CPL Contract Law for Land Professionals 3 — Questions and Answers
Question 1: A lease's 'habendum clause' reads 'for a term of five years and as long thereafter as oil or gas is produced.' If production ceases for 90 days due to a pipeline dispute, what is the likely consequence?
- The lease automatically terminates at the end of the primary term
- The lease may terminate unless a savings clause such as a cessation of production clause applies (Correct answer)
- The lease continues indefinitely because force majeure covers pipeline disputes
- The habendum clause is voided and the lease converts to a month-to-month tenancy
Correct answer: The lease may terminate unless a savings clause such as a cessation of production clause applies
A cessation of production beyond what is temporary can trigger lease termination under the habendum clause unless the lease contains a cessation-of-production savings clause.
Question 2: Which of the following best describes 'contract novation' in the context of oil and gas assignments?
- The original party remains liable alongside the new party after assignment
- The original obligor is released and a new party is substituted with the obligee's consent (Correct answer)
- An assignment executed without the lessor's approval
- A unilateral modification of lease terms by the lessee
Correct answer: The original obligor is released and a new party is substituted with the obligee's consent
Novation substitutes a new party for an original party with all parties' consent, releasing the original party from further obligation.
Question 3: A landman is reviewing a farmout agreement. Which provision addresses what the farmee must do to earn an assignment of an interest in the acreage?
- Pugh clause
- Earning clause (or earn-in obligation) (Correct answer)
- Continuous drilling obligation
- Working interest conversion clause
Correct answer: Earning clause (or earn-in obligation)
The earning clause specifies the drilling or other obligations the farmee must fulfill to earn a transfer of an interest from the farmor.
Question 4: Under the parol evidence rule, when may extrinsic evidence be admitted to interpret an oil and gas contract?
- Never—the written contract is always the sole source of the parties' agreement
- Only to add terms not found in an integrated agreement
- To resolve ambiguity in the contract's language or to show fraud, mistake, or illegality (Correct answer)
- Only if both parties stipulate that extrinsic evidence is admissible
Correct answer: To resolve ambiguity in the contract's language or to show fraud, mistake, or illegality
The parol evidence rule bars extrinsic evidence to contradict an integrated written agreement but allows it to clarify ambiguous terms or to prove defenses such as fraud or mutual mistake.
Question 5: What is the significance of a 'Mother Hubbard clause' (or anaconda clause) in an oil and gas lease?
- It extends the primary term upon payment of delay rentals
- It captures small strips or tracts adjacent to the described land that the lessor may own (Correct answer)
- It grants the lessee the right to pool the leased premises
- It limits surface use to minimize damage to crops
Correct answer: It captures small strips or tracts adjacent to the described land that the lessor may own
The Mother Hubbard clause picks up small adjacent tracts owned by the lessor that may not be precisely described in the lease's legal description, preventing gaps in coverage.
Question 6: In contract law, 'anticipatory repudiation' occurs when:
- A party fails to perform at the time performance is due
- A party clearly indicates before the performance date that it will not perform its contractual obligations (Correct answer)
- Both parties mutually agree to cancel the contract before its effective date
- A court voids a contract due to unconscionable terms
Correct answer: A party clearly indicates before the performance date that it will not perform its contractual obligations
Anticipatory repudiation is a party's unequivocal statement or action before performance is due indicating that it will breach the contract, entitling the non-breaching party to treat the contract as breached immediately.
Question 7: An oil and gas lease assigns a 3/16 royalty to the lessor. The lessee proposes to pool the tract into a 640-acre unit. After pooling, the lessor's royalty interest in the unit's production will be:
- 3/16 of total unit production regardless of acreage contribution
- 3/16 multiplied by the fraction of the unit represented by the leased tract (Correct answer)
- 1/8 of total unit production as pooling reduces royalties to the statutory minimum
- 3/16 of production allocated to the leased tract only, calculated separately from unit production
Correct answer: 3/16 multiplied by the fraction of the unit represented by the leased tract
Upon pooling, the lessor's royalty is typically reduced proportionately: the lease royalty fraction is multiplied by the ratio of leased acres to total unit acres.
CPL Contract Law for Land Professionals 3
A lease's 'habendum clause' reads 'for a term of five years and as long thereafter as oil or gas is produced.' If production ceases for 90 days due to a pipeline dispute, what is the likely consequence?