Last Updated on The habendum clause is the part of a contract that is associated with the interests, property rights, and other related aspects of ownership that are handed over to one of the parties to a deal.
In the oil and gas industry, the habendum clause clearly defines the primary term a company holds the mineral rights to a given land but not the obligation to start exploration.
What Is A Habendum Clause?
When it comes to oil and gas leases, the habendum clause states how long the lease remains in force as it defines both the primary and secondary term of the lease. It is one of the fundamental oil and gas clauses.
This lease will remain in effect even if the primary term expires as long as there is actual production in paying quantities or commercial quantities over a long period of time(secondary term). When talking about oil and gas law, this habendum clause has a character that is fee simple absolute.
What Is The Purpose Of The Habendum Clause In Oil And Gas Lease?
Primarily, the habendum clause is divided into primary and secondary terms. Habendum clauses in oil and gas leases give a clear understanding of the contractual terms.
Primary Term
The primary term which is sometimes referred to as the first period is the total duration in which the modern oil company has to determine whether to explore and drill for oil and gas.
For the oil and gas lease to be extended, then the oil company has to meet the production clauses for producing oil and gas as set in the contract. If not, the lease will be terminated as the primary term comes to an end.
Secondary Term
The secondary term is known as a period in which the lease will remain in effect as long as the company continues to produce oil. In addition to the production clause that keeps the lease running, there are also some other provisions that can see the lease extended into the secondary term, and these are known as savings clauses.
The secondary term may also be extended as long as all the oil and gas that was discovered have not been produced yet.
Savings Clauses
Saving clauses could extend the lease into the secondary term without production or reworking operations.
The Shut-In Royalty Clause
This is a type of clause that allows the lease to keep being active when oil or gas is not produced from a well that has the ability to produce in paying quantities. After initial drilling, gas wells are usually shut.
The Operations Clause
This kind of clause perpetuates the lease for the entire period where the company engages in drilling a well. It gets triggered if the company engages in these activities towards the end of the first term.
The Dry Hole / Temporary Cessation of Production Clause
This clause perpetuates the lease for a given grace period if the company goes ahead to drill a hole in a situation where the lease would have been terminated. The company is then required to save the lease by commencing an extra well.
The Force Majeure Clause
This clause lets the company save a lease even when it is not supposed to be possible due to a delay or regulatory action or another reason that is beyond the control of the company.
Production Defined
So what does production actually mean? This is the actual production in commercial quantities over a significant time. This means that the oil company has to make a profit after deducting marketing costs and operating expenses.
The mineral owner might feel that any royalty payment is preferable to no payment while the company might not have an interest in operating a marginal well. In a case like this, it could be a legal issue regarding whether the oil company is under the obligation to operate a marginal well, meaning whether or not a paying quantity is produced by the well.
Delay Rental Payments
During the primary term, the lease might provide for payment of a delay rental as a privilege for the delay of the start of the drilling process. This payment will usually be done if wells have not been commenced during the primary term and the amount paid is usually nominal (an example is about 1$ per mineral acre).
Due to the fact that most primary terms are short (not exceeding three years), a lot of leases state that delay rentals have been prepaid and included in the bonus or do not provide for delay rentals at all.
Is A Habendum Clause Required?
The habendum clause is a vital provision of oil and gas leases. This is because it defines the time in which the rights given to the lessee will be extended, meaning how long the lease will remain active. When there is a habendum clause, the interests of the lessee and lessor are both represented.
Habendum Clause Restrictions
These are some of the restrictions the habendum clause sets in some cases;
Timeshare Lease
There are certain cases where the habendum clauses are restricted by a timeshare lease. The lease would be subject to a countdown in this duration. What this means is that ownership might be transferred back to another person if some criteria are met.
Treaty Lands
If you opt for treaty land agreements, then you will that some of them cap the title transfer rights at 100 years to restrict ownership. This indicates that the land would not be transferrable after 100 years.
When it comes to the investment aspect, it could be very enticing for buyers in the first half of ownership, but that is quickly turned to a discount when the second half commences because of the transfer cap.
Transfer After Death
There are many leases that automatically terminate and have the transfer of ownership cease when the possessor dies. What this signifies is that the title is transferred back to the original owner as soon as the current possessor dies regardless of whether the lease expires or not.
Recommendations
These are some tips you can follow to ensure you get sufficient profit from the habendum clause for a reasonable period.
- You should aim to keep the primary term as short as you can. This would promote early exploration. Generally, you should not be looking to sign oil and gas leases that have a primary term over three years. A one-year primary term could be all you need if you are in an actively developed area.
- If the lease you wish to sign has a delay rental clause, then you should ensure that the lease will terminate automatically and not require more action if the delay rental payment is not made adequately.
- You should not insist on delay rentals in case of a short primary term. There are other various provisions that should your top priorities.
Conclusion
So, the habendum clause is a type of term clause in the lease of deed contracts that sets out the lessee’s rights, types of interests, and other ownership details.
When it comes to oil and gas production, the habendum clause defines the duration in which the mineral interests are subjected to the mineral lease. Since they are consisting of basic legal language, they are included in these contracts to give a full picture of the terms in context.
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