Lease Terms and Definitions

ANNIVERSARY DATE

The date, usually one year from the effective date of the lease, by which rentals must be paid to maintain the lease in effect in the absence of drilling or production.

ASSIGNMENT CLAUSE

A standard clause in a contract allowing free transfer of an Assignor’s interest.

BANK DRAFT

An instrument guaranteeing payment to a party within a certain time window, so long as certain conditions are met.

BONUS

The consideration paid to an owner of minerals for an Oil and Gas Lease.

COMMERCIAL QUANTITY

An amount of oil and gas production large enough to enable the operator to realize a profit, however small.

COMMUNITY LEASE

A single lease covering two or more separately owned tracts of land.

CONDITION

is a stipulation to a set of facts that has consequences.

CONSIDERATION

The price, inducement, or influence which induces a contracting party to enter into a contract.

CONTINUOUS DEVELOPMENT CLAUSE

In an oil and gas lease, a clause designed to keep drilling operations going steadily after the primary term has expired.

CORRELATIVE RIGHTS

Doctrine that each owner or producer in a common pool may produce only in such manner or amounts as not to injure the reservoir to the detriment of others or take an undue proportion of the production or cause undue drainage between developed leases.

COUNTERPARTS

A series of identical instruments to be signed by persons in different locations or a large number of persons. The instrument will be binding upon anyone signing any of the counterparts regardless of how many of the other persons sign and all counterparts are treated as one instrument.

COVENANT

Any promise, express or implied.

DAMAGE CLAUSE

In an oil and gas lease, the clause specifying that the lessee will be liable to the surface owner for damage to crops and other surface features.

DEFERRED BONUS

A bonus paid to a mineral owner at a later date usually to avoid excess tax payments by the mineral owner.

DELAY RENTAL

Yearly payments made to Lessor during the primary term to compensate for delayed drilling.

DESCRIPTION

A statement, usually in writing, that identifies a particular tract of parcel of land by known and accepted landmarks.

DETERMINABLE FEE

An interest in property that will end at the happening or non-happening of a particular event. In Texas, an oil and gas lease is considered a grant of a determinable fee.

DIVISION ORDER

A schedule of owners and their decimal ownership share in revenues of a well’s production derived from the sale of oil or gas.

DIVISION ORDER

An instrument, signed by each mineral owner in a unit, that establishes the pro rata share each interest is to receive as a result of production of the well.

DIVISION ORDER TITLE OPINION

An opinion, generally written by an attorney, stating the names and decimal ownership interests within a producing oil or gas well, unit, or lease.

DRILLING AND DELAY RENTALS CLAUSE

In an oil and gas lease, the clause that allows the lease to expire after a given period of time unless drilling begins or a delay rental is paid.

EXECUTION

The completing of a legal instrument by the required actions, for example, by signing and delivering the instrument.

EXECUTIVE RIGHTS

Executive rights include the right to negotiate and execute oil & gas leases, lease bonuses, and delay rentals.

FIRST RIGHT OF REFUSAL

A provision in leases stating that the operator has the right to top lease before any third party does. (This in effect is an option – the option to review and preempt a transaction by another party).

FORCE MAJEURE

An act outside the control of two contracting parties such as storms, earthquakes, wars, etc.

GRANTING CLAUSE

Clause in an oil and gas lease that specifies the right and interests granted by the lessor to the lessee.

HABENDUM CLAUSE

The clause in a Lease setting forth the duration of the Lessee’s interest.

HELD BY PRODUCTION

Mineral lease provision that extends the right to operate a lease as long as the property produces a minimum quantity of oil & gas.

HORIZONTAL PUGH CLAUSE

A clause often added to an oil lease to limit holding non producing lands beyond primary term of a lease. Also known as a Freestone Rider or a Pugh Clause.

IMPLIED COVENANTS

An obligation or benefit not specified in an oil and gas lease, but held by the courts to be implicit in such lease.

LEASE

The generic name for an Oil, Gas and Mineral Lease.

LEASE BONUS

Usually, the cash consideration that is paid by the lessee for the execution of an oil and gas lease by a landowner. It is usually based on a per acre payment.

LEASEHOLD

The estate in real property created by a lease.

LEASEHOLD INTEREST

The interest in the minerals of the Lessee or holder of the Lease. It is normally the interest which must bear all of the cost of drilling a well.

LESSEE

The purchaser (taker) of an Oil, Gas and Mineral Lease.

LESSOR

The party who grants an Oil, Gas and Mineral Lease.

MINERAL LEASE

An instrument which sets out the terms by which one party leases the right to explore and produce (if found) certain minerals within a specific tract or tracts of land. In the oil and gas industry, this is sometimes referred to as an Oil, Gas, and Mineral Lease.

MINIMUM ROYALTY

A royalty payment amount to be made regardless of the rate of production.

MOTHER HUBBARD CLAUSE

A clause which is intended to include in the Lease all adjacent lands omitted as a result of poor descriptions or other inadvertent omissions.

NET ACRES

The gross acres multiplied by the mineral interest.

NET MINERAL ACRES

An expression of the fractional interest in a tract of land expressed as acres rather than a percentage. For example, a 1/4 undivided interest in an 80-acre tract amounts totals 1/4 interest in the entire 80 acres or 20 net mineral acres.

