Best if printed in landscape.

2) GRANTING, WARRANTY, AND LESSER INTEREST CLAUSES

The granting clause describes the land subject to the lease, the substances subject to the lease, and the right of the company to use the subject lands.

Remember -- under state law, mineral owner has right to enter onto the surface to explore for and produce minerals, but the mineral owner must transfer that right to the oil company as part of the mineral lease in order for the company to have that right.  link to court case

Also remember -- under North Dakota law, only the minerals named in a mineral lease are being transferred. link to NDCC.

Mineral owners should exercise due care in deciding how the total number of mineral acres under their control should be leased. This decision, probably, more than any other, will either increase or greatly decrease many of the problems arising between mineral owners and oil companies throughout the potentially long duration of the lease. Remember that a typical lease will govern all land covered by the lease for the full duration of the lease, which could be several decades if production is obtained. In other words, one well -- even a low producer -- will ordinarily hold all leased acreage. Thus, a mineral owner may have only one chance to negotiate the terms of a lease, so the mineral owner must “get it right the first time.”

In most cases, the following guideline should be applied in North Dakota. Regardless of how many mineral acres are to be leased, any land within a given surveyed quarter section (160 acres) should have its own lease. For example, if the mineral owner had 80 mineral acres in the south half of the northwest quarter in a given section, and another 80 acres in the north half of the southwest quarter in the same section, each quarter section should have its own lease. Following this guideline will eliminate many of the problems associated with allowing a company hold on large acreages with only minimal development. A company may object to this limitation where horizontal drilling is contemplated because horizontal wells require larger tracts, but the company can address this problem through compulsory pooling, discussed below. If this general guideline is followed, the lease “pooling” clause, discussed below, should be deleted from the lease to keep the company from pooling the various leases.

An alternative to executing several leases is to execute a single lease with a “retained acreage” (or "continuous development") clause. This clause effectively subdivides a lease into several leases by providing that a single well will extend the primary term of the lease only regarding that portion of the leased tract that is included in the drilling unit for that well. Drilling units are discussed below. A retained acreage clause should be drafted by knowledgeable legal counsel.

Retained acreages clauses must not be confused with so-called “Pugh” (or “Freestone”) clause that apply only if the lessee exercises its authority to pool the mineral owner’s interest on the mineral owner’s behalf under the lease pooling clause. As already indicated and as is further discussed below, the pooling clause should be deleted from the lease.

A Mother Hubbard or Coverall Clause should also be deleted. These provisions, which normally follow the space in the lease form where the leased tract is described, could cause problems by allowing the company to claim adjacent acreages when mineral acres are divided and leased in small tracts. Both provisions are normally contained in leases used in states where surveying errors or metes and bounds description are common, but there is generally little need for such provisions in a lease covering lands in North Dakota.

Granting Clause

The granting clause of an oil and gas lease outlines the purpose of the lease and describes the land subject to the lease, the use of the land, and the substances that can be exploited. This clause is normally the first substantive provision in a lease.

North Dakota law stipulates that no mineral lease shall be interpreted as passing any interest to any minerals except those minerals specifically named in the lease. It further states that if the minerals are named, the lease also includes their compounds and byproducts, and "in the case of oil and gas, all associated hydrocarbons produced in a liquid or gaseous form so named shall be deemed to be included in the mineral named.” See N.D.C.C. §47-10-24.

Mineral owners should only lease those minerals the company demands, thus retaining the rights to all other minerals for possible later leasing. Therefore, a granting clause that includes the statement "oil and gas and related by-products and fluid hydrocarbons produced therewith" should sufficiently protect the mineral owner in most situations and be adequate for the company.

Other suggestions for evaluating the granting clause include:

1. Be sure that the granting clause allows surface use only for operations related directly to the development of the leased tract. The granting clause should not allow the company to use the surface to develop other lands.
2. To avoid any dispute between the surface and mineral owners, specify that the extraction method used by the company cannot strip away nor substantially destroy the surface except to build those facilities necessary for the drilling and production process.
3. In the case of severed minerals, recognize that a mineral severance does not necessarily sever all mineral substances. A mineral severance also does not likely sever subsurface storage (e.g., the subsurface storage of gas). Whether or not the minerals have been severed, the granting clause of an oil and gas lease should not allow the company to store oil or gas or other substances on or under the leased acreage, except for the temporary surface storage of oil produced from the leased acreage in a tank battery. If the company desires to lease storage rights, a storage lease should be separately negotiated with appropriate payment provisions to the mineral owner.
4. Similarly, the granting clause should not allow the company to dispose of saltwater or other waste on or under the leased acreage, except for the subsurface disposal of saltwater and other permitted wastes from wells drilled on the leased acreage. If the company desires to lease disposal rights, a disposal lease should be separately negotiated with appropriate payment provisions to the mineral owner.
5. If other minerals are named in the lease, the royalty clause (discussed below) should provide for royalty on all included substances.
6. If the mineral owner desires to limit surface use in any way, such as not allowing a well site within 1320 feet of the mineral owner’s house, these limitations should be expressly included in the lease.

Warranty Clause

Leases generally contain a warranty clause whereby the mineral owner warrants and agrees to defend his or her title. Further, the company is authorized to discharge any lien, mortgage, or encumbrance on the property at the mineral owner’s expense. This clause should be deleted. Moreover, to avoid the possible implication of implied warranties the mineral owner should expressly disclaim any warranty of title (e.g., see paragraph 2 of the State lease). Since landmen for companies conduct preliminary investigations as to the ownership of mineral interests prior to any lease negotiations and conduct detailed investigations before paying lease bonus, the warranty clause should not be necessary to protect the company.

Lesser Interest Clause

The lesser interest (or proportionate reduction) clause is not objectionable, but the mineral owner must understand how it operates. The granting clause will simply describe the land by legal description. Its wording assumes that the mineral owner is leasing the full mineral interest even though the mineral owner may only own a fraction of the minerals. The lesser interest clause allows the lessee to reduce the stated lease benefits (perhaps bonus, rentals, and certainly royalty) to reflect a fractional interest (e.g., see paragraph 2 of the State lease).

Assume mineral owner owns only a 1/4 interest in the minerals and leases for a 1/5 royalty. In the event of production, the lessee would pay mineral owner a net royalty of 1/20 (1/4 X 1/5). Although not solely by reason of the lesser interest clause, the royalty would be further proportionately reduced if the mineral owner’s tract comprised only 1/2 of the drilling unit for the well to 1/40 (1/2 X 1/4 X 1/5).

The lesser interest clause allows the company to reduce the stated benefits to reflect the mineral owner’s actual interest in the property and avoids the necessity of specifying the actual interest held by the mineral owner in the granting clause.

Next Pages

Mineral Lease -- Introduction and Habendum clause

Mineral Lease -- Granting clause

Mineral Lease -- Royalty clause

Mineral Lease -- Saving clauses

Mineral Lease -- Other clauses and Closing Thoughts

Last Updated July 26, 2010

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