September 27th, 2022
Delay Rentals and Paid-Up Leases
If you’re the beneficiary of a “paid-up” oil and gas lease, you may wonder why your neighbors are collecting payments on their non-producing oil and gas rights while you haven’t seen a dime.
Many oil and gas leases provide for a defined “primary term” (e.g. five-year term) during which the payment of “delay rentals” permits the oil and gas operator to maintain the lease without initiating operations. In contrast, some operators prefer to offer landowners a larger lump-sum bonus payment up front in conjunction with the execution of the lease rather than paying delay rentals. The latter scenario results in a “paid-up” lease.
Operators may opt to delay production on leased property for a multitude of reasons having to do with the energy market or the operator’s resources and objectives. Alternatively, the party seeking to lease your minerals may have no intention of developing your property but hopes to assign your lease to another company at a profit. Most leases allow for the lessee company to unilaterally assign its rights to another party.
A paid-up lease is not necessarily better or worse than one which provides for delay rental payments. However, be aware that if delay rentals are not paid in accordance with the lease terms, you may have grounds to terminate the lease and find another prospective lessee. A lease may also require the property owner to provide notice of nonpayment and give an opportunity for the operator to “cure” the default before the lease is terminated.
If you’re concerned with the terms of a non-producing lease, consult a mineral rights attorney and have a copy of your lease handy.