Preliminary Thoughts
- There is no “model” lease that has been approved by the state of Ohio
- Consult with an experienced attorney -- terms of a lease are negotiable
Summary of Clauses You Are Likely to Find in Your Lease
- Right to explore, develop, and produce (Granting Clause)
- Authorizes drilling equipment on our property, unless a non-drilling lease is negotiated
- Includes list of minerals to be developed
- May also include list of minerals not to be developed: for example, gravel and sand
- Authorizes Installation of ingress/egress drives, power lines, pipelines, tanks, fencing, compressor stations, and related items, unless limited by lease terms
- Lease term (Habendum Clause): primary and secondary
- Length of primary term (typically five years with right to renew for five)
- Secondary term: initiated by operations or production; end of term often indefinite
- May contain an automatic termination or forfeiture for failure to develop or abide by lease terms
- Financial terms (Royalty Clause)
- Royalty terms (varies between 12.5% and 20% plus)
- Gross vs. net (deduction for post-production costs)
- Shut-in royalties (amount and conditions may vary widely)
- Free gas or payment in lieu if well is on lessor’s property
- May contain a right to audit
- Surface and subsurface provisions
- Legal description of premises
- Leases may be limited to subsurface activities
- Location of well(s), tanks, power lines, pipelines (depth), compressor stations, fencing and gates, ingress/egress driveways, and related items -- minimum distances to a dwelling and other buildings may be specified
- Removal of timber can be limited or compensated for
- Crop damage can be compensated for
- Withdrawal of water can be limited or compensated for
- May specify requirements for restoration and repair of surface disturbance (standards)
- Unitization or pooling rights
- Your property may be included with other property to form a drilling unit
- Pugh clause: release of acreage and formations not included in drilling unit
Additional Matters You May Want Your Lease to Address
- Require bonus payment to be paid (up-front)
- Have well water tested by an independent laboratory: both before and after drilling
- Define when drilling operations “commence”
- Define when a well is “completed”
- Horizontal severance clause: If the premises may contain several producing formations at varying depths, lease each strata separately
- No hazardous materials
- No gas storage
- No storage pits
- No injection well(s)
- Removal of equipment upon completion of drilling related activities
- Maintenance of driveways, tanks, fencing, gates and other equipment and structures
- Insurance coverage: workers comp and employer’s liability, commercial general liability and umbrella liability, business auto, and environmental liability -- coverage to include the landowner
- Indemnification provision
- Assignment rights (notice and consent)
- If there is a mortgage on premises: check with your lender
- Taxes: Ad Valorem, property, CAUV, Forestry, and Conservation Reserve Program. Check with your tax advisor on applicable items plus income tax relating to bonus and royalty payments
- Ensure that the executed lease is recorded with the County Recorder’s office
- Legal disputes: how and where to be addressed
Prepared by Geauga County Planning Commission, January 2012
Note: The foregoing is not meant to constitute or represent legal advice. Please consult with an experienced attorney before entering into a lease on your property.