Lease Provision Penalties: Hard vs Soft - Landman Insider.com

Lease Provision Penalties: Hard vs Soft

In this episode I’d like to chat about a part of lease provisions that people landmen, lease analysts, and land managers may not typically keep track of.  I’ve written several articles in the past on lease provisions, but this will address them from a different perspective. As land professionals, we know that we need to keep track of the provisions that are applicable to agreements we own or manage.  However, it is not always obvious what types of information needs to be captured.  One bit of data that is important for a number of provisions is whether the provision contains a penalty for non-compliance.

First, let’s talk about what I mean by Hard vs Soft.

Go Directly to Jail


Hard Penalty:
The provision contains language that will cause a financial loss to the Lessee if he does not abide by the lease provision.
Examples of Penalties:
  1. Loss of Lease
  2. Monetary Damages (Daily or Lump Sum)
Soft Penalty: The provision contains language that requires the Lessee to perform a certain action, but no loss to the Lessee is implicit if not performed.

Let’s discuss a few provisions where this might come into play:

Release Required:  A provision in the lease requires the Lessee to promptly execute and file a release of lease upon expiration of any lands.

  1. Hard: Lessee shall promptly execute and file a release of Oil and Gas Lease upon expiration of any lands contained therein within 30 days of such expiration.  Failure to comply with this lease provision will result in liquidated damages of $1/net mineral acre/day for each day after 30 days.
  2. Soft: Lessee shall timely execute and file a release of Oil and Gas Lease upon expiration of any lands contained therein.

Consent to Assign: A provision in the lease requires the Lessee to obtain consent from the Lessor before any portion of the lease is assigned.

  1. Hard: Lessee shall obtain written consent from Lessor before any assignment, or partial assignment, of this lease occurs.  Failure to obtain such consent prior to the filing of any assignment will automatically terminate this lease as to lands contained in such assignment or partial assignment.
  2. Soft: Lessee shall obtain written consent from Lessor before any assignment, or partial assignment, of this lease occurs.  Such consent will not be unreasonably withheld.

Don't Burn Money
While this type of provision data might not be necessary on an everyday basis, it can provide some valuable leeway in a time crunch — as well as save you from burning money needlessly.  A few obvious situations where this could arise:

  1. During a divestiture with a short time-frame to close the transaction.  There may not be time to obtain all consents necessary.  Without the above data you would have to individually review all leases, or attempt to obtain consents from all parties.  However, if you have this data available, your team can focus on the leases which contain the most onerous provisions.
  2. In many shale plays the landmen and land administration professionals can be overwhelmed in the fast paced frenzy of drilling.  It is common for non-core activities to be put off until a later date.  One of those activities is filing timely releases of contracts that expire.  Having the information available to quickly determine how many leases might expire over the next several months that could cause a financial liability would certainly allow prioritization of efforts on managing those contracts.
This information is also applicable to field landmen who are negotiating for the purchase of mineral leases.  One should always attempt to negotiate to include “soft” provisions as opposed to those with a “hard” penalty for non-compliance.  Your client will appreciate it, whether they realize it now or not.

While these are only a few examples of why you should capture this type of data, I’m sure there are a myriad of other examples where a department can benefit from this type of data capture.  Do you currently capture this type of data?  Was it useful in the past?  Let us know in the comments below!

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