For the prior video in this series introducing the different types of leasehold estates held by tenants, click here

Oil, gas, water, mineral and farm leases – demystified and explained

In addition to the typical residential and commercial leases, special use leases exist in California real estate practice.

Oil, gas, water and mineral leases convey the right to use mineral deposits below the earth’s surface.

The purpose of an oil lease is to discover and produce oil or gas. The lease is a tool used by the fee owner of the property to develop and realize the wealth of the land. The tenant provides the money and machinery for exploration, development and operations.

The tenant pays the landlord rent, called a royalty. The tenant then keeps any profits from the sale of oil or minerals the tenant extracts from beneath the surface of the parcel.

A ground lease

on a parcel of real estate is granted to a tenant in exchange for the payment of rent. In a ground lease, rent is based on the rental value of the land in the parcel, whether the parcel is vacant or improved. Fee owners of vacant, unimproved land use leases to induce others to acquire an interest in the property and develop it.

An original tenant under a ground lease constructs their own improvements. Typically, the tenant encumbers their possessory interest in a ground lease with a trust deed lien to provide security for a construction loan.

Master leases benefit fee owners who want the financial advantages of renting fully improved multi-tenant property, but do not want the day-to-day obligations and risks of managing the property.

For instance, the fee owner of a shopping center and a prospective owner-operator agree to a master lease.

Another type of special-use lease is the farm lease, sometimes called a cropping agreement or grazing lease. Here, the tenant operates the farm and pays the landlord either a flat fee rent or a percentage of the value of the crops or livestock produced on the land.