as to payment - Lesseepays 1/16th* “subject toany outstanding royalty interests” - Operatorpays 1/16th* provides for proportionate sharingof overriding royalty - Both Lessee and Operatorpay 1/16th(here, 50/50)
Overriding Royalty“Operator agrees to bear its shareof burdenscreated by any overriding royalty carved out of the lease ...Operator’s share of any burden will be proportional to its working interest ownershipin the oil and gas lease from which the burden was created.”
Lease ProvisionLease Provision“In case Lessee assigns this lease, in whole or in part … Lessee shall be relievedof 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 ProvisionAlternatively, the following language may appear in the assignment:“Assignee agrees to indemnifyLessee against any future claims …”
“Wash Out”Lessee-Assignee:How does lessee preventassignee 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 recognizedunder new lease?
Assignment ProvisionInclude language in assignment recognizing overriding royalty:“… overriding royalty applies to renewals and extensionsof the lease”
Assignment ProvisionAlternatively, include a “reassignment” clause* Assignee must offer to reassign leasebefore letting it terminate
Partial AssignmentCompany 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 AssignmentRights and duties of lessor-lesseeare set when lease signed* Lease survivesas long as there is production- Production by B Company keeps lease alive for both halves of property
Partial AssignmentFailureby A Company or B Company to pay delay rentals properly causes lease to terminateon bothhalves …… unlesslease provides otherwise (common in modern leases):“Rentalsare apportionedbetween leasehold owners ratably based on the surface acreage of each … defaultby one has no effecton other owners”
Farmout AgreementIf, 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)