loss of the portion of the failed payments
Surrender 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?
o
TX: paying quantities -> so we need actual
production and marketing
Lease however has a provision that contains a shut-in
royalty provision for when the well fails to actually
produce
review of paragraph 8 of the lease
o
a special limitation is not a covenant, it is a
self-executing consequence
59
Conditions v. Covenants:
o
if 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 should
not 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 properly
Lease shall terminate if royalty payment
is made as a substitute for continued
production but not if it is a fee for failure
to produce
Really seems to depend on the
leniency of the court…Redding pipe
material condition
OK: shut-in royalties clause is not
constructive production and thus does
not result in automatic termination
LA: failure to pay shut-in royalties does
not result in automatic termination
Finds that failure to pay royalties
has the remedy of damages in
most circumstances
60
o
Most modern leases provide that the shut-in
payment is to be made
after
a shut in and
grace period.
Shut-in provision: requires the well being able to
produce in paying quantities
o
Note 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?
o
Is it the end of the calendar year? Is it the lease
anniversary 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 begins
from August 1–September 15, the
due date is changed to the
following September 15.
What if the grace period extends beyond the primary
term?
o
Will payment be made before the end of the
primary term, or will the grace period itself
constitute constructive production?
