Tax Adviser May 2024: Lease termination payments: Considerations for the lessor

accounting for lease termination lessor

The BLM will still grant lease suspensions, which will allow an operator to maintain its lease if the suspension requirements are met, and which toll the running of the term of any previously issued permit to drill. Moreover, even if a well is not drilled within the 3-year time period, as noted above, an operator can submit a new APD. The BLM received a comment suggesting that the term “operator” should be revised to explicitly state that the operator holds operating rights and thus has the same obligations as the operating rights owners to plug wells and remediate the well sites. The BLM does not concur with the recommendation, as an operator could be a lessee and may or may not own operating rights. Thereafter, from time to time before the expiration of any existing plan, the Unit Operator shall submit for the approval of the AO a plan for an additional specified period for the development and operation of the unitized land.

Whenever reference is made herein to the Unit Operator, such reference means the Unit Operator acting in that capacity and not as an owner of interest in unitized substances, and the term “working interest owner” when used herein shall include or refer to Unit Operator as the owner of a working interest only when such an interest is owned by it. (3) Has set the surface casing for the well and has submitted a plan, approved by the BLM prior to expiration of the APD approval, for continuously drilling the well to reach the proposed total measured depth in the approved APD. The plan must include the timeframe for continuously drilling and completing the well and any extenuating circumstances that may delay the continuous drilling and completion of the well. (c) Upon the accounting for lease termination lessor removal of drilling or production equipment from the well site which is to be permanently abandoned, the surface of the lands disturbed in connection with the conduct of operations must be reclaimed in accordance with a plan first approved or prescribed by the authorized officer. Upon receipt of the request for suspension of production and the accompanying payment, the authorized officer may approve a suspension of production for that lease year and the lease will not expire during that year for lack of production. (a) Failure to meet the minimum annual tar sand production schedule level in any year will result in the assessment of an advance royalty in lieu of production which will be credited to future production royalty assessments applicable to the lease or unit.

C. Congressional Review Act

The BLM will require a bond as provided under § 3104 for operations conducted in a subsurface storage agreement. Because the increased royalty amounts, bonus bids, and rentals, and the EOI fee, are non-discretionary, the BLM is not required to include these increases in its evaluation of the impacts on small businesses. Congress passed the RFA “to establish as a principle of regulatory issuance that agencies shall endeavor, consistent with the objectives of the rule and of applicable statutes, to fit regulatory and informational requirements to the scale of the businesses, organizations, and governmental jurisdictions subject to regulation. To achieve this principle, agencies are required to solicit and consider flexible regulatory proposals and to explain the rationale for their actions to assure that such proposals are given serious consideration.” Public Law , section 2(b), 94 Stat. The RFA requires agencies to analyze alternatives to their rules with an eye towards minimizing significant impacts on small entities. In this case, the BLM cannot consider alternatives to mandatory instructions in the IRA.

Wigwam LLC had entered into a ten-year lease agreement with Chopin Ltd to lease a specific machine to help with the manufacturing of guitars. However, at the start of year three, Wigwam no longer requires the machine and immediately terminates the lease due to a new way of manufacturing. As stipulated in the lease contract, a lease termination incurs a $500,000 termination fee and, in doing so, will remove the obligation of future lease payments and have the ability to return the leased machinery. In doing so, the lessee no longer has access to the right of use asset and no future lease payments. Depending on the facts and circumstances of the lease agreement, the lessee may be required to make a termination payment. IFRS 16 requires the calculation of a modified lease liability, and an adjustment to the asset value to reflect the partial termination with any variance recorded to gain or loss in the current period.


A more reasonable approach may be to try to use experience to determine the average duration of the eviction process and amortize the payment over this period. However, where the 12-month rule applies, taxpayers may have a reasonable position to expense the termination payments immediately, as the benefit period for purposes of the 12-month rule is considered to be the unexpired term of the lease. IFRS 16 highlights that land typically has an indefinite economic life (IFRS 16.B55-B57). Consequently, it’s implausible that the lease term will cover the majority of the economic life of the underlying land.

  • (a) The royalty rate on all combined hydrocarbon leases or tar sand leases is 16.67 percent of the value of production removed or sold from a lease.
  • These recommendations would substantially change the meaning of the paragraph, which was intended to address situations when the BLM inadvertently omits a stipulation when preparing parcels for a lease sale.
  • Commenters pointed to language in a draft version of the IRA bill that included nationwide bonds, which Congress ultimately removed before the law was enacted.
  • In Latter, the documents stated that the lessees were “willing to assign and transfer all their right, title and interest in their said existing lease.” The package from the lessor also included payments to reimburse the lessees for their improvements.
  • Therefore, the rule will impact future leases on Federal land; however, it will not impact current leases.
  • A combined hydrocarbon lease will be for a primary term of 10 years and for so long thereafter as oil or gas is produced in paying quantities.

The contract must be accompanied by a statement showing all the interests held by the contractor in the area or field and the proposed or agreed plan for development and operation of the field. All the contracts held by the same contractor in the area or field must be submitted for approval at the same time and full disclosure of the projects made. (d) The BLM will notify the surface owner of the proposed surface owner protection bond amount. (b) If the acreage is incorrectly indicated in a Notice of Competitive Lease Sale, payment of the rental based on the error is curable within 15 calendar days of receipt of notice from the authorized officer of the error. (a) Each competitive bid submitted in response to a Notice of Competitive Lease Sale must be accompanied by full payment of the first year’s rental based on the total acreage for that lease in the Notice of Competitive Lease Sale.

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