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Negotiating Your Lease: Termination Clause

Negotiating Your Lease: Termination Clause

Many royalty owners are surprised to learn that an oil and gas producer’s failure to pay royalties does not authorize termination of the lease.  Often, clients will seek our assistance where a company has failed to send due royalties despite ongoing production.   Prevailing law indicates that mineral owners are not entitled to cancellation of the lease as a remedy for untimely or nonpayment of royalties unless that remedy is explicit in the lease.  The lease will remain in effect, and the burden will be on you to recover the unpaid royalties.

In most royalty disputes, the fundamental question comes down to: what does the lease say? If you did not negotiate your lease terms with the aid of an expert, it’s likely that your remedy is limited to filing a lawsuit against the oil and gas producer for the amounts due.  This can present challenges as the producer may have also included terms that confine you to arbitration or provide other structures on how and when you may file suit.

Any lease that an oil and gas company has presented you will have been meticulously constructed to advantage itself.  As the mineral owner, your mantra must be: KNOW and NEGOTIATE.  You need to know precisely what the lease terms mean and not to be afraid to negotiate terms.  An attorney with experience in oil and gas transactions can help you on both fronts.

As an example, the company’s lease may not include any terms at all that involve when the company neglects to pay timely royalties.  The absence of those terms may indicate industry-favorable laws applicable in your state. See McCausland v. Wagner (Pa. Super. Ct. 2013) (lessee’s failure to pay royalties not grounds for terminating the lease). 

It is perfectly reasonable and appropriate for you to negotiate terms that place the burden of making timely royalty payments on the producer.  You may include terms in your lease that grant you the option to terminate the lease arrangement if royalties are not paid on time.  You may include terms that impose added costs for late payments.  You may insist on access to unlimited civil remedies for breach of contract in any proper jurisdiction.  You likely have much more leverage for negotiation than you realize! If you are considering leasing your oil and gas interests, please consider hiring a mineral rights attorney.  You can save yourself a lot of headaches down the road.

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