LEGAL GUIDE
Written by attorney David Benjamin Ross | Oct 17, 2010

Oil and Gas Leases – Pugh Clauses In Pennsylvania, Potter County, McKean County, Tioga County

Oil and Gas Leases – Pugh Clauses In Pennsylvania, Potter County, McKean County, Tioga County

A perspective from a Pennsylvania oil & gas attorney.

The land man comes to your door with a gas lease and promises of money. Should you just sign the lease without having it reviewed? Absolutely not.

The standard gas lease is written to be extremely favorable to the gas company. Some examples are – automatic renewal at the same price, requiring the land owner to defend the title if a challenge is ever made, absence of adequate environmental protection clauses, and the ability to hold the land beyond the primary term of the lease without clearly defining what activities will allow them to continue to tie up your land without additional compensation.

Land and the oil, gas, and minerals underneath it are most likely the most valuable you own. Everyone understands that buying and selling property requires the services of an attorney but too many people don’t realize that they should have a lease reviewed by an attorney. The truth is that oil and gas leases are much more complex than most real estate closings, and the impact that a lease can have on the enjoyment and value of the land is potentially far greater.

As a brief study of the clauses found and not found in a standard gas lease, I want to touch briefly on just one clause that could have an immense impact on the value the land owner derives during the term of the lease. In oil and gas leases there is something known in the industry at a Pugh Clause. You will not find this clause in the standard lease offered to you, but it is a vitally important clause. Here is how the Pugh clause works. Let say you own 500 acres and part but not all of your land ends up in a producing unit pool. If you don’t have a Pugh clause all of your land will be held under the lease indefinitely but only the portion of the land in the producing unit will be earning you money in the form of royalties. The remainder of the land is held by the gas company under the lease. You get zero income from the land while the gas company can hold your land without paying you anything.

If you have a Pugh clause, the clause will provide that only the portion of the land in a unit pool is held so that you are free to lease out the remaining land to another company so that you can earn money from the land.

Here is what a “typical" Pugh clause looks like. “If, at the end of the Primary Term, a portion or portions of the leased premises is pooled or unitized with lands that are not a portion of the leased premises, so as to form a pooled unit or units, operations on, completion of a well upon, or production from such unit or units will not maintain this lease in force as to that portion of the leased premises not included in such pooled unit or units."

There are many variations. Some clauses allow them to hold the land but have them pay rent to hold the land. Some Pugh clauses are vertical Pugh clauses that only allow them to hold the land up to the depth drilled. The benefit of this type of clause is that if drilling technology develops such that they can drill deeper wells over time then the deeper horizons are still available for you to sell.

Let me know if you liked this article. I hope that you come away with a better understanding of the complexities of gas leases and the importance of every single term – not just the terms that are in the standard lease but terms like the Pugh Clause that aren’t there. These really are issues that require expertise beyond the average layperson’s knowledge base. If you needed surgery you would consult a physician. For something so complicated and with such far reaching impacts, you should consult an attorney. You can find us on the web if you want more information or help with a lease at WWW.RossandRossLaw.com

*** As always, this article is for general informational purposes only. Our firm is not giving legal advice nor does an attorney client relationship exist. If however this article was helpful you would like to learn more, click the link below to visit our web site and to contact us. Lawyer Advertising.

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