The Paid Up Lease Form is the most common vehicle for obtaining an oil and gas lease in most parts of the country.
Many sophisticated landowners demand a rental lease form, most oil companies offer a paid up lease form.
Why is a paid up lease form a good idea for an oil company?
The main reason is that it is near nigh impossible to lose a paid up lease form during the primary term.
In Texas, the payment of royalties is a covenant, not a condition. What does that mean? It means the Lessee promises to pay the royalties, but if he does not he has not breached a condition that would cancel the lease.
The best lease forms provide that the Lessee is required to pay royalties (a condition of lease) or the lease may ipso facto terminate.
There is a case---what a nice case ---that discussed the obligation (covenant) to pay royalties during the primary term and the paid up lease form. The landowner had in their lease that if the Lessee failed on royalty payments, the lease was terminated. However, this particular lease was a paid up lease and it was during the primary term.
The Lessee argued that you cannot terminate a lease that is pre-paid.
Good point.
BUT, the landowner had a real smart attorney and the habendum clause read .. "for 3 years and as long thereafter as oil and gas are produced in paying quantities and the royalties are paid as provided hereinbelow." (emphasis added)
What genius!
Well, guess what I have added to my lease forms? I put in the language in bold above. However, for the clause to work, you must have turned the payment of royalties into a condition of lease, but when you have done that, you have protection during the primary term against a breach of lease for non payment of royalties.