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Held by Production Clause

A condition in a contract or lease that reinforces an entity’s authority to manage a property or franchise

What is the Held by Production Clause?

Specific to the oil, gas, and mineral sectors, the “held by production” clause is a condition in a contract or lease that reinforces an entity’s authority to manage a property or franchise, provided that certain gas and oil production requirements are met by the respective entity. The held by production clause can also be referred to as the HBP.

 

Held by Production Clause

 

It is important to note that the explanation of the HBP clause will be different for each lease or contract that it governs. The factors that influence the structure of a lease or contract, regarding the HBP clause, can be negotiated. It means that the finalization of the contract or lease can be equally favorable for parties involved – i.e., the lessee and the lessor. The lessee is normally the party that will be producing the mineral, while the lessor is the party that owns the mineral or commodity.

In practicality, the HBP clause gives a lessee the rights or permission to carry out drilling and exploration activities on a property, with the condition that the lessee meets a certain oil and gas production level. The clause allows the lessee to continue operations on the property beyond the original lease or contract period.

Furthermore, the HBP clause gives mineral and/or energy companies permission to operate into a secondary lease period, without going through lease renegotiation. It allows for uninterrupted operation concerning the economic life cycle relevant to the mineral being produced.

 

Summary

  • Specific to the oil, gas, and mineral sectors, the “held by production” clause is a condition in a contract or lease that reinforces an entity’s authority to manage a property or franchise, provided that certain gas and oil production requirements are met by the respective entity.
  • The “held by production” clause is also referred to as the habendum clause by certain individuals. The habendum clause is a provision in a contract or lease that specifies the type of benefits and rights that can be exercised by a beneficiary or lessee.

 

The Habendum Clause

The “held by production” clause is also referred to as the habendum clause by certain individuals. The habendum clause is a provision in a contract or lease that specifies the type of benefits and rights that can be exercised by a beneficiary or lessee. The clause popularly begins with the phrase, which many now connect to marriage ceremonies, “to have and to hold.”

The contents of the habendum clause may differ from contract to contract; however, ownership is always defined in the clause. Habendum clauses are important in leases and contracts because they state property ownership transfer, and they also make a provision for the extension of a lease period or term.

In mineral and/or oil and gas leases, the lease periods can either be the primary term or the secondary term.

  • A primary term is generally one to three years. It is the maximum amount of time that a lessee has to decide whether or not they intend to pursue exploration and drilling (oil and gas). For a lease to be extended beyond a primary term, the lessee has to meet production levels relevant to the leased area or be involved in drilling and exploration activities on the leased area or a portion thereof.
  • A secondary term comes after the primary term and depends on whether production in paying quantities has been recognized and established. Secondary term clauses usually read as “This lease will remain in force and effect for a term of n years and as long thereafter as oil or gas produced.”

Regarding real estate, the habendum clause stipulates the ownership rights that accompany a property being purchased or leased. Legally, the clause provides an overview of the property or estate that has been granted and the interests that have been granted.

 

Contextual Example of the Held by Production Clause

Consider the following example relevant to oil and gas:

James owns a seven-acre property (a piece of land) in Texas and intends to lease it out to an oil-producing company. The company intends to explore the property for the drilling and extraction of oil. James inserts the following HBP or habendum clause into the lease:

ABC OilCo (the oil company) reserves the right, but not the legal requirement, to operate on Property XYZ (land owned by James) for a fixed term of 3 (three) years. If ABC OilCo (the oil company) begins oil production, ABC OilCo automatically reserves the right to extend the lease term by an additional 5 (five) years.

 

More Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Exculpatory Clause
  • Lease Classifications
  • Hammer Clause
  • Oil and Gas Company Balance Sheets

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