I am just about ready to sign a lease agreement with a landman, but something is bothering me a bit. Can someone please clarify this? It almost sounds as if the lessee has the ability to pay $1 per acre per year for the privilege of sitting on this lease forever until they get around to drilling. Is that wrong?
“During any period after expiration of the primary term hereof when gas is not being so sold or used and the well or wells are shut in and there is no current production of oil or operations on said leased premises sufficient to keep this lease in force, Lessee shall pay or tender a royalty of One Dollar ($1.00) per year per net royalty acre retained hereunder, such payment or tender to be made, on or before the later of ninety (90) days following the date of shut in or the anniversary date of this lease during the period such well is shut in, to the Lessor. When such payment or tender is made it will be considered that gas is being produced within the meaning of the entire lease.”
I would not sign it with that language. It could put you in limbo for decades. I have been able to get a much higher per acre value and you definitely need a very short time limit on it with quite specific language. Suggest you get legal advice, because that clause implies that there are other clauses in your potential lease that need a good legal eye. Most draft leases are not in the mineral owners’ favor. An investment in good legal advice upfront can save you quite a bit in lost royalties over the life of a lease. I am not giving legal advice.
Lessee is hereby granted the right at any time and from time to time to pool or unitize the leased premises or any portion or portions thereof, as to all strata or any stratum or strata, with any other lands as to all strata or any stratum or strata, for the production primarily of oil or primarily of gas with or without distillate. However, no unit for the production primarily of oil shall embrace more than 40 acres, or for the production primarily of gas with or without distillate for more than 640 acres; provided that if any government regulation shall prescribe a spacing pattern for the development of the lease or allocate a producing allowable based on acreage per well, then any such unit may embrace as much additional acreage as may be so prescribed or as may be used in such allocation of allowable. Lessee shall file written unit designations in the country in which the leased premises are located. Operations upon and production from the unit shall be treated as if such operations were upon or such production were from the leased premises whether or not the well or wells are located thereon. The entire acreage within a unit shall be treated for all purposes as if it were covered by and included in this lease except that the royalty on production from the unit shall be as below provided, and except that in calculating the amount of any shut in gas royalties, only the part of the acreage originally leased and then actually embraced by this lease shall be counted. In respect to production from the unit, Lessee shall pay Lessor, in liue of other royalties thereon, only such proportion of the royalties stipulated herein as the amount of his acreage placed in the unit, or his royalty interest therein on an acreage basis bears to the total acreage in the unit.
If said Lessor owns a less interest in the above described land than the entire and undivided fee simple estate therein, then the royalties herein provided shall be paid to the Lessor only in the proportion which his interest bears to the whole and undivided fee.
Lessee shall have the right to use, free of cost, gas, oil, and water produced on said land for its operations thereon, except water from wells of Lessor.
Lessee shall have the right at any time to remove all machinery and fixtures placed on said premises, including the right to draw and remove casing.
If the estate of either party hereto is assigned, and the privilege of assigning in whole or in part is expressly allowed, the covenants hereof shall extend to their heirs, executors, administrators, successors or assigns. However, no change or division in ownership of the land or royalties shall enlarge the obligations or diminish the rights of Lessee. No change in the ownership of the land or royalties shall be binding on the Lessee until after the lessee has been furnished with a written transfer or assignment or a true copy thereof. In case Lessee assigns this lease, in whole or in part, Lessee shall be relieved of all obligations with respect to the assigned portion or portions arising subsequent to the date of assignment.
Lessee mayh at any time and from time to time surrender this lease as to any part or parts of the leased premises by delivering or mailing a release thereof to Lessor, or by placing a release of record in the proper County.
Lessor hereby warrants and agrees to defend the title to the lands herein described and agrees that the Lessee shall have the right at any time to redeem for Lessor by payment any mortgages, taxes, or other liens on the above described lands, in the event of default of payment by Lessor, and be subrogated to the rights of the holder thereof.
Notwithstanding anything to the contrary contained in this lease, no litigation shall be initiated by Lessor for damages, forfeiture, termination or cancellation with respect to any breach or default by Lessee hereunder, for a period of at least 90 days after Lessor has given Lessee written notice fully describing the breach or default, and then only if Lessee fails to remedy the breach or default within such period.
M_Barnes, thank you for your input. It’s validating, and it also makes me wonder what is wrong with the lawyer I hired to do 2 hours of work for $700. I posted the rest of the agreement in hopes that people can help flag any other problematic wording.
