The adjacent lands clause is often a forgotten clause in oil, gas and mineral leases. However, the clause can prove to be vital for an operator’s successful and cost effective development of a field. In general, a mineral lease grants to the lessee the right to use the surface of the leased premises as reasonably necessary for the full exploration of the leased premises itself (or lands pooled therewith). An adjacent lands clause lets the lessee also use the surface of the leased premises to conduct operations on adjacent lands, even if they are not owned by the lessor or pooled with the leased premises.
An adjacent lands clause is usually found within the granting clause of a lease. The Bath Form Louisiana Spec. 14-BR1-2A-NL Paid up R2/99 contains a typical adjacent lands clause:
Lessor…hereby grants, leases and lets unto Lessee, the exclusive right to enter upon and use the land hereinafter described for the exploration for and production of oil, gas, sulphur, and all other minerals, together with the use of the surface of the land for all purposes incident to the exploration for and production, ownership, possession and transportation of said minerals (either from sand land or acreage pooled therewith), and the right to dispose of salt water, with the right of ingress and egress to and from said lands at all times for such purpose, including for operations hereunder or in connection with similar operations on adjoining lands, the land to which this lease applies and which is affected hereby being situated in ________ Parish, Louisiana, and described as follows…
Other leases contain such clauses elsewhere. For example, older State of Louisiana leases sometimes have their own specific adjacent lands clauses tucked away in the continuous operations clause. Therefore, you should never take for granted what each provision in a lease contains.
The most well-known Louisiana case interpreting adjacent land clauses is Caskey v. Kelly Oil Co., 737 So.2d 1257 (1999). In Caskey, the Louisiana Supreme Court ruled that a lessee under a lease with an adjacent lands clause could improve and use an existing road on the leased premises to conduct operations on adjacent land not owned by the lessors, whether or not the lessors would receive any benefit from the lessee’s use of the road; the lessee’s use of the road was subject only to the requirement under La. R.S. 31:11 that the lessee exercise its rights with reasonable regard for the rights of the lessors. In deciding this issue, the Court discussed the purpose of the adjacent lands clause: the adjacent lands clause is a burden on the leased premises but promotes the efficient development of oil and gas fields and the State of Louisiana’s policy of developing mineral resources; the clause is intended to permit a lessee to develop an oil and gas field without regard to property lines and without the need to construct duplicative roads, pipelines, tank farms and other facilities and resolves the impracticality for a mineral lessee to determine in advance which tracts of land will share in the production from a specific well, or whether a specific well will be productive, or whether the leased premises subject to the adjacent lands clause may later be pooled or unitized with producing wells on adjacent lands. Thus, the adjacent lands clause can go a long way to help an operator develop a field cost effectively.
The Court also noted that when several leases in a field contain adjacent lands clauses, there is a potential benefit to all lessors. Thus, the Court reasoned that the fact that a particular lessor ultimately does not receive any direct benefits from the lessee’s use of the surface of its leased premises to conduct operations on adjacent lands does not affect the validity of the contractual provision.
The Court further noted that the clause is limited to the term of the lease and thus is effective after the primary term only if there is production in paying quantities from the leased premises or lands pooled with the leased premises or operations to obtain such production. Thus, a lessee cannot rely on an adjacent lands clause unless the lease has been otherwise properly maintained (such as by the proper payment of rentals, timely operations and/or production in paying quantities).
It is important to appreciate the difference between “adjacent” and “adjoining” lands because you may see either word used depending upon the individual lease. The court in Melder v. Great Americans Insurance Co., 9 So.2d 243 (La. App. 2d Cir. 1942), distinguished between adjoining and adjacent by defining adjoining as meaning contiguous, abutting, or touching as distinguished from lying near or adjacent. In Ortego v. Sevarg Co., 550 So.2d 340 (La. 3d Cir. 1989), the court addressed an adjacent lands clause that used the term “adjoining land”; it ruled that a lessee using the lessor’s property for a pipeline to service mineral production from property located across a road from the lessor’s property was not adjoining because the road was not proven to be owned by one of the lessee’s lessors. Thus, it is important to note whether the word adjoining or adjacent is used within a particular adjacent lands clause and where exactly the other lands at issue are located in relation to the leased premises.
The first step in analyzing whether a lessee may use the surface or subsurface of the leased premises for operations elsewhere is identifying whether the lease contains an adjacent lands clause. If such a clause is identified, then the proper analysis, according to the court in Caskey, is not whether the lessor receives a mutual benefit from the lessee’s use of the surface or subsurface of lessor’s lands but whether the lessee’s use of the lessor’s lands is reasonable. The court in East v. Pan American Petroleum Corp. 168 So.2d 426 (La. App. 3d Cir. 1964), suggests that a lessee’s use of surface rights is subject to the requirements that its acts be ordinary, customary, reasonable, and necessary in connection with its mineral operations.
The reasonable standard derives from La. R.S. 31:11, which requires that the landowner and the mineral owner each exercise their respective rights with reasonable regard for those of the other. The standard of what is reasonable is flexible and requires judicial interpretation to determine reasonableness under a given set of circumstances. This standard of reasonableness is not the same as a negligence standard. As the court in Broussard v. Northcott Exploration Co., 481 So.2d 125 (1986), noted, whether a lessee’s actions are reasonable should be decided on a case by case basis. Thus, the reasonableness of a lessee’s use of the leased premises for operations or production elsewhere may be a fact intensive inquiry that may differ from case to case. For example, in East, the court ruled that a lessee acted unreasonably in excavating dirt from the leased premises to build a board road to access a well site on an adjacent tract. However, in Caskey, the court ruled that the lessee acted reasonably in improving a “pig trail” by removing timber and creating a shale road that could be used to access a well site on adjacent lands even though the lessor did not participate in the well.
In short, each lease should be analyzed to determine if it allows for the lessee to use the leased premises for production from or operations on other lands and, if so, exactly what other lands come within the scope of the clause. If the lease allows the lessee to use the leased premises for operations on other lands, then the question whether a lessee’s use is reasonable will be decided on a case by case basis depending on the facts.
If you should have any questions regarding adjacent lands language in a mineral lease, or the lack thereof, then please do not hesitate to contact us at Gordon Arata.