The Default Clause

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The Default Clause

 The industry lease forms circulating around Alabama in the current market contain default clauses similar to that set out below:

In the event lessor considers that lessee has not complied with all its obligations hereunder, both express and implied, lessor shall notify lessee in writing, setting out specifically in what respects lessee has breached this contract.  Lessee shall then have sixty (60) days after receipt of said notice within which to meet or commence to meet all or any part of the breaches alleged by lessor.  The service of said notice shall be precedent to the bringing of any action by lessor on said lease for any cause, and no such action shall be brought until the lapse of sixty (60) days after service of such notice on lessee.  Neither the service of said notice nor the doing of any acts by lessee aimed to meet all or any of the alleged breaches shall be deemed an admission or presumption that lessee has failed to perform all its obligations hereunder.  Should it be asserted in any notice given to the lessee under the provisions of this paragraph that lessee has failed to comply with any implied obligation or covenant hereof, this lease shall not be subject to cancellation for any such cause except after final judicial ascertainment that such failure exists and lessee has then been afforded a reasonable time to prevent cancellation by complying with and discharging its obligations as to which lessee has been judicially determined to be in default.  If this lease is cancelled for any cause, it shall nevertheless remain in force and effect as to (1) sufficient acreage around each well as to which there are operations to constitute a drilling or maximum allowable unit under applicable governmental regulations, (but in no event less than forty acres), such acreage to be designated by lessee as nearly as practicable in the form of a square centered at the well, or in such shape as then existing spacing rules require; and (2) any part of said land included in a pooled unit on which there are operations.  Lessee shall also have such easements on said land as are necessary to operations on the acreage so retained.

This clause contains language very unfavorable to the lessor.  First, it allows a sixty-day grace period, which is a long time.  More significantly, however, the clause prohibits any forfeiture until after a second grace period of an undetermined “reasonable time” following “final judicial ascertainment that such failure exists.”  To demonstrate how long the oil company could be in default under this type of clause consider the following example.   Assume that the oil company breaches its implied covenant of development and allows drainage by drilling a well across from the trust estate’s land and draining the trust estate with that well.  You or your client would immediately put a demand on the oil company to drill a well on your land offsetting the draining well.  The oil company refuses. If the industry language in the lease is enforceable, you would not be able to cancel the lease until a reasonable time after you get a final judgment determining that the oil company breached its implied covenants.  Getting that final judgment could take a long time.  You could anticipate a fifteen to twenty-four month delay in getting to trial.  You could anticipate another fifteen to twenty-four month delay in getting an appellate decision on the trial court judgment.  This means that you could not begin the cancellation effort until two and one-half to four years after your original notice of default. Then you would have to deal with the meaning of the standard industry default clause.

Most oil companies will work with you on the default clause. The following clause has been accepted by oil companies in Alabama leases:

Failure to Remedy.  Subject to the force majeure provisions of this Lease, in the event Lessee has failed to comply with any other obligations hereunder, other than the payment of royalty or other sums of money as discussed in this Agreement, both express and implied, and Lessee does not remedy such failure within sixty (30) days after receipt of written notice thereof from Lessor, or, if such failure cannot reasonably be remedied within said thirty (30) day period, and Lessee does not commence bona fide efforts to remedy such failure within such thirty (30) day  period and thereafter continuously and diligently pursue such efforts to a successful conclusion, Lessor may terminate this Agreement, effective upon written notice to Lessee, and also may pursue any other remedies available to it.

Copyright 2011 by Edward G, Hawkins. All rights reserved.