The Leasing Clause

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The Leasing Clause

 An example of the typical industry leasing clause is as follows:

Lessor, in consideration of                                       Dollars, receipt of which is hereby acknowledged, and of the covenants and agreements of lessee hereinafter contained, does hereby grant, lease and let unto lessee the land covered hereby for the purposes and with the exclusive right of exploring, drilling, mining and operating for, producing and owning oil, gas, sulphur and all other minerals (whether or not similar to those mentioned), together with the right to make surveys on said land, lay pipe lines, establish and utilize facilities for surface or subsurface disposal of salt water, construct roads and bridges, dig canals, build tanks, power stations, power lines, telephone lines, employee houses and other structures on said land, necessary or useful in lessee’s operations in exploring, drilling for, producing, treating, storing and transporting minerals produced from the land covered hereby or any other land adjacent thereto.  The land covered hereby, herein called “said land”, is located in the County of                 , State of                             , and is described as follows:

 

[description of land]

 

This lease also covers and includes, in addition to that above described, all land, if any, contiguous or adjacent to or adjoining the land above described and (a) owned or claimed by lessor by limitation, prescription, possession, reversion or unrecorded instrument or (b) as to which lessor has a preference right of acquisition. Lessor agrees to execute any supplemental instrument requested by lessee for a more complete or accurate description of said land.  For the purpose of determining the amount of any bonus or other payment hereunder, said land shall be deemed to contain _________________________ acres, whether actually containing more or less, and the above recital of acreage in any tract shall be deemed to be the true acreage thereof.  Lessor accepts the bonus as lump sum consideration for this lease and all rights, and options hereunder.

 

The first sentence of the second paragraph is called a “Mother Hubbard Clause,” and it picks up small areas owned by the lessor that are adjacent to the described property, but omitted from the legal description: "This lease also covers and includes, in addition to that above described, all land, if any, contiguous or adjacent to or adjoining the land above described and (a) owned or claimed by lessor by limitation, prescription, possession, reversion or unrecorded instrument or (b) as to which lessor has a preference right of acquisition." The clause is enforceable in Alabama. Busken v. AmSouth Bank, 504 So.2d 231 (Ala. 1987).]

Alabama also recognizes the validity of blanket descriptions.  In the case of Wright v. Louisville & N.R. Co., 82 So. 132, 133 (Ala. 1919), the Supreme Court of Alabama upheld the validity of a deed conveying “all the property owned by the grantor, real and personal, and every kind and character, then belonging to said grantor, including all the lands owned by the grantor in fee simple, situated in [certain designated] counties in Alabama.”  See also McMillan v. Aiken, 88 So. 135 (Ala. 1920).

If you or your client hold substantial acreage and if the timing and location are favorable, you may be able to restrict the lease to specified formations or to checkerboard the leasehold acreage so that you or your client retain unleased blocks within the oil company’s prospect area. A checkboard leasing scheme would leave alternating blocks of acreage unleased among leased acreage.  For example:

 

Unleased

Leased

Unleased

Leased

Unleased

Leased

 

The paper companies who held the bulk of acreage underlying the Big Escambia Creek Field refused to lease that field until the oil companies agreed to checkerboard the lease hold acreage.  Under the checkerboard scheme, each alternating section in the original prospect remained unleased.  The checkerboard scheme allowed the paper companies either to demand extremely high royalties for their lands that offset producing wells or to participate as working interest owners in those offset wells

 

Demanding that  the lease cover only specified formations or that blocks of land remained unreleased with in the prospect area can be a deal breaker.  You should not make this type of demand unless you or your client estate hold mineral interests that are so attractive to the oil company that it will do anything to get the deal.

Sometimes you may want to force the oil company to expand the lease hold acreage to include lands not initially wanted by the oil company.  You or your client may have lands that you suspect to be dry because of prior exploration results.  In that case, you can increase the bonus income to you or your client by refusing to lease unless the oil company includes the extra, non-productive  acreage.

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