An extension clause, if included in a lease, gives the lessee the right (but not the obligation) to extend the lease for a specified number of years after the expiration of its primary term upon the payment of an extension payment.
This clause comes in handy when the primary term of a lease is about to expire, but a well has not yet been drilled upon the leased premises. If the lease contains an extension clause, and your company/client still plans on developing the acreage, it can choose to extend the lease by paying the agreed upon amount. A record of the extension should be filed in the county where the property lies.
As I mentioned above, the lessee does not have to extend the lease. If the operator has decided not to develop the acreage, it can simply let the lease expire. If it stills want to develop, but the lease did not contain an extension clause or its terms are now unfavorable, it could attempt to negotiate an amendment that adds or amends the clause and then pay the extension payment. It could also choose to let the lease expire and then renegotiate a new lease with the lessor. As you can see, there are a lot of options, each with its own costs, risks, and benefits, so the best choice depends on the needs of the operator.