Held-by-Production Clause

What it is

A held-by-production clause (also called a habendum clause) is a provision in oil, natural gas, or mineral leases that allows the lessee (typically an energy company) to continue operating beyond the lease’s primary term so long as the property is producing a minimum amount of oil, gas, or mineral value. In practice, production that yields at least a “minimum paying quantity”—enough revenue to exceed operating costs—keeps the lease in force for the life of the productive operations.

How it works

• Leases commonly have two parts: a fixed primary term and an open-ended secondary term. The primary term lasts for a set number of years; the secondary term continues while production persists.
• If a producing well on the leased property meets the minimum paying quantity, the entire leasehold remains effective without renegotiation or extension payments.
• This allows companies to avoid renewing leases in areas that become more valuable as production increases, preserving their investment and operational continuity.

Why companies use it

• Protects investments in drilling, infrastructure, and development.
• Avoids the need to renegotiate or pay higher lease rates if surrounding acreage becomes more valuable.
• Enables companies to operate throughout the economic life of a field, capturing long-term returns.

Impact on landowners

• Landowners may be unable to renegotiate terms or benefit from rising lease values if a lessee maintains a lease through continued production.
• Disputes can arise over what qualifies as “minimum paying quantity” or whether production is sufficient to hold the lease.
• The clause can limit a landowner’s ability to lease to others or capture windfalls from nearby booms.

Example: shale boom and fracking

When horizontal hydraulic fracturing proved highly profitable in certain shale formations, leasing competition and land values rose dramatically. Companies responded by securing held-by-production provisions to lock in lower lease rates and preserve acreage—even acquiring older leases with marginal wells and using new technology to restore production. This practice contributed to conflicts between landowners seeking higher payments and companies protecting their investments.

Key takeaways

• A held-by-production (habendum) clause extends a lease beyond its primary term while production continues at or above a minimum paying quantity.
• It benefits lessees by preserving leasehold rights and investment value but can disadvantage landowners when market values rise.
• Clear definitions of what constitutes adequate production are critical to avoid disputes.

Conclusion

Held-by-production clauses are a standard mechanism in energy and mineral leases that tie the life of the lease to ongoing production. They are an important tool for companies managing long-lived assets, but they also create potential tensions with landowners when production and lease values change over time.