Post Lease Considerations for Landowners

Landowners throughout the shale play who have active leases, but no drilling may be looking at the calendar to see if their lease will expire.
Post Lease Considerations for Landowners - Articles

While leases can be very different from each other, a number of landowners may have signed a lease with a renewal clause, also referred to as an extension of lease clause. This clause generally gives the exploration and production company an option to renew the lease for an additional 5 or 10 year term upon the payment of the upfront bonus (again).

This clause can be confusing to landowners and mineral owners - folks may be under the impression that the Exploration and Production (E & P) company (lessee) has an obligation to renew or extend the lease, and payment is due at the end of the primary term. However, this clause is almost always an option, not a guarantee. This means that it is the company's option to renew or extend the lease under the terms and conditions laid out. They do not have to exercise this option… and in some areas of the state they won't.

At the end of the primary term, minus any activity that could take the lease into a secondary term, the lessee (E&P company) might exercise one of three choices;

  1. The company might exercise their option to renew the lease for another primary term of 5 years (or 10 years, or whatever is described in the lease). This may be the most likely choice if the mineral owner is in an area that has good production history and competition present. This may also be a likely choice if the original lease had a lower bonus payment and lower royalties. Under the terms of the original lease, landowners may not have any choices to make if the lessee exercises this option.
  2. The company might allow the lease to expire and make a new (lower) offer. This may be a likely option for areas that lack competition and have leases that paid more bonus dollars and higher royalties. In this circumstance, landowners would have to decide to accept the offer, reject the offer, or negotiate.
  3. The company might allow your lease to expire and not offer a new lease. This may be a likely option for areas where there has been little to no development, lacking infrastructure and competition. This does not mean that there will never be development in the area, but the lessee has determined that they won't plan on it in the short run.

If you have a lease that is set to expire, find your copy of the lease and read it again. It may be best to plan and anticipate before your lease expires. If you are unsure about the renewal or extension clause, contact an attorney knowledgeable in oil and gas law to review your lease with you.