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5 Cards in this Set

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  • Back
Implied covenants are unwritten promises that impose duties on Lessee and protect Lessor.
May be negated by express clauses in the lease agreement.
Standard of Performance [O&G leases]

Lessee acts as a reasonably prudent operator (RPO). Not a fiduciary standard. RPO's are profit-seeking business persons who care how much it costs to drill and produce, though lessors may not care (lessors get cost-free royalties).

Lessor has burden of proof in implied covenant cases to prove that it would be profitable for Lessee to do an act (usually drill a well). Thus, Lessor would have to prove that Lessee can recover o&g at a profit
Does Lessee ever covenant to drill even one well under typical "unless" lease form? No, if Lessee does not drill, lease will eventually expire (absent delay rentals or a savings clause, etc.).

Note: "Unless" lease allows Lessee to pay delay rentals during the primary term. Express clause negates any implied covenant to drill a first well on the tract UNLESS the tract is being drained.
Implied Covenant to Protect Against Drainage

Lessee act as an RPO to protect leased premises against drainage. Requires proof of 3 elements:

1) Substantial drainage
2) Lessee could drill profitable well to offset drainage
3) Damages
Note: To prove profitability, Lessor must prove expected revenues from Lessee's working interest > drilling and production costs. Formula is different from the formula for determining if a well is PPQ under the habendum clause, where Lessee's revenues only had to exceed operating costs (because here the well has not been drilled yet).
Implied Covenant to Market

Market o&g (1) within a reasonable time and (2) at best price realizable.

Both judged by what reasonably prudent operator would do.
Note: Express "market value" royalty clause in a lease negates the implied covenant to base royalties on a higher contract price received by Lessee.
Implied Covenant to Develop

In TX, implied covenant of reasonable development but not an implied covenant to explore. I/C to develop may be broad enough, in some cases, to include exploration.

Standard for breach of I/C to reasonably develop is whether lessor can prove a reasonable expectation of profit from additional drilling, regardless of whether proposed well is on an already proven tract or new strata.