rentals

Can a Terminated Lease Be Reinstated?

Federal leases can be terminated for a number of different reasons.  The question answered here is whether or not they can be reinstated.  The simple answer to that question is the same as all other legal questions: it depends. It depends on the reason the lease was terminated, how long the lease has been terminated, and what steps the lessee has taken to rectify the termination.

Three common ways that a federal lease will terminate are: (1) the expiration of the primary term, (2) the cessation of production in the extended term, or (3) the lessee’s failure to make proper rental payments.  All federal leases issued under the Mineral Leasing Act are granted for a specified period of time referred to as the primary term.  If there is no discovery of oil or gas in paying quantities, the lease will terminate automatically upon the expiration of the primary term.[1]  On the other hand, if there is a discovery, the lease will be extended past its primary term so long thereafter as there is a well capable of producing in paying quantities.  If production ceases and no reworking or drilling operations are commenced within 60 days of cessation of production, the lease will terminate automatically.  In both cases, the terminated leases may not be reinstated.

Generally, federal leases require the payment of an annual rental during the primary term and before discovery of oil and gas in paying quantities.  If the lessee fails to make proper and timely rental payments, the lease will automatically terminate. However, a federal lease terminated for failure to make proper rental payments can be reinstated under certain circumstances. The purpose of such reinstatements is to give lessees a second chance to pay the annual rental, but there are certain limitations.

Where a rental is timely paid, but the rental amount is insufficient by a nominal amount or by reliance on an incorrect bill, the lease will not automatically terminate.[2]  However, the nominal amount must be under $100 or 5% of the total rental amount, whichever is less, and must be paid within the period stated in a Notice of Deficiency issued by the supervising agency (usually 15 days).[3]  In all other cases, a lease terminated for failure to make proper and timely rental payments may only be reinstated under a Class I or Class II reinstatement.[4]

Class I Reinstatement: A lease may be reinstated as a Class I reinstatement if the following conditions are met:[5]

(1) The full rental amount must be paid within 20 days after the due date;

(2) The lessee must show that the failure to timely pay the rental amount was either justified or was not due to a lack of the lessee’s reasonable diligence;

(3) Within 60 days after receipt of a notice of termination, the lessee files a petition for reinstatement, together with a non-refundable filing fee (currently $80)[6] and the required rental, including any back rental or royalty accrued on the lease if the lease becomes productive prior to reinstatement; and

(4) The terminated lands cannot be subject to a newly-issued oil and gas lease or otherwise have been disposed of or become unavailable for leasing.

By regulation, “reasonable diligence” includes a rental payment postmarked by the U.S. Postal Service, common carrier, or their equivalent (but not by private postal meters) on or before the due date (or the next day if the agency is closed for a holiday).[7]  In most instances, where a Class I reinstatement is granted under reasonable diligence, the lessee is able to establish that the rental payment was lost in the mail or the lessee erroneously received notice from the BLM that the lease was in producing status.

Circumstances have been held “justifiable” where there are factors outside of the lessee’s control, such a death or illness of the lessee or member of his or her close family or a natural disaster occurring immediately prior to the due date cause a failure to exercise reasonable diligence.[8]  Generally, it is very difficult to demonstrate a “justifiable” cause.  For example, Class I reinstatement petitions have been denied where the lessee suffered from a chronic illness and where the lessee was in the middle of relocating offices.

If a Class I reinstatement is granted, the lease is restored as the lease existed prior to termination.  There is no change to the rental or royalty rates going forward or the primary term of the lease.

Class II Reinstatement: For leases that terminate after August 8, 2005, a lease may be reinstated as a Class II reinstatement if the following conditions are met:[9]

(1) The full rental amount is not paid within 20 days after the due date where the failure was either justified or not due to a lack of the lessee’s reasonable diligence or any time if the failure was inadvertent;

(2) On or before the earlier of 60 days after receipt of a notice of termination or 24 months after the termination of the lease, the lessee files a petition for reinstatement, together with a non-refundable filing fee of $500 and the required rental, including any back rental or royalty (at the increased rates, if applicable, see below) accrued on the lease if the lease becomes productive prior to reinstatement;

(3) Notice must be published in the Federal Register at least 30 days prior to the date of reinstatement, the cost of which shall be reimbursed by the lessee, and the authorized officer shall provide notice of the reinstatement to the Chairpersons of the Committee on Interior and Insular Affairs of the House of Representatives and of the Committee on Energy and Natural Resources of the Senate; and

(4) The terminated lands cannot be subject to a newly-issued oil and gas lease or otherwise have been disposed of or become unavailable for leasing.

