Title Examination Series: Shut-In Royalty Clauses

A shut-in royalty clause provides that a Lessor can pay a royalty for a well that is drilled and capable of production, but for which gas is not being sold. Shut-in clauses will usually provide a time frame upon which the shut-in payments must be made, and provide for the term covered by such payments. Often shut-in payments will be limited to a total cumulative period, or for certain periods at a time. For example, a shut-in provision may limit to “any single period of more than two (2) consecutive years, or three (3) years in the aggregate.” Absent such a provision, a well could potentially be shut-in forever.

A title examiner should note the existence or lack thereof of a shut-in royalty provision, the amount and timing of payments, and any limitations on the use of shut-in royalties to maintain the lease.