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Defining The Lessee’s Covenants to Drill and Develop a Lease

Keith B. Hall, Drafting and Negotiating the Modern Oil and Gas Lease

Implied covenants are obligations that are not expressly imposed by a contract, but which courts nevertheless find are binding on one or more parties to the contract. Courts routinely hold that oil and gas lessees are bound by several implied covenants. This paper reviews the various implied covenants that have been recognized as binding oil and gas lessees, and examines the justifications for recognizing those covenants. The paper then discusses various issues that sometimes arise in implied covenants disputes, including the remedies that are available, certain procedural issues, and whether a lessee must continue to perform his implied contractual duties while a lawsuit is pending in which a lessor argues that a lease is invalid or that the lease is no longer in effect. Finally, the paper addresses the application of implied covenants in situations involving new technology and discusses the application of implied covenants in shale plays. A Primer on Implied Covenants History of and Justifications for Implied Covenants For more than 100 years, courts have held that a mineral lessee’s duties include various implied covenants that are not expressly stated in a lease. The earliest case to recognize the existence of implied covenants may have been Stoddard v. Emery, an 1889 case in which the Pennsylvania Supreme Court stated in dicta that oil and gas lessees are bound by an implied covenant to reasonably develop the leased premises. Three years later, the Pennsylvania Supreme Court again stated that a lessee was bound by an implied covenant of reasonable development, and just a few years later, the same court held that lessees are bound by an implied covenant to protect the leased premises against drainage. Ohio soon followed suit in recognizing implied