A problem potentially arises when an individual transfers an oil and gas lease to a third-party, and that oil and gas lease expires, is surrendered, or is otherwise terminated and no longer covers the subject property.  When an existing oil and gas lease is assigned, and that lease terminates, the oil and gas rights will typically revert back to the original owner unless otherwise stipulated in an agreement.  This can create a significant problem for an individual who is assigned an existing oil and gas lease with the mistaken belief that they will own the oil and gas rights forever, but only later learn that the oil and gas lease has expired or otherwise terminated and that they no longer have any interests in the oil and gas rights attached to the property.

Specifically, I recently reviewed a case as part of a settlement wherein a landowner received the ½ interest in an existing oil and gas lease.  However, that oil and gas lease expired, thereby terminating the oil and gas rights under the assignment, and subsequently all of the oil and gas rights reverted back to the assignor.  The assignor then had the ability to re-lease the oil and gas rights for a substantially larger signing bonus and a much higher royalty percentage.  Unfortunately, the individual who was assigned the oil and gas lease did not receive any significant benefit from the assignment of the oil and gas lease expired.  Had the parties entered into a permanent assignment of the oil and gas rights, the situation could have been avoided and the assignee could have participated in the subsequent leasing of their oil and gas rights with a significant financial benefit.

If the intention of the parties is a permanent assignment, merely assigning an existing oil and gas lease very well may not achieve the desired result.  It is absolutely critical when making assignments of oil and gas interests, that the parties completely understand their intention in the assignment, and that the appropriate documentation is prepared to achieve the desired effect.  A mistake in this area could cost thousands or even millions of dollars to the parties, depending upon the amount of oil and gas rights involved the location/geology of the property at issue, as well as several other factors.

As more and more landowners are transferring or assigning oil and gas rights and existing oil and gas leases, this is an area where the landowner must completely understand their exact intentions and seek knowledgeable and professional guidance to properly achieve their goals and avoid an extremely costly mistake.

Should any landowner seek to transfer their interests in an oil and gas lease, or to permanently assign oil and gas rights, the landowner must make sure that they fully understand their intentions and further understand what type of legal documentation needs to be prepared to accurately achieve their goal. 

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners