10 Nov Understanding a “Pugh Clause”
• Origin of the Pugh Clause
The Pugh Clause originated in 1947, when a Louisiana lawyer, Lawrence G. Pugh, drafted a clause to prevent the holding of non-pooled acreage in his clientʼs lease while certain portions of the lease acreage were being held under pooled arrangements. The Louisiana Supreme Court held that production from a unit including a portion of a leased tract will maintain the lease in force as to all lands covered by the lease even if they are not contiguous.
• Purpose of Pugh Clause
The main purpose of a Pugh Clause is to “protect the lessor from the anomaly of having the entire property held under a lease by production from a very small portion.” The clause is designed to “foster reasonable development of leased property.”
• What is a Pugh Clause and what does it mean?
A Pugh Clause is a clause added to an oil and gas lease to limit holdings on non- producing lands or depths beyond the primary term of the lease. Simply put, a Pugh Clause means that end of a primary term lease, the lease will expire as to any part of the land that is not being used by the oil & gas company.
• How does a Pugh Clause affect land lease owners?
Gas leases used by oil and gas companies drilling in Pennsylvania allow the companies to combine multiple properties/leases into a pooled production unit. The landowners/ lessors then have to share royalties from wells based on their share of the ownership. In most cases, the production units are in the form of a rectangle with the boundaries not following the original property lines. The landowner/lessor will receive royalties only for the portion of the land included in the production unit, yet the entire property is extended into the secondary term of the lease and held by production. If a landowner/lessor has only a small portion of land within that unit, it is not a favorable position to be in. The Pugh Clause is designed to rectify this situation.
• What happens when there is no Pugh Clause present in the lease?
Without a Pugh Clause, the balance of acreage outside of any of your land included in a pool would not be included to calculate royalty payments, yet would still be under the original lease.
• Who does a Pugh Clause benefit?
The Pugh Clause most definitely is to the benefit of the landholder/lessor.
• Is a Pugh Clause included in a standard gas leases?
Generally, no. The standard gas lease is usually written to be favorable to the oil and gas leasing company or other businesses with an interest in leasing land for oil & gas.
• Is there a “standard language” Pugh Clause?
There are as many variations of Pugh Clauses as there are persons drafting the clauses. Some allow the oil & gas company to hold the land but have them pay rent in order to do so. Some are vertical clauses that only allow the company to hold the land up to the depth drilled.