This next clause was added after I got another offer on the same property and the competing company told me that they would offer a 3-year term that would expire.
Thirteen) Notwithstanding anything to the contrary contained in this lease, and for the same consideration, Lessor does hereby grant to Lessee, and its successors and/or assigns, the option to be exercised prior to the date on which this lease or any portion thereof would expire in accordance with its terms and provisions of extending this lease for a period of Two (2) years as to all or any portion of the acreage then held hereunder which would expire unless so extended. The only action required by Lessee to exercise this option being the tendering of payment to Lessor, their heirs or assigns of the additional consideration in a sum equal to the amount on a per net mineral acre basis paid on the effective date of this lease, which payment shall cover the entire extended term. This additional bonus payment shall be considered tendered by Lessee when deposited with the U.S. Postal Service for delivery to the Lessor by certified mail at the address above on or prior to the expiration of the initial primary term of this Lease. Upon tender, the primary term of this Lease will be amended from Three (3) to Five (5) years. If this lease is extended to only a portion of the acreage then covered hereby, Lessee shall designate such portion by a recordable instrument. The consideration specified herein to extend this lease as provided herein shall in all respects be subject to the proportionate reduction provisions of paragraph 5 of this lease whereby the amount of such consideration for such extension may be proportionately reduced in the event this lease covers less than the full and entire mineral estate in any or all of the lands covered thereby.
BTW I had to type out the number “Thirteen” above because if I actually put 13) there, this forum software always changed it to “3)” - very strange bug.
If, at the expiration of the primary term, there is no production in paying quantities on the leased land or on lands pooled therewith but Lessee is conducting operations for drilling, completing or reworking a well, this lease nevertheless shall continue as long as such operations are prosecuted or additional operations are commenced and prosecuted (whether on the same or successive wells) with reasonable diligence and dispatch, and if production is discovered, this lease shall continue as long thereafter as oil or gas are produced. In addition, if at any time or times after the primary term, there is a total cessation of all production, for any cause (other than an event of force majeure), this lease shall not terminate if Lessee commences or resumes any drilling or reworking operations or production with reasonable diligence and dispatch. Drilling operations or mining operations shall be deemed to be commenced when the first material is placed on the leased premises or when the first work other than surveying or staking the location is done thereon which is necessary for such operations. Any off lease operation intended to result in production from an interval under the leased premises or lands pooled therewith shall be considered for all purposes hereunder as if such operations were commenced and conducted on the lease premises.
Believe it or not, I actually did get legal advice - a lawyer charged me $700 to tell me the lease draft “isn’t bad.” He ended up making only three changes.
Struck out a title clause that said “Lessor hereby warrants and agrees to defend the title to the lands herein described and agrees that the Lessee shall have the right at any time to redeem for Lessor by payment any mortgages, taxes…” (The double-asterisked phrase is what is struck out)
In the depth clause, changed “penetrated” to “producing” so the depth clause is only affected by what is producing.
Added a gross proceeds clause to the exhibit.
In my next reply, I’m going to put additional text in from the lease. Would love to get peoples’ opinions on it.
I never give the two-year option to extend. It’s like heads you win, tails I lose. I am aware that some people give the two-year option for a payment equal to 150% of the original lease bonus. I apologize that I don’t have time to review the lease carefully. The warranty jumped out at me, which your attorney already deleted, and the two-year option jumped out at me too. I kinda wonder whether you ought to engage another attorney. . . maybe others will offer opinions on that.
Personally, I would hire a different attorney. I still see some major red flags on that lease (and I am just a mineral owner, not an attorney, so not giving legal advice- just my opinion.). The changes he/she made were good, but not enough. I strike #6 as no one gets any of my products without paying me. I never allow an addition of time. Too much can happen in three years, much less five. The commencement of drilling in #3 is totally inadequate. That gross proceeds clause had better be really tight. No “however” language. I have very tight language on my shut in clause and about ten more clauses added to my lease. (This is in OK-TX is COMPLETELY different.) I have a very tight depth clause.
Wow, you may not be an attorney, but I think you know more about mineral rights than my previous attorney does. Either that or my previous attorney is playing both sides. I don’t suppose you know any good attorneys?
You need an oil and gas attorney, not a general real estate attorney, in the state where your minerals are located so that the attorney knows state law.
My minerals are mostly in Lea County in the very SE corner of NM, and a smaller number of tracts in Texas. I have