Once you sign a lease with an operator, the primary term of the lease will keep the entire leased acreage available for use by the lessee operator. When the operator creates a unit for production, your property must be included in that unit for you to receive royalties from the gas produced and sold. However, merely signing a lease with an operator does not guarantee that your entire acreage will be part of a producing unit. When the operator drills, it may want to include in its unit of production only a small portion of your acreage. The portion of your property that is not included in the unit arguably could remain within the control of the operator beyond the primary term of the lease because the operator will contend that the portion within the unit in production extends the term of the lease as to all your property.

To avoid this restriction and to free up the land that is not part of the unit, you should consider the inclusion of a clause in your lease that will permit the portion of your property that is not unitized to revert back to your control once the primary term of the lease ends. To free up the rest of your acreage that is not in the unit of production, you should insert a clause in your lease that allows the acreage that is not part of the unit to revert back to you. This clause will prevent the operator from arguing that the entirety of your acreage is being held by production and still within its control. This clause will allow you to lease the remainder of your property to another producer. This clause is commonly referred to as a Pugh clause.

Keep in mind that Pugh clauses can be both vertical and horizontal. Moreover the use of this clause may require specific language to effectively accomplish your intent. If you are a landowner with a sizeable amount of acreage, you should consider inserting a Pugh clause in your lease or addendum. The attorneys in our law firm would be pleased to assist you in understanding more about this concept.

Bradley M. Bassi, Esquire

Partner at Bassi, McCune, & Vreeland, P.C.

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