A perspective from a Pennsylvania oil & gas attorney.
The land man comes to your door with a gas lease and promises of money. Should you just sign the lease without having it reviewed?
The standard gas lease is written to be extremely favorable to the gas company. Some examples are - automatic renewal at the same price, requiring the land owner to defend the title if a challenge is ever made, absence of adequate environmental protection clauses, and the ability to hold the land beyond the primary term of the lease without clearly defining what activities will allow them to continue to tie up your land without additional compensation.
Land and the oil, gas, and minerals underneath it are most likely the most valuable you own. Everyone understands that buying and selling property requires the services of an attorney but too many people don't realize that they should have a lease reviewed by an attorney. The truth is that oil and gas leases are much more complex than most real estate closings, and the impact that a lease can have on the enjoyment and value of the land is potentially far greater.
As a brief study of the clauses found and not found in a standard gas lease, this article touches on just one clause that could have an immense impact on the value the land owner derives during the term of the lease. In oil and gas leases there is something known in the industry at a Pugh Clause. You will not find this clause in the standard lease offered to you, but it is a vitally important clause. Here is how the Pugh clause works. Let say you own 500 acres and part but not all of your land ends up in a producing unit pool. If you don't have a Pugh clause all of your land will be held under the lease indefinitely but only the portion of the land in the producing unit will be earning you money in the form of royalties. The remainder of the land is held by the gas company under the lease. You get zero income from the land while the gas company can hold your land without paying you anything.
If you have a Pugh clause, the clause will provide that only the portion of the land in a unit pool is held so that you are free to lease out the remaining land to another company so that you can earn money from the land.
Here is what a "typical" Pugh clause looks like. "If, at the end of the Primary Term, a portion or portions of the leased premises is pooled or unitized with lands that are not a portion of the leased premises, so as to form a pooled unit or units, operations on, completion of a well upon, or production from such unit or units will not maintain this lease in force as to that portion of the leased premises not included in such pooled unit or units."
There are many variations. Some clauses allow them to hold the land but have them pay rent to hold the land. Some Pugh clauses are vertical Pugh clauses that only allow them to hold the land up to the depth drilled. The benefit of this type of clause is that if drilling technology develops such that they can drill deeper wells over time then the deeper horizons are still available for you to sell.
Let me know if you liked this article. I hope that you come away with a better understanding of the complexities of gas leases and the importance of every single term - not just the terms that are in the standard lease but terms like the Pugh Clause that aren't there. These really are issues that require expertise beyond the average layperson's knowledge base. If you needed surgery you would consult a physician. For something so complicated and with such far reaching impacts, you should consult an attorney.
Feel free to contact our firm for a review of your Pennsylvania oil & gas lease.
From offices in Coudersport, Potter County, Pennsylvania, Ross and Ross, LLC serves the personal injury, bankruptcy, social security disability, divorce and family law needs of Western, Northwestern, Central and North Central Pennsylvania including the communities of Coudersport, Galeton, Shinglehouse, West Branch, Smethport, Port Allegany, Bradford, Roulette and Wellsboro, as well as Potter County, McKean County, Tioga County, Bradford County and other areas of Western PA and Central PA.
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