Implied Covenants in Oil and Gas Leases
The past several years has seen court disputes concerning leases in the gas and oil sector mainly because of the term “implied” which does not provide concise language interpretation. The main idea behind implied agreements generally indicates that there should be mutual benefit and leases are supposed to work as intended. In such covenants, the lessee usually has more control with more bargaining power. For example, a lease may be granted for 4 years so long as there is production of gas and oil thereafter. According to court interpretation, there should be realization of income or sufficient profit for the lease to withhold (McFarland, 2015). This means that if no production occurs within this period, the lessee is not entitled to any breach. Similarly, temporary termination of production is not a qualifying factor for lease cessation if the lessee is capable of restoration.
Based on the above insights, implied obligations have been considered to cover three duties which include premise development, leasehold protection, and lease administration. In relation to development, the lessee is accorded the obligation which is considered as reasonable diligence by the operator (McFarland, 2015). This means that only prudent sections should be allowed for development unless reasonable quantities or profits are expected. Protection, on the other hand, entitles recovery of damages upon proof of extensive damage on the leased land. For example, in the Amoco v. Alexander case, drainage damages were awarded to Alexander after proof that Amoco failed to protect wide flow drainage (Justia Law, n.d). Finally, administration involves proper management of leased resources for the benefit of both parties. For example, if a well dries due to acidity, the lessee is not responsible for damages in instances where information was not supplied concerning such occurrences by the land owner.
Justia Law (n.d). Amoco Production Co. v. Alexander. Retrieved from http://law.justia.com/cases/texas/supreme-court/1981/b-9131-0.html.
McFarland, J. (2015). The Oil and Gas Lease-Part V: Implied Covenants. Retrieved from http://www.oilandgaslawyerblog.com/2015/01/the-oil-and-gas-lease-part-v.html.