I’m in the process of purchasing a parcel in the southern ute reserve, near Ignacio, where Red Willow is currently active. Purchase and sale agreement has been signed.
The previous owner has a lease agreement with red willow for compensation of $1200 a year, no end date on the lease. I’m no oil expert, but I know that that’s way too low for compensation. No royalties have even been determined in the past.
My question is, once I acquire the parcel, how likely is it that I can any type of royalty agreement/will I have a right to any?
Also, how do I know if the current owner even owns the mineral/subsurface rights? I called county and they have no record of a separation in the past.
Most likely the lease is still in the primary term and hasn’t been drilled yet. $1,200/year might be very reasonable for annual rentals, depending on the acreage involved. Your purchase of the property will not necessarily include the mineral rights. Your Purchase and Sale Agreement will specify whether or not you are buying the mineral estate along with the surface. Many times the seller will reserve the minerals. If Red Willow is paying them lease payments, you can be pretty confident the they own something. The Company will have done their homework before paying anything out.
Are you saying that there is already established production of oil and/ or gas on the parcel of land you are buying and that the current owner is currently receiving a flat $1,200 a year in royalty payments? If this is the case then this is the first time I have ever heard of a royalty being paid out this way. Usually it is stipulated in the lease what the royalty rate will be and is typically between 20-25% these days. That means they would get 20-25% of whatever their net mineral acre interest is in the producing Unit/ Well upon disposition and sale by the operator. Somebody who is leased at a 25% Royalty rate and owns 100% of the minerals under a given tract of land will receive much more $$ than somebody who leased at a 20% Royalty rate and only has a 25% mineral interest in the same tract. That being said, you do not have the information necessary to determine if $1,200 a year is “way too low compensation”. You would need to go to the county courthouse and run record mineral title from patent to determine what the seller of the parcel actually owns. You also state this is on a reserve so I am not sure how Colorado handles mineral interests on reserves.
To answer the first question: It is highly unlikely that the seller is including his mineral interest in the sale of the subject parcel. There will most likely be a mineral reservation in the deed you sign. Depending on the language in the deed, If there is no mineral reservation and seller owns the minerals, then you may be entitled to receive those payments as you would then be the new mineral owner. This almost never happens, especially when there are royalty payments being paid.
As far as your second question, I briefly touched on that above. One way to determine if somebody is a mineral owner is to do your own examination of courthouse property/ deed records. Most people choose to employ an attorney or a landman as most do not know where to begin when it comes to this approach. A simple method would be to go to the courthouse with the guys name and search it in their computer system if they have one. If not ask the county clerk for help running the name and pull all documents associated with his name. If you see that he has signed Oil and Gas Leases then chances are very good he is a mineral owner. Compare the legal descriptions on the lease/leases with the legal description of your parcel and if they match that is a pretty clear indication he/she owns at least a fraction of the minerals. Also sometimes you can google them as some websites have information on mineral owners and the area they own in. This method usually only captures folks who have current or past production of their minerals.
Sorry this is so long, hope it helps in some way!!
The purchase includes two 40 acre parcels, both of which have already been drilled and these drilling rigs/pumps (Not sure what they’re called) have been on the for 15 years now. The current owner inherited the parcels from his father and has no idea about how any of this works. The owner receives $1200 a year on a right of way agreement for just one parcel. For the other parcel, there is no record of any payment required. That’s it.
The current owner just wants the cash he will get from the sale. The owner doesn’t even know if they own the mineral rights or what royalties are.
As for the court house, I called county and found the previous deeds and there is no indication that the surface and mineral rights have been separated.
I will do a bit of research on how CO handles reserves and what rights owners have.
A title search on the property should show who owns the minerals and if any oil and gas leases exist. The seller may not own the minerals, but as surface owner is entitled to an annual payment for easement / ROW / access.
If the minerals are leased by the seller, I would contact the operator of the wells after you get the deed recorded and start from there by notifying them of the ownership change.
Also, search unclaimed funds in the name of the seller and the seller’s father, in Colorado and any other state they have ever lived. MissingMoney is a good way to search multiple states, but isn’t all inclusive. This is sometimes a good way to determine if royalties are owed to a person but are not being received by that person.
You need to make sure that you understand the full legal situation before purchasing. Your title research needs to go all the way back to the first owner (sovereignty in Texas, but likely called something else in Colorado), to see if the minerals were severed - not just deeds to the seller and his father. A ROW is very different from an oil and gas lease. If these are oil wells, and the seller is not receiving any royalties, then either he owns no minerals or someone sold the royalty stream from the wells. If these are not oil wells, then are they water wells taking water out or possibly injection wells for produced water disposition? What rights does the ROW grant? Is it perpetual or does it terminate upon cessation of use of the wells? Can the grantee add additional lines or roads or well sites or anything else - with or without additional compensation to the surface owner? Have a real estate attorney who is experienced in oil and gas or ROW review the terms and explain this to you. If the seller does not own minerals, then the attorney can also explain Colorado law regarding the rights of surface vs minerals. It seems odd to me that the seller claims not to know anything about the land owned by his family for so long. Is it possible that he receives royalties from the minerals and also separately an annual ROW payment for the surface use? And is he selling only the surface and $1,200 to you and will keep the minerals and royalties? Has he explained anything in writing or only in verbal conversations with seller or his broker?