The granting clause of a lease contains the required words of grant that create an interest in the lessee.1 This clause is typically found at the beginning of the lease and is often overlooked when drafting a lease, to the detriment of the lessee. The granting clause generally covers three main topics: (i) the leased substances; (ii) the associated easement rights; and (iii) the property description.
The granting clause should include a careful description of the substances covered by the lease. Typical granting clauses include language such as “oil, gas, and other minerals,”2 “oil and all gas of whatsoever nature or kind,”3 or some variation of these simplistic descriptions. Even though this language may, at first glance, seem uncontroversial, the failure to adequately list the substances covered by the lease has led to a multitude of lawsuits.
For example, the failure to adequately define the leased substances can lead to questions whether the lease covers coalbed methane, which depending on the state, may not be included in a general grant of gas. Another problem is encountered when interpreting what is included in the “other minerals” under a lease. The parties to a lease should not rely on a court to dictate what substances are covered by that lease.
As a practical matter, the goal in drafting the leased substances portion of the granting clause is to ensure that the lease covers all substances that are necessary to produce the oil and gas from the leasehold. Any special substances that may be encountered, such as coalbed methane, helium, carbon dioxide, hydrogen, or sulfur, should be individually listed in the lease. By including a list of known or expected substances, together with catch-all language to cover substances that may not yet be known or expected in the field, the lessee can avoid unfavorable interpretations by a court that could render the lease unprofitable or unusable.
Associated Easement Rights
The second part of the granting clause is the description of the easement granted to the lessee. Historically, the grant of an easement and the right to conduct surface operations has been broadly, if not vaguely, described in the lease. The lessee has, instead, relied on the implied right of access to the surface estate arising from the mineral estate’s dominance. Reliance on this implied right of access can be problematic when the surface owner engages in activities that prevent or inhibit oil and gas development or when the surface owner disagrees with and challenges the lessee’s use of the surface estate.
As for split estate lands, the lessee should be careful to ensure that the lease does not grant and that the lessee does not rely on a right of access that was not reserved or conveyed in the deed creating the split estate. Keep in mind that the lessor can only grant the rights that the lessor owns.
To avoid these issues, I recommend that this portion of the granting clause describe the specific activities that the lessee will be conducting on the leased premises, such as construction and location of the various production facilities, powerlines, roads, pipelines, and any other activity that may foreseeably be required to produce the oil and gas. By describing the specific activities, the surface owner is put on notice of the types of activities that the lessee is planning to conduct on the surface estate. If a lawsuit ensues, it will be very difficult if not impossible for the surface owner to argue that they were unaware that the surface would be used for these activities.
I note also that, even though the lessee, through careful drafting of the lease, may be able to secure surface access for gathering facilities and other surface disturbance activities not related to production of oil and gas from the leasehold, this grant of access could be terminated upon expiration of the lease term. For such activities, I recommend that the lessor obtain a separate surface use agreement specifically granting the right to conduct these activities to ensure that they survive termination of the lease.
The Leased Premises
Finally, the granting clause should include a description of the land covered by the lease. This should, of course, include a legal description of the property together with the acreage covered by the leasehold. For small or irregular tracts of land, the lease should include a Mother Hubbard clause4 to ensure that inadequately described property that is adjacent to and contiguous with the leasehold will be covered by the lease.
In the event that the lease is limited in depth, the property description should include language that identifies the specific interval covered by the lease, making sure that the depth description is tied to a measured depth in a specific well. A carefully crafted depth description will avoid confusion as to the actual depth covered by the lease.
A common, but surprising, issue is that some granting clauses fail to include present words of grant. That is, the granting clause describes the activities that can be undertaken on the leasehold but does not expressly grant the rights to the underlying oil and gas.5
Another issue that you should be aware of is that, with horizontal drilling resulting in ever increasingly long laterals, the easement in the granting clause should include language granting the lessee a subsurface easement to accommodate horizontal development. Again, if this subsurface easement will be used for the benefit of lands located outside the leasehold, the subsurface easement should be created by a separate agreement between the parties, thereby preventing the easement from terminating with the underlying lease. Also, for a lease limited by depth, the granting language should include a subsurface easement for all depths that must be traversed in order to access the leased interval.
In summary, through careful drafting of the various components of the granting clause, the lessee can protect itself from unexpected complications and ensure that it is allowed to fully develop and produce the oil and gas resource.