Oil and Gas Lease Contract Options – Primary vs Secondary
July 13, 2016
If you are looking to sell your oil and gas royalties, it is important to understand that there are different lease contract options which are applicable at different times. Companies looking to purchase mineral rights and pay oil and gas royalties to mineral owners normally lease based on “primary” or “secondary” term options. Understanding these terms and keeping communication lines open between mineral owners and mineral lessees is important to ensure an amicable and profitable relationship.
What Is A Primary Lease Term?
The primary term on any lease for mineral rights is the initial, contracted length of time that mineral owners agree to lease their land and mineral rights. Leases can be any length of time as agreed by the contracting company and the mineral owners, ranging anywhere from a few months to a few years or more. Longer leases could extend for ten years or beyond.
During the primary lease term, even if land is not being actively drilled, the lessee does not need to do anything for the lease to remain in effect. The lease remains intact until the documented expiration date. The lessee normally retains the option to end the lease early, after providing notice to the mineral owner who should always get a release of the lease. This allows for easier record keeping and is a document to give the county notice that the lease is no longer in effect, for taxation and other purposes.
What Is A Secondary Lease Term?
A secondary lease term is one that follows the primary lease term, should the land be actively producing oil or gas at the time the primary lease expires. This continuation of the primary lease is automatic and assumed; it allows the lessee to continue leasing as long as the well is producing. It is important for mineral owners to understand this part of an oil or gas lease, since it means that once they decide to sell their oil and gas royalties, their land could be under contract for quite some time once it starts actively producing.
Continuation of the Primary Lease Term
In some cases, even if the land is not being drilled or actively producing oil or gas, a lessee may wish to extend their primary lease rather than release it. To do this, the lessee must notify the mineral owner of their intent to continue the lease prior to the expiration of the primary lease and then document how long they would like this continuation. Some companies extend primary leases year after year.
This used to be called a delay rental and the lessee could pay additional fees for a delayed release of the primary lease. This is now accommodated by adding an extension clause in the primary lease contract. While most primary leases are paid in full up front, the extension clause gives the lessee the opportunity to extend the primary lease before it expires and pay additional rental fees at that time.
As with any lease, it is essential for both parties to have a clear understanding of lease terms. This is especially true when someone wants to sell oil and gas royalties. A primary lease can expire automatically or be extended; it can also default into a secondary lease if land is actively producing oil or gas. When trying to sell oil and gas royalties, mineral and land owners must understand how these various options can be applied and how they affect the oil and gas royalties being sold!
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