Whether you’re reviewing a lease for the first time or have years of experience in the field, it’s always worthwhile to revisit the foundational language that shapes oil and gas agreements. Each clause in an oil and gas lease serves a specific legal and operational function — from outlining the term of the lease to defining compensation, handling unforeseen events, and preserving rights during inactivity.
These brief summaries will help you understand what each clause does, why it matters, and how it affects both lessors and lessees in real-world transactions.
1. The Granting Clause
The first clause, which “grants, demises, leases, and lets,” confers the right to explore for oil and gas and outlines the basic elements of the lease, including the parties, date, consideration, and land description.
2. The Mother Hubbard Clause
This “cover-all” clause ensures that small or inaccurately described pieces of land are still included in the lease, which is essential in areas with vague or irregular land descriptions.
3. The Habendum Clause
Also known as the Term Clause, this clause sets the lease’s duration—typically a fixed primary term followed by a secondary term that depends on production.
4. Royalty Clause
Defines how the lessor is paid, typically as a fraction of production revenue, free from drilling costs but possibly subject to post-production expenses.
5. Drilling or Delay Rental Clause
Allows the lessee to maintain the lease during the primary term by making annual payments, rather than commencing drilling operations immediately.
6. Shut-In Royalty Clause
Keeps the lease valid when a well is capable of producing but temporarily shut in, usually due to pipeline or marketing delays.
7. Savings Clauses
Prevent a lease from terminating when production stops or a dry hole is drilled, if operations resume within a defined time.
8. Pooling Clause
Allows the lessee to combine tracts to form a pooled unit that meets state spacing requirements, thereby keeping all included leases active.
9. Pugh Clause
Provides for the release of acreage that lies outside of a pooled or unitized area, allowing the lessor to lease or develop those lands separately once the primary term ends.
10. Surrender Clause
Lets the lessee release non-productive acreage, avoiding unnecessary payments and helping landowners clear title.
11. Force Majeure Clause
Protects the lease from termination in the event of uncontrollable circumstances, such as storms or new laws, that delay operations.
12. Assignment/Change of Ownership Clause
Covers how interests can be transferred, and when and how the lessee must be notified of a new owner.
13. Warranty Clause
Lets the lessee recover payments if the lessor didn’t actually own the interest they leased—also protects against liens and unpaid taxes. Ensures the lessor guarantees a valid title to the minerals.
14. Proportionate Reduction Clause
Allows the lessee to reduce payments if the lessor owns less than 100% or if acreage is released after lease execution.
15. Legal Effects and Signature Clause
Clarifies that the lease is binding once signed, regardless of whether all parties have executed it.
Understanding these key lease clauses isn’t just about legal compliance — it’s about protecting interests, reducing risk, and ensuring smooth communication between lessors and lessees. Whether you’re negotiating new leases or reviewing existing ones, a solid understanding of these terms provides the confidence to ask the right questions, identify potential issues early, and make informed decisions.
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