Where the failure to timely pay is inadvertent generally means all circumstances where the lessee did not intentionally fail to make the rental payment.  It does not include, circumstances where the lessee was not financially able to pay or simply chose not to pay.[10]

If a Class II reinstatement is granted, the reinstatement is effective as of the date of termination.   However, for payments accruing after the termination date, the rental rate shall be increased by $5 per acre for non-competitive leases and $10 per acre for competitive leases and the royalty rate shall be increased to 16⅔% for non-competitive leases and by an additional 4% from the then-current rate for competitive leases.[11]  The increased rates are set forth in an agreement, which must be signed by all lessees.

There is no change to the primary term of the lease.  However, if the reinstatement of a lease either: (1) occurs after the expiration of the primary term or any extension thereof, or (2) will not afford the lessee a reasonable opportunity to continue operations under the lease, the authorized officer may extend the term of the reinstated lease for such period as determined reasonable, but in no event for more than 2 years from the date of the reinstatement and so long thereafter as oil or gas is produced in paying quantities.[12]

The benefit of Class II reinstatements is that, unlike Class I reinstatements, they do not require the lessee to justify when it failed to make proper rental payments.  Instead, the lessee only needs to show that the lessee did not deliberately fail to make the payment.  However, they are subject to increased rental and royalty rates.

[1] See Trent Maxwell, The Habendum Clause – ‘Til Production Ceases Do Us Part, The Oil & Gas Report, available at: http://www.theoilandgasreport.com/2015/02/05/the-habendum-clause-til-production-ceases-do-us-part-2 (explaining what it means to have a well producing in paying quantities).

[2] See PRM Exploration Co., 91 IBLA 165, GFS (O&G) 33 (1986).

[3] 43 C.F.R. § 3108.2-1(b).

[4] There is also a Class III reinstatement that deals with terminated leases stemming from a specific set of facts involving an unpatented oil placer mining claim. Although this will not be discussed at length, it is worth noting that a terminated oil placer mining claim can be converted/reinstated if it meets the necessary requirements set forth in 43 C.F.R. § 3108.2-4.

[5] 43 C.F.R. § 3108.2-2.

[6] See 43 C.F.R. § 3000.12 for up-to-date filing fees.

[7] 43 C.F.R. § 3108.2-2.

[8] See Torao Neishi, 102 IBLA 49, GFS (O&G) 41 (1988), citing Louis Samuel, 8 IBLA 268, GFS *O&G) 72 (1972), but see also William H. Siegfried, 135 IBLA 155, GFS (O&G) 11 (1996) (finding that a chronic illness is not justifiable).

[9] 43 C.F.R. § 3108.2-3.  The term for leases that terminate on or after August 8, 2005 is 15 months after the termination of the lease instead of 24 months.

[10] See Torao Neishi, 102 IBLA 49, GFS (O&G) 41 (1988).

[11] 43 C.F.R. §§ 3103.2-2(d) and (e) and 43 C.F.R. § 3103.3-1(a).

[12] 43 C.F.R. § 3108.2-3(e).

What Are the Types of Federal Oil and Gas Leases?

An Introduction to Federal Oil and Gas Leasing

The federal government is responsible for oil and gas leasing under three different types of land: onshore public lands, offshore public lands, and tribal lands.  For purposes of this series, we will focus on onshore public lands and, more specifically, those under the jurisdiction of the Bureau of Land Management (“BLM”).  Below is a brief history of federal oil and gas leasing, a summary of the most common types of oil and gas leases administered by the BLM (renewal / exchange leases, public domain leases, and right-of-way leases), and a basic outline of the federal oil and gas leasing process today.

History of federal leasing.  Prior to the Mineral Leasing Act of 1920 (“MLA”), the development of oil and gas on public lands was done by making a placer location under the General Mining Act of 1872.  Since the MLA was passed, oil and gas on public lands has been developed by leasing.  Specifically, the MLA originally authorized the issuance of competitive leases for lands within a known geologic structure (“KGS”) of a producing oil or gas field and prospecting permits for lands not within a KGS, until the Act of August 21, 1935, which replaced prospecting permits with non-competitive leases.  Although the MLA was amended numerous times, the basic framework remained the same from 1935 to 1987, when the Federal Onshore Oil and Gas Leasing Reform Act (“FOOGLRA”) was passed.  In addition to the numerous amendments to the MLA and FOOGLRA, Congress also passed additional laws affecting oil and gas development, including the Multiple Mineral Development Act of 1954, the National Environmental Policy Act of 1969, the Federal Land Policy and Management Act of 1976, the Federal Oil and Gas Royalty Management Act of 1982, and the Energy Policy Act of 1992.

