DRILLING-DELAY RENTAL CLAUSE

drilling-delay  rental clause.Oil & gas.  A  provision  in  an  oil-and-gas  lease giving  the  lessee

the  right  to  maintain  the  lease  from  period  to  period  during  the  primary  term  by  paying  delay

rentals instead  of  starting  drilling  operations. •  Lessees  use  drilling-delay  rental  clauses because

courts have said that they obviate any implied covenant to drill a test well on the premises. They

are accepted  by  lessors  because  they  provide  for  periodic  income  from  the  lease. See  “or”lease,

“unless”lease under LEASE. [Cases: Mines and Minerals    78.1(3). C.J.S. Mines and Minerals §§

269–270.]

“The  purpose  of  the  lease  drilling-delay  rental  clause  is  to  ensure  that  the  lessee  has  no

obligation to drill during the primary term by negating any implied obligation to test the premises.

Before drilling-delay rental clauses became common in oil and gas leases, many courts held that

lessees  had  an  implied  duty  to drill a  test well  on  the  leased  premises  within  a  reasonable time

after grant of the lease. The rationale for the implied covenant was that the major consideration for

the grant of the lease by the lessor was the expectation that the property would be tested within a

reasonable  time.  The  courts’  determination  of  what  was  a  reasonable  time  ranged  from  a  few

months to several years, depending upon the circumstances. Lessees found that they could not rely

upon  a  long  stated  term  alone  to  preserve  their  rights.”  John  S.  Lowe,  Oil  and  Gas  Law  in  a

Nutshell 195–96 (3d ed. 1995). [Blacks Law 8th]