as to payment
- Lessee
pays 1/16th
*
“
subject to
any outstanding
royalty interests”
-
Operator
pays 1/16th
*
provides for
proportionate sharing
of overriding royalty
- Both Lessee and Operator
pay 1/16
th
(here, 50/50)
Overriding Royalty
“Operator
agrees to bear its share
of burdens
created by any
overriding royalty carved out of the
lease ...
Operator’s share of any burden will be
proportional to its working interest
ownership
in the oil and gas lease from
which the burden was created.”
Lease Provision
Lease Provision
“In case Lessee assigns this lease,
in whole or in part …
Lessee shall be relieved
of all
obligations with respect to
the assigned portion or portions
…
upon furnishing the Lessor with
a written transfer or assignment
or a true copy thereof.”
Assignment Provision
Alternatively, the following language may
appear in the assignment:
“Assignee agrees to indemnify
Lessee against any future claims …”
“Wash Out”
Lessee-Assignee
:
How does lessee prevent
assignee
from “washing out” non-operating
interest
(e.g., overriding royalty),
which can occur when assignee
lets lease terminate and then
re-leases property
?
“Wash Out”
Lessee-Assignee
:
How does lessee ensure
overriding royalty recognized
under new lease
?
Assignment Provision
Include language in assignment recognizing
overriding royalty:
“… overriding royalty applies to
renewals and extensions
of the
lease”
Assignment Provision
Alternatively, include a “reassignment”
clause
* Assignee must offer to reassign lease
before letting it terminate
Partial Assignment
Company A takes lease on 640-acre tract
and subsequently assigns east half
(320 acres) to Company B
* If Company B completes productive
well, does entire lease survive?
* If instead Company B fails to pay
delay rentals, does entire lease
terminate?
Partial Assignment
Rights and duties of lessor-lessee
are set
when lease signed
* Lease survives
as long as there is
production
- Production by B Company
keeps lease alive for both halves
of property
Partial Assignment
Failure
by A Company or B Company to pay
delay rentals properly causes lease
to terminate
on both
halves …
… unless
lease provides otherwise
(common in modern leases):
“Rentals
are apportioned
between
leasehold owners ratably based
on the
surface acreage of each …
default
by one
has no effect
on
other owners”
Farmout Agreement
If, close to the end of lease’s primary term,
lessee not
interested in drilling …
then lessee
(“farmor
”) may assign
working
interest in leased acreage
(“farm out”) to an
operator
(“farmee
”) …
in return for farmee agreeing to drill well(s)
