Guide · lease offers · Exhibit A
What is missing from this oil and gas lease offer?
An offer letter usually quotes three numbers: a bonus per net mineral acre, a royalty fraction, and a primary term in years. The printed lease form attached to that letter was written for the company, and the clauses that protect the owner are almost never in the printed form unless you add them on an Exhibit A addendum.
In one paragraph
When a company landman mails you a printed lease form, the headline bonus and royalty fraction are only the starting point. Six things are usually missing from the printed form: (1) a written bonus agreement stating your net mineral acres, the total bonus payment, and whether you are being given a live check or a sight draft that lets the company walk away before paying; (2) gross-proceeds royalty language that expressly overrides any `"market value at the well"` or `"amount realized"` wording in the printed form; (3) a horizontal Pugh clause releasing acreage outside a producing unit at the end of the primary term; (4) a vertical Pugh (depth-severance) clause releasing depths below the deepest producing interval; (5) a strict cap on how long shut-in royalty payments can hold the lease without actual sales; and (6) deletion of the general warranty of title, plus surface and water protections if you own any share of the surface.
The bonus, the net acres, and the sight draft
Look at paragraph 1 of almost any printed lease form: it recites `"Ten Dollars ($10.00) and other good and valuable consideration"` rather than your actual bonus per net mineral acre. That is intentional so neighboring owners reading the county deed records cannot see what the company paid you.
Because the lease itself does not state the dollar figure, you need the bonus per net mineral acre, the number of net mineral acres the company is paying on, and the payment method in writing. Watch how the payment is made: a bank draft with `"30 banking days"` or `"60 banking days"` printed on its face is not a check. A conditional draft gives the company time to run courthouse records and return the lease unpaid if it decides not to take your tract. Never hand over or record an executed original lease without either a live check at closing or a written escrow/receipt agreement stating when payment clears and when the lease must be returned if unpaid.
Why "free of costs" can fail without overriding "at the well"
In Texas, the words in the printed royalty paragraph control whether gathering, compression, treating, dehydration, processing, and transportation costs are subtracted from your royalty check. Since Heritage Resources, Inc. v. NationsBank (1996), Texas courts have held that if the royalty clause values production `"at the well,"` an added sentence saying `"there shall be no deductions from Lessor's royalty"` can be read as surplusage because gas at the wellhead has not yet incurred post-production costs.
If your goal is a cost-free royalty, the addendum must state that it controls over the printed form, value the royalty on gross proceeds at the point of sale to an unaffiliated third party, and specify how conflict with any `"at the well"` or `"market value at the well"` language in the printed form is resolved.
Horizontal and vertical Pugh clauses (retained acreage)
Under a standard printed pooling clause, if the company pools 10 acres of your 300-acre tract into a unit and drills one producing well anywhere in that unit, the entire 300 acres across all depths from the grass roots to the center of the earth is held by production (`HBP`) for as long as that one well produces in paying quantities.
- Horizontal Pugh clause: Releases all acreage not included inside a producing pooled unit or proration unit at the end of the primary term (or at the end of a continuous-drilling program).
- Vertical Pugh (depth-severance) clause: Releases all depths below the stratigraphic equivalent of the deepest producing perforation (often written as 100 feet below the deepest producing perforation or the base of the producing formation) at the end of the primary term so deep formations cannot be held idle by a shallow well.
Shut-in limits and continuous development
A printed shut-in clause often lets the lessee pay $1.00 per net acre per year while a well capable of producing gas is shut in, with no time limit. Ask for two limits on any shut-in clause: a real annual payment per net mineral acre, and a hard cap on duration (for example, no more than two consecutive years and no more than three years cumulative after the primary term).
Title warranty and surface protections
Strike the general warranty of title in the printed form. Under a general warranty, if a prior deed in your family's chain of title had a reservation you did not know about, the company can ask you to refund part of the bonus. Ask for a lease without warranty of title (or at most a special warranty limited to acts by, through, and under you, with any recovery capped at the bonus actually received).
If you own the surface estate (or an undivided share of it), the printed form gives the lessee broad use of your land and sometimes free use of fresh water. Ask for surface protections in writing: no use of fresh groundwater or surface stock tanks, stated minimum distances from houses, barns, and water wells, buried flowlines below plow depth, double ditching of topsoil, and a separate surface damage schedule for pads, roads, and pipelines.