loss of the portion of the failed paymentsSurrender clause: allows the lessee to release/surrender part of the lease that is found to be unproductive. Real property law would normally not allow the lessee to sever the land. Prevention of automatic termination: view clauses on p. 222 to see examples of these. Freeman v. Magnolia:Is there a lease and what jurisdiction?oTX: paying quantities -> so we need actual production and marketingLease however has a provision that contains a shut-inroyalty provision for when the well fails to actually producereview of paragraph 8 of the leaseoa special limitation is not a covenant, it is a self-executing consequence 59
Conditions v. Covenants: oif payment of the shut-in royalty is made a condition for continuance of the lease or failure to pay is made a special limitation, improper payment terminates the lease. On the other hand, if the language creates a mere promise to pay, then the lease generally shouldnot terminate if payment is not made, but the lessor should be able to recover the payments. If the constructive production defined by the clause is the existence of a well on the premises capable of production in paying quantities, then the lease should not terminate at the end of the primary term even if the lessee fails to pay the shut-in royalties properlyLease shall terminate if royalty payment is made as a substitute for continued production but not if it is a fee for failure to produceReally seems to depend on the leniency of the court…Redding pipematerial conditionOK: shut-in royalties clause is not constructive production and thus does not result in automatic terminationLA: failure to pay shut-in royalties does not result in automatic terminationFinds that failure to pay royalties has the remedy of damages in most circumstances60
oMost modern leases provide that the shut-in payment is to be made aftera shut in and grace period. Shut-in provision: requires the well being able to produce in paying quantitiesoNote 3 Problem: “While there is a gas well on this Lease…, but gas is not being sold or used, Lessee shall pay or tender annually at the end of each yearly period during which gas is not sold or used, as royalty an amount equal to the delay rental period provided for …”What does yearly period mean?oIs it the end of the calendar year? Is it the leaseanniversary date? Is it the shut-in date?If it runs from the shut-in date, as Smith believes, then it the date of payment changes annually. For example, if shut-in occurs on June 1, and then production beginsfrom August 1–September 15, the due date is changed to the following September 15.What if the grace period extends beyond the primaryterm?oWill payment be made before the end of the primary term, or will the grace period itself constitute constructive production?