A Pugh clause in an oil and gas lease is a provision that prevents a single producing well from holding your entire leased tract indefinitely. When the lease’s primary term ends, the clause automatically releases any acreage (and in some versions, any depths) that aren’t actually part of a producing unit. The land that reverts to you becomes free to lease again, often on fresh terms.
If you own mineral rights and you’re being asked to sign a lease, this is one of the handful of provisions that can make the difference between a well-developed property and a thousand acres sitting idle under someone else’s name for decades.
Why You Need One in the First Place
Every oil and gas lease has a habendum clause that sets how long it lasts. The usual structure is a fixed primary term of three to five years, followed by an open-ended secondary term that continues “as long thereafter as oil or gas is produced.” The phrase that does the damage is “from the leased premises.” Under that standard language, production from any well anywhere on the leased land keeps the whole lease alive, even if the well sits on 40 acres of a 2,000-acre tract.
The problem writes itself. A lessee can drill one well on a small corner of your property, produce just enough to satisfy the habendum clause, and hold all the surrounding acreage without ever developing it. You can’t re-lease the idle acreage to a company willing to drill. A Pugh clause breaks that dynamic by splitting the lease at the end of the primary term so that only the acreage genuinely tied to production survives.
How the Clause Actually Works
At the end of the primary term, a Pugh clause looks at your tract and separates it into two piles: acreage that is inside a producing unit, and acreage that isn’t. The producing portion stays under the lease on the original terms. Everything else expires and reverts to you.
You don’t need the lessee’s agreement for this to happen. The release operates by force of the lease language itself. The lessee may still need to record a partial release with the county so the public land records reflect what the lease already accomplished, but the legal release is automatic.
The clause is sometimes called a Freestone Rider or a retained acreage clause, though some practitioners draw a technical distinction between a Pugh clause and a retained acreage clause depending on whether the release reaches only non-pooled acreage or all non-producing acreage.
Horizontal and Vertical Versions
Pugh clauses come in two varieties, and a well-drafted lease often includes both.
Horizontal Pugh Clauses
A horizontal Pugh clause deals with surface acreage. It releases any land outside the boundaries of a producing drilling or spacing unit. If your lease covers 640 acres and only 160 acres fall within the unit around a producing well, the other 480 acres revert to you when the primary term ends.
Vertical Pugh Clauses
A vertical Pugh clause does the same thing with depth. It releases formations below (and sometimes above) the zone where production is occurring. If a well produces from a formation at 5,000 feet, a vertical Pugh clause can hand you back the rights to everything beneath it, which you can then lease separately, often to a different operator targeting a deeper play.
The language inside a vertical clause matters more than people expect. Some clauses draw the line at a fixed depth in feet, which sounds precise and causes problems. Underground formations don’t sit at uniform depths; they rise and fall across a tract. A formation at 5,000 feet on one side of a property may be at 5,400 feet half a mile away. The better approach uses what geologists call the stratigraphic equivalent, defining the cutoff by reference to the base of a named geological formation rather than a number on a tape measure. That keeps the entire productive zone with the lessee while releasing everything genuinely beneath it.
Pure vs. Modified: The Distinction That Catches Landowners Out
This is where a Pugh clause that sounds protective turns out to be hollow.
A pure Pugh clause releases acreage that is not included in a pooled unit at the end of the primary term. Read quickly, that sounds adequate. The gap is this: if the lessee pools your acreage into a unit but never actually produces from it, a pure Pugh clause won’t release it. The acreage is technically in a pooled unit, so it stays under the lease even though nothing is happening on it. On a large tract, a lessee can draw pooled units across the whole property and hold everything without producing a drop.
A modified Pugh clause closes that door. It releases all acreage not in a production unit, pooled or otherwise. The word change is small; the practical effect is large. Pooling alone no longer holds land. Actual production does. On larger tracts especially, the modified version is the one worth insisting on.
What Counts as “Production”
A Pugh clause typically requires production to hold acreage, and courts have long read that to mean production in paying quantities unless the lease says otherwise. A well that technically produces but loses money every month shouldn’t be allowed to lock up your minerals.