NON-EXECUTIVE MINERAL INTEREST

A term used to describe an interest in oil and gas which lacks the right to join in the execution of oil and gas leases. It does have the right to a share of the bonus, delay rentals as well as royalty under existing or future leases.

NON-PARTICIPATING ROYALTY

An interest in oil and gas production which is created from the mineral estate. Like the plain “royalty interest” it is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right (or obligation) to make decisions regarding execution of those leases

NON-PARTICIPATING ROYALTY OWNER

A person who owns a severed portion of a royalty interest, but who does not execute leases, participate in bonuses or rentals, or have rights of exploration and production.

NON-PRODUCING MINERAL OWNER

An owner of minerals that are not currently being produced and sold.

OIL, GAS AND OTHER MINERAL LEASE

The agreement outlining the basic terms of developing lands or minerals such as royalty to be paid, length of time, description of lands.

OVERRIDING ROYALTY INTEREST (ORRI)

“A royalty in excess of the royalty provided in the Oil & Gas Lease. Usually, an override is added during an intervening assignment. ORRIs are created out of the working interest in a property and do not affect mineral owners. An overriding royalty interest (ORRI) is often kept or assigned to a geologist, landman, brokerage, or any entity that was able to reserve an interest in the properties.”

PAID UP LEASE

An Oil and Gas Lease where rental payments are paid along with bonus.

PARTICIPATING ROYALTY INTEREST

A royalty interest giving its owner the right to “participate” in bonuses received and in any oil or gas found.

PRIMARY TERM

The initial period provided in an oil and gas lease to develop the property. Oil & gas leases often have a secondary term referred to as an extension.

PRODUCER’S 88 (Oil and Gas Lease)

Any of a wide variety of lease forms used in the mid-continent and Gulf Coast regions of the country.

PRODUCING MINERAL INTERESTS

A mineral interest upon which production is actively taking place and minerals being removed and marketed. Oil & gas leases often have stipulations that require “commercial quantities” for continuation of a lease.

PRODUCING MINERAL OWNER

An owner of minerals that are currently being produced and sold. Payments made to producing mineral owners are known as royalty payments or royalties.

PRODUCING ON A LEASE BASIS

A well which is producing oil and/or gas from a non-unitized tract.

PROPORTIONATE REDUCTION CLAUSE

In an oil and gas lease, the clause that allows for proportionate reductions in rentals and royalties should the lessor’s interests be less than the entire fee simple estate.

PUGH CLAUSE

A clause often added to an oil lease to limit holding non producing lands or depths beyond primary term of a lease. Also known as a Freestone rider.

RATIFICATION

The act of confirming. Ratification of an oil and gas lease means to confirm it’s existence and terms.

RELEASE

Return of interest from Lessee to Lessor as in a Release of Oil, Gas and Mineral Lease. Also, an instrument whereby a landowner or tenant relinquishes any claim of damage caused by any operations of another party.

RENTAL DIVISION ORDER

A form used to prorate delay rental payments for multiple signature leases.

RIDER

A separate listed provision in a lease. Also called an exhibit or addenda.

ROYALTY

Revenue generally received by a mineral owner from the production of oil or gas, free of costs (except taxes).

ROYALTY INTEREST

An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage.

ROYALTY PERCENTAGES

Percentage of gross or net production that is paid to the mineral owner. Usually described as a fraction (1/8th, 3/16th, 1/6th, 1/5th, 1/4th, etc.)

SECONDARY TERM

The term, usually in a phrase like “..so long thereafter as oil or gas is produced…” that extends a lease beyond its primary term.

SHUT IN ROYALTY

Payment to royalty owners under the terms of a lease which allows the lessee to defer production from a well capable of producing but shut in for lack of a market.

SHUT-IN ROYALTY

Monies or consideration paid to lessor to keep a Lease in effect after a well has been drilled but has been shut down until some future date.

SIGHT DRAFT

Often referred to as a bank draft (or even 30 day sight draft) is an instrument guaranteeing payment to a party within a certain time window, so long as certain conditions are met. Usually, the leasing company uses that period to confirm title ownership.

SUBORDINATION

In the case of an oil and gas lease, a supplementary agreement that resolves the priority of rights to the leased property and subordinates an earlier instrument (a mortgage for example) to the oil and gas lease.

SUSPENDED FUNDS

Money that is held by the operator until certain requirements are met. This often happens when a change in title has taken place.

TOP LEASE

An oil and gas lease which becomes effective only after the expiration (or termination) of an existing lease upon the subject land tract.

UNDEVELOPED ACREAGE

Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas.

VERTICAL PUGH CLAUSE

Limits an operator’s ability to hold all depths of minerals with producing formations. Deals with depths of the minerals instead of areal extent addressed in a traditional Pugh Clause.

W-9

The IRS (Internal Revenue Service) form used to request someone’s TIN (taxpayer identification number).

WARRANTY CLAUSE

In an oil and gas lease, the clause that assures title to the leased property by an express covenant to that effect.

WORKING INTEREST (WI)

The interest in the minerals of the Lessee or holder of the Lease. It is normally the interest which must bear all of the cost of drilling a well.