary term'), and as long thereafter as oil or gas is produced from said land."
That sentence creates two phases with different rules:
Courts in many states read "produced" to mean produced in paying quantities. What that takes varies by state and by the lease.
A lease in its secondary term, kept alive by ongoing production. An HBP lease signed in 1952 can still control a tract today, which is why examiners spend so much time asking whether old leases ever expired.
For title work, automatic termination matters because a lease's expiration may not show up in the records. Some states require the lessee to record a release after a lease ends, but releases are often late or never recorded. Some operators record an affidavit of production to give notice that they claim the lease is held by production. An examiner treats it as the operator's claim and checks production records.
03
Royalty, bonus & delay rentals
A lease produces three kinds of payment, and they arrive at different times:
- Bonus is the up-front payment for signing, usually quoted per net mineral acre. It is paid once, whether or not a well is ever drilled.
- Delay rentals are annual payments that keep a lease alive during the primary term without drilling. Most leases today are "paid-up": the rentals are included in the bonus and no annual payments are due.
- Royalty is the lessor's share of production. Royalty doesn't pay the costs of drilling or producing the well; whether it shares costs after production (gathering, processing, transport) depends on the lease and state law. The traditional figure was 1/8; modern leases commonly provide for 3/16, 1/5, or 1/4.
The royalty decimals lesson shows how a lease royalty becomes the decimal on a division order.
Older instruments often assume a 1/8 royalty. Many deeds and leases were written when 1/8 was standard, and courts still have to decide what they meant once royalties changed.
04
Clauses that matter in title
After the habendum, the clauses an examiner checks first are the ones that decide whether the lease is still alive, and over which land:
An examiner can't just read the habendum and check a production date. Savings clauses can carry a lease through a gap in production, and a Pugh clause can mean the lease ended as to some land but not the rest.
To see how a pooled unit divides production among tracts, try the pooling lesson.
05
Termination & top leasing
A lease usually ends in one of these ways:
- Expiration: the primary term runs out with no production and no savings clause keeping the lease alive. Termination is automatic.
- Missed delay rental: under older "unless" leases, a late or missed rental payment can end the lease during the primary term. The lease language controls.
- Cessation of production: production stops during the secondary term and isn't restored within whatever time the lease, or state law, allows.
- Release or surrender: the lessee gives the lease up and records a release. Releases are often recorded late, and sometimes never.
Because a terminated lease often leaves nothing in the records, a company that wants to lease the minerals may take a top lease instead of waiting for certainty.
A lease granted over land already subject to an existing (bottom) lease, taking effect only if the existing lease terminates. A recorded top lease tells an examiner that someone thinks the bottom lease has ended or may end. The bottom lessee sometimes takes the top lease itself.
06
Leasing fractional interests
Topic 01 and Topic 02 showed how mineral estates get split into undivided fractions. Often several people own undivided shares of the same minerals.
Each co-owner leases their own undivided share, separately.
Generally, one co-owner can't lease another's share. A landman leasing a whole tract tries to find every owner and get a signature from each, often on separate lease forms signed months apart. Whether a well can go forward without every owner varies by state; some states have statutes on this, and state pooling orders can reach unleased owners. Each lease covers only the signing owner's fraction:
These loose ends come up often in title examination:
- Unleased interests: an operator may be able to drill under leases from some co-owners, but it has to account to the unleased owners for their share. How that works, and what the unleased owner receives, varies by state. The examiner flags every unleased interest.
- Proportionate reduction: the "lesser interest" clause lets the lessee reduce payments to match the fraction the lessor actually owned. A lessor who claimed 1/2 but owned 1/4 gets paid on 1/4.
- Ratification: a co-owner who didn't sign the original lease, such as a missed heir, can later adopt it by signing a ratification. In some states an NPRI holder, who has no right to lease, can ratify the lease's pooling terms. Read each ratification closely; its effect depends on the wording.
07
Review questions
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