The test, with some variation state to state, asks whether the well’s operating expenses exceeded its income over a reasonable stretch of time, and whether a reasonably prudent operator would keep running the well to make a profit rather than purely to speculate on future prices. Routine operating costs count; capital costs like drilling and completion don’t. A few bad months during a price crash won’t kill a lease if the well was profitable before and recovers afterward. Whether production has dropped below paying quantities is a factual question, and if disputed, it goes to a jury.
The point for you: a lessee holding marginal acreage with a struggling well faces the same standard. If the well isn’t economic, it isn’t producing in the sense the Pugh clause requires, and the acreage should fall away.
Shut-In Wells
A shut-in well is capable of producing but isn’t currently flowing, usually because of a pipeline gap or weak prices. Most leases let the lessee pay a small annual shut-in royalty to keep the lease alive in lieu of actual production. The question for you is whether a shut-in well counts as production for Pugh clause purposes. In many leases, it does, which means a single shut-in well paying a nominal royalty could hold an entire unit’s worth of acreage without producing anything.
The fix is lease language that caps how much acreage a shut-in well can hold, limits how long shut-in status can continue, or states plainly that shut-in payments don’t satisfy the Pugh clause’s production requirement. These are negotiating points before you sign, not after.
When the Lease Also Has a Continuous Development Clause
Many modern leases pair a Pugh clause with a continuous development clause, and the two don’t always coexist cleanly. A continuous development clause lets the lessee extend the lease onto undeveloped acreage past the primary term by maintaining an active drilling program, typically requiring a new well within 90 to 180 days after completing or abandoning the previous one.
The conflict is obvious. The Pugh clause says non-producing acreage is released at the end of the primary term. The continuous development clause says the lessee can hold that same acreage by continuing to drill. Which controls depends entirely on how the lease is written. Courts have gone both ways. Pugh clauses using the phrase “notwithstanding anything to the contrary” have been held to override continuous development, releasing acreage even while the lessee was actively drilling elsewhere. Other courts have read continuous development as preserving undeveloped acreage so long as the required drilling pace is maintained.
If your lease has both clauses, make the drafting resolve the conflict in the text. State which one controls, and under what conditions. Ambiguity here is where lawsuits start.
What to Push For in the Lease
A Pugh clause lives or dies on its wording. The provisions worth insisting on, in roughly the order you should raise them:
- A modified Pugh clause, not a pure one, so pooling alone can’t hold your land.
- Both horizontal and vertical coverage, so unused depths under a producing unit also fall away.
- Stratigraphic-equivalent language for the vertical cutoff rather than a fixed depth in feet.
- A statement that the lease applies separately to each production unit, so one unit’s survival doesn’t maintain the lease on others.
- An explicit priority rule if the lease also has a continuous development clause.
- Clear treatment of shut-in wells, specifying whether a shut-in royalty payment is enough to hold acreage under the Pugh clause.
Does Your State Already Give You One?
Most Pugh clauses are negotiated into the lease. A handful of states have enacted statutory versions that apply automatically, generally requiring release of acreage outside producing spacing units within a set period after the primary term ends. The details vary by state: minimum unit sizes, grace periods for commencing new drilling, and timing all differ.
Even where a statutory version exists, it tends to be narrower than what you could negotiate contractually. Treat any statutory Pugh clause as a backstop, not a substitute for careful lease drafting.
What Happens After the Clause Triggers
When the primary term ends and the Pugh clause releases non-producing acreage, the release itself is automatic. Getting it reflected in the public land records is a separate step. The lessee is usually expected to execute and record a partial release with the county recorder’s office. Recording fees are modest, typically around $15 to $75 depending on the jurisdiction.
Lessees don’t always file promptly. An unrecorded release clouds your title and makes it harder to negotiate a new lease on the acreage that has come back to you. If a reasonable period has passed and nothing has been filed, a written demand from an attorney usually moves things along. Some states have statutes that require lessees to file releases within a specified period after lease termination, with penalties for ignoring the deadline.
Once the released acreage is clear of the old lease, every term is open again. Bonus payment, royalty rate, primary term length, and the Pugh clause itself can all be negotiated from scratch. In an active play, the new lease is often substantially better than the one that just expired on the land you got back.