An oil and gas lease is regarded as terminable upon breach of a covenant, express or implied, if the interests of the owner are substantially prejudiced by such breach. Generally, a lease may expressly limit the lessee’s transfers of “percent interests” in the working interest to safeguard the purpose of the lease. If the lessee retains only a small percentage interest, that would be detrimental to the interests of the lessor.
An assignment is different from a sublease. While an assignment merely transfers an existing estate into new hands, a sublease creates a new estate. In the absence of express agreements in the lease concerning assignment and subletting, the lessee can assign the lease or sublet the premises as a whole, or transfer one part of the leasehold and retain the balance[i]. However, if the assignee makes any alternative arrangement without the consent of the lessor, the lessor has the right to treat the assignee as an interloper and may declare the lease terminated.
In an assignment agreement in which an overriding royalty is reserved in the transferor, the assignee has to provide notice of an intention to allow the lease to lapse. An instrument of transfer may also contain a forfeiture clause, a provision for liquidated damages, and a warranty of title by the grantor.
A lessee will not be permitted to fail in the development of the property and to hold the lease for speculative or other purposes unless such holding is in strict compliance with his/her contract. Further, the transfer must be for a valuable and sufficient consideration other than such development[ii]. If the transferee is an innocent purchaser, the law protects such person’s rights, provided the purchaser must show that s/he made the purchase in good faith and without notice of any outstanding claims or equities[iii]. However, this protection is not available to a purchaser who acts in bad faith or fails to comply with the requirements. For instance, if a recorded lease contract includes a clause providing that a conveyance by the landowner of any part of the land will not affect the lessee until written notice of conveyance is given to the lessee by both the landowner and the purchaser, such a clause must be honored. If the purchaser of a portion of the land fails to give the requisite notice and takes the land subject to the lessee’s right of selection, and if the lessee selects the tract purchased, the lessee is entitled to have the title quieted as against the purchaser.
It is to be noted that the mere assignment of an oil and gas lease reserving an overriding royalty interest does not in itself create a confidential or fiduciary relationship between the assignor and assignee. If such a relationship is created, it must be by the terms of the assignment or by other acts of the parties[iv].
A covenant for the renewal of a lease runs with the land and is binding upon the successor of the lessor.
Generally, a lessor under an ordinary lease not involving gas or oil interests, cannot sue a sublessee for money rental. However, rent or royalty under an oil lease is a percentage of the oil produced, or the proceeds therefrom. The lessor in an oil and gas lease has a property right in the royalty percentage of oil produced from the leased land, and the lessee, by executing a sublease rather than an assignment, cannot defeat the lessor’s direct right against the party by whom the oil has been produced from the leased premises.
[i] Cox v. United States, 358 F. Supp. 798 (N.D. W. Va. 1973).
[ii] Baldwin v. Kubetz, 148 Cal. App. 2d 937 (Cal. App. 2d Dist. 1957).
[iv] Exploration Co. v. Vega Oil & Gas Co., 843 S.W.2d 123 (Tex. App. Houston 14th Dist. 1992).