Renewal and exchange leases.  Renewal and exchange leases are generally found only in very old oil and gas fields.  As discussed above, under the original MLA, the BLM issued oil and gas prospecting permits for lands not within a KGS.  Upon a valuable discovery of oil or gas, the permittee became entitled to obtain a lease on the greater of 160 acres or 1/4th of the permit area and a preferential right to lease the remainder of the permit area.  Under the MLA, such earned leases, as well as competitive leases issued before 1935, had 20-year fixed terms with no Habendum clause (i.e., no “and so long thereafter” language), but the lessee had a preferential right to a “renewal lease” for a fixed successive period of 10 years.  Renewal leases were subject to certain requirements, such as a limitation on existing overriding royalty interests of 5%.  There is no limit on the amount of times a renewal lease could be renewed, although a 1990 amendment to the MLA now provides that a renewal lease renewed after November 15, 1990 will continue for 20 years and so long thereafter.  Due to the uncertainty of operating under a fixed term lease, subsequent amendments to the MLA also authorized the lessee of any 20-year lease (including renewals of such leases) or any lease issued before August 8, 1946 to exchange the lease for an “exchange lease” with the customary Habendum clause.  Because they involve oil and gas leases issued prior to 1946, there are few active renewal and exchange leases today.

Public domain leases.  Public domain leases are the most common federal oil and gas leases.  They cover lands or mineral deposits owned by the United States that were never granted to the state, patented into fee ownership, or disposed of under any public land law (there are certain exceptions, such as lands incorporated by cities, towns, or villages, lands in national parks, monuments, or reserves, or lands in wilderness areas or wilderness study areas).  They can also cover acquired lands – lands patented into fee ownership and subsequently reacquired by the federal government – if consented to by the surface managing agency.  Public domain leases are authorized under the MLA.  However, because of the numerous amendments to the MLA, the history and terms of such leases vary significantly.  For example, the primary term, rentals, and royalties depend on several factors, including: whether the lease was issued competitively or non-competitively, the period of time in which the lease was issued, and the period in time in which the rental or royalty was required.  As a result, it is important to review the lease to confirm the terms of a public domain lease.  Where the original grant of the lease has been lost or destroyed, a review and understanding of the history of the MLA and applicable regulations becomes necessary.  Because most oil and gas leases issued today are public domain leases, we discuss current leasing of public domain lands in the final section of this article below.

Right-of-way leases.  The lands under federal rights-of-way, not subject to an oil and gas lease at the time the right-of-way was issued, may only be leased under the Right-of-Way Leasing Act of 1930 (the ROW Act).  Although the ROW Act appears to include all rights-of-way, the BLM typically only issues right-of-way leases under railroads and reservoirs.  Under the ROW Act, the right-of-way owner is the only party that may lease the lands, but an owner or lessee of the oil and gas rights in the adjoining lands may submit a compensatory royalty bid and the BLM will issue either a right-of-way lease to the right-of-way owner or a compensatory royalty agreement to the adjoining owner or lessee, whichever is the most advantageous to the United States.  Because of the limited instances where lands fall under this category, right-of-way leases are less common than public domain leases.

Oil and gas leasing today.  The MLA, as amended, and FOOGLRA still govern the leasing of public domain lands for oil and gas today.  Such leasing is accomplished as follows:

  • Lands available for oil and gas leasing are nominated
  • The BLM selects tracts to be included in an upcoming lease sale
  • Notice of the lease sale is made
  • The BLM considers any protests filed and makes a final list of included tracts
  • The lease sale is held and the tracts are offered for oral bidding
  • The BLM issues a lease on each tract to the highest qualified bidder

In the event any tract does not receive any bids or the minimum acceptable bid, the tract becomes available to be leased non-competitively for a period of two years following the lease sale to the first qualified applicant.  The current lease terms for both newly issued competitive and non-competitive oil and gas leases are a primary term of 10 years, a royalty interest of 12.5%, and rentals of $1.50 per acre for the first five years, then $2 per acre thereafter.  After a discovery on the leased lands, a minimum royalty of not less than the annual rental is due in lieu of the annual rental.