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The Oil and Gas Lease — Part II: The Primary Term

In Texas, an oil and gas lease grants to the lessee the fee mineral estate in the leased premises for the term of the lease. The lease provides for an initial term during which the lessee need do nothing in order to keep the lease in effect — called the “primary term.” Thereafter, the lease terminates unless the lessee is producing oil or gas or conducting operations in an effort to discover and produce oil or gas. If the lease remains in effect beyond the primary term, the remaining time the lease is in effect is called the “secondary term.” A typical lease will provide that

“This lease shall remain in effect for a term of three (3) years (the primary term) and as long thereafter as oil or gas is produced from the leased premises or operations, as provided herein, are being conducted on the leased premises.”

The primary term can be one month or ten years or more. Today, most leases provide for a three-year primary term. If no production or operations take place during the primary term, the lease terminates automatically and the mineral estate reverts to the lessor.

It is not necessary to obtain a release of the lease from the lessee in order to terminate the lease. It is, however, a good practice to request a release from the lessee to record in the county records, in order to give notice that the lease is no longer in effect.

It used to be common practice to include in the lease a provision for payment of “delay rentals.” A delay rental clause provides that the lease will terminate at the end of each year during the primary term unless the lessee either commences operations or production or pays the lessor a delay rental, which keeps the lease in effect for another year during the primary term. Under an “unless” delay rental clause, the lessee has no obligation to pay the delay rental, and the lease expires if there is no production or operations and the delay rental is not paid. Delay rentals are usually expressed as a number of dollars per acre.

Today most leases are “paid-up” leases, meaning that all payments necessary to keep the lease in effect during the primary term have been paid. Such leases contain no delay rental clause.

Instead, it is now common for lessees to request an option to extend the primary term. Such a clause provides that the lessee has the option to extend the primary term by making an additional payment to the lessor prior to the end of the primary term. A provision for an option payment has similar effect as a delay rental clause, but is expressed differently. A typical offer might be for a three-year paid-up lease with a two-year option. Usually, the option payment is the same amount as the bonus paid for the initial execution of the lease. The option payment must be tendered to the lessor during the primary term in order to avoid lease termination.

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