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Your rights in Oil & Gas Leases: Protecting your ability to use your land

There are many issues to be aware of as a landowner when being asked to sign an oil and gas lease. While you want to allow the gas company access to your land to develop the oil and gas contained below the surface area, you also will want to protect your ability to use the land itself for your own purposes, whether that be farming or simply enjoying the natural beauty of the land.

One of the first issues that you should be concerned with is the potential liability relating to the activities being undertaken by the gas company. Oil and gas exploration can be a dirty and potentially dangerous undertaking. There are potential environmental contamination concerns as well as personal liability concerns from accidents that may occur. Frequently oil and gas leases will contain some language regarding indemnification and liability. As a signatory, you will want to make sure that you have competent counsel review these provisions to make sure that you will be protected should anything go wrong with the oil and gas exploration project, whether that be an oil or gas spill or simply an accident. You will also want to make sure that there is language in the lease for the gas company to repair and replace any land that they damage in the process of putting in the equipment as well as any damage they may cause accessing the pipeline or equipment to remove the oil. Finally, you will want to make sure there is a provision for the gas company to pay for any crop damage that may occur to your land as a result of their activities.

Another issue to consider is what portion of the surface area of the land will be available to the gas company for putting in pipelines and other equipment. As a matter of law, a lessee has an implied access right to the minerals contained in the leased land. Some leases provide for an additional rental payment for a portion of the surface area that is used by the gas company in accessing the minerals. Other leases are silent on the issue. Some leases give a blanket right to the gas company to occupy as much of the surface area as is needed to access the mineral rights. You will want to carefully consider what you are willing to agree to and make sure your counsel has negotiated the lease accordingly. Some oil and gas leases also provide for gas storage. Does the lease provide for both oil and gas exploration and underground gas storage?

As part of the consideration, you will want to determine what issues are important to you. For example:

  • What easement rights are contained in the lease?
  • Does the lease specify where the easement is or is it a general grant?
  • Will you as the landowner have any control over where the pipeline will cross your land?

Regardless of the issues, you will want to have those provisions reviewed carefully by counsel to make sure your rights are protected.

With respect to the actual mineral rights, the lease will generally specify what it is the gas company is leasing. Review this provision carefully, as it determines what minerals are being leased and from where they are being leased. Some leases are for the entire sub-surface area; others specify a particular strata of the subsurface.

Of particular importance are the royalty provisions. Make sure you have your counsel carefully explain this to you so you understand under what circumstances royalties are due. For example, there may be different rates for different types of materials. There may be a payment for production. In addition, make sure to review carefully the information regarding what costs may be deducted from the royalty. Michigan law requires that certain costs for production be listed specifically in the lease if the gas company is going to deduct them prior to paying the royalty amount. You will also want to make sure that you understand what records regarding production and costs will be made available to you and where they will be made available.

Another important factor to consider is the term of the lease. What is the primary term? What is the secondary term? Are there annual rental payments? Are there shut-in well payments? How is the gas company able to renew the lease and bind your land and under what conditions? What constitutes "commencement" of drilling under the terms of the lease? Is the gas company allowed to pool your land with other surrounding land to create a larger field?

These are but a few of the issues that arise in negotiating an oil and gas lease. The provisions can be confusing and overwhelming, even to a lawyer who does not specialize in oil and gas law. Make sure that there aren’t any unwanted surprises down the road due to a failure to properly negotiate the oil and gas lease and protect your rights to your property.

Jeremy J. Burchman (J.J.) is an attorney, specializing in business, energy and utility law at Fraser Trebilcock, one of Michigan's oldest law firms with offices in Detroit, Grand Rapids, Lansing and Washington, D.C.  Reach Mr. Burchman at 517.377.0817 or jburchman@fraserlawfirm.com.