Poor Man’s Pugh Provision

Separate Parcels on Separate Oil and Gas Leases

A landowner leasing multiple parcels to an Oil and Gas Company should generally seek to lease the multiple parcels on separate Oil and Gas Leases.  When multiple parcels are listed on the same Oil and Gas Lease the Gas Company can typically “hold” all of the parcels under lease by merely meeting the minimum Lease requirement(s) to “extend” the gas lease on any one of the individually identified Leased parcels.
 
Oil and Gas Leases typically “describe” the “Leasehold”, or parcels under the subject Lease, by identifying a single parcel or multiple parcels under the “Description” heading or portion of the Lease.  The Lease may also identify the parcels under lease by including an attached “Exhibit” that specifically identifies and lists multiple parcels included in the subject Lease.  Because the Lease typically identifies the “Leasehold” to include the multiple parcels listed on the Lease or Exhibit page, any activity sufficient to hold any individual parcel is sufficient to hold the entire “leasehold.”  The landowner should seek to avoid listing multiple parcels on the same Gas Lease whenever possible to prevent having all of their parcels “held” under lease when not all of their properties have experienced activity justifying extension of the Gas Lease into the secondary term.

The problem for the landowner is even more troublesome when the leased parcels are not contiguous and may even be in different townships or counties.  We do not want to see landowners have multiple parcels “held” under a single Lease where the company has only engaged in activity sufficient to extend the Lease on one or more parcels, but did meet the requirements to hold the other parcel(s) in a different area.
 
As an extreme example, a landowner may have two large parcels and a third small non-contiguous parcel identified as the “Leasehold” on a single Gas Lease and the gas company files for a drilling permit and only unitizes the small parcel.  The two larger parcels remain without any activity whatsoever.  In many cases this permitting company activity will hold all three of the parcels under the terms of the Oil and Gas Lease, even though the two large parcels have seen no development activity whatsoever.  If the three parcels were leased separately on separate Leases, in our example only the small parcel would remain under lease and the leases involving the larger parcels would terminate due to a lack of activity.  Accordingly, in this example, the two larger parcels’ gas rights would revert back to the landowner such that they would be available to lease again with the potential of a higher bonus and royalty percentage.

I strive in virtually all cases to have my clients’ multiple parcels leased in separate Oil and Gas Leases.  This strategy avoids the example set forth above, and may result in the opportunity for the landowner to have significant financial rewards with a second bite of the leasing apple.  With pure and modified Pugh Provisions becoming more difficult to obtain, separate leases acts as a “Poor Man’s Pugh Provision” such that the gas company will be required to meet the requirements on each Gas Lease to “hold” the individually leased parcels.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners