Bizarre clauses in term royalty deed

Ownership and Title
1

A company sent my friend an offer to purchase his royalties for a term to end at the expiration of the current OGL, and applying to property in Tarrant County, Texas. My friend asked me to review it and offer an opinion about whether or not it was worth signing. So far, so good.

However, the more I read the offer and the accompanying Term Royalty Deed, the more furious I became because the company was asking my friend to agree to several clauses that I had never seen before in reviewing thousands and thousands of OGLs over the last decade. And these were clauses that in my opinion were potentially unethical.

First of all, the Term Royalty Deed specifies that Grantee shall own the royalties "from and after the Effective Date" of the existing OGL, which is defined as "the date of first production," until the expiration of the existing OGL. So does that mean that Grantee could come after Grantor for any royalties already received on a producing well? Sounds like it to me. Not that the Grantee would do so necessarily, but just giving themselves the option to do so seems very shady to me.

Secondly, the Term Royalty Deed specified that Grantee has the right to perform a "personal credit check" and delve into several other aspects of Grantor's finances, something I had never seen before in a Deed or Lease.

But the third and most bizarre clause in the Term Royalty Deed was a Power of Attorney (POA) that allows Grantee to "correct the description of the property being conveyed, if necessary, to show the actual description of all properties owned by Grantor." From my reading of this clause, Grantee could, without notification of or consent of Grantor, add all other properties owned by Grantor to the legal description, thereby getting more royalties for NO additional consideration! Furthermore, from my reading of this clause, Grantee could obtain title to not only the royalty estate but also the surface estate for the life of the OGL, thereby getting an easement or pad site for NO additional consideration, and creating a cloud on Grantor's title!

I have seen shady royalty deeds, or "royalty contracts" as they were called, while researching title in many parts of Texas, but they were from the 1950's, not any in the last fifty years or so. So am I missing something here and overreacting, or does this offer, as I told my friend, "not pass the smell test?"

2

If you liked derivatives in the financial markets your going to love derivatives in the oil and gas lease business.

Easy money now in trade for future income with lots of strings attached to sue if things don't work out for the buyer. It may be OK for an 85 year old, single, with no desire to leave any future income to heirs. Otherwise the potential burden on the lifestyle is probably not worth the tenuous revenue.

Only the brokers are assured of a sure profit in these deals as they find another way to raise money looking to go into oil and gas. Follow the money and it will lead you to the beneficiary.

Gary L Hutchinson

Minerals Managemnt

3

Pete,

Looks like you have a good handle on that contract. It appears they are fishing for the ignorant or uninformed. If it was my friend I'd suggest they RUN not walk away from that offer. The fact they even presented this nonsense would make me highly suspicious of any subsequent document they offered. That is my two bits.

4

The credit check is a little bizarre, but they would probably need to check to make sure the minerals have not been pledged as collateral on a loan. The other two may be intentional, but more likely off of some form they didn’t think to change. Needs to be tightened up for sure. The underlying lease needs to be reviewed carefully. Is it one of those that can be extended forever at little cost? Does it cover all depths regardless of whether producing? Those are just a couple of issues to look at.

5

Eastern MT, it's funny you said, "RUN not walk away from that offer," because that is EXACTLY what I told my friend at lunchtime after reading the Offer Letter and Term Royalty Deed. That and, "There is no way in H E double L that you are going to sign this Deed." When I spoke so emphatically, he was delighted because his initial concerns were confirmed in spades. I reported the company to TIPRO, NARO, AAPL, RRC, and the Texas Attorney General because, as you theorized, I too think they are preying on the ignorant, elderly, poor, and minorities. My friend fits three of the four categories, and lives in a low-income neighborhood full of minorities and elderly folks. I'm still waiting on a response from the A.G., but nobody else seems willing to do anything whatsoever.

Wade, I also agree with your theory that Grantee wants to perform the credit check to verify whether or not the minerals are encumbered, it's just that I had never seen this clause before in a Deed or Lease. Grantee also could use the credit check to figure out what other properties Grantor owns and then steal those additional royalties and possibly parts of Grantor's surface from him under the POA clause for a pipeline easement, pad site, or tank location. So the credit check could be innocent, but it could also be sleazy, unethical, and contribute to something criminal. The underlying lease can be extended (it's a 3+2), and it covers all depths (it's in the Barnett Shale, not West Texas or Eagle Ford, where depth severances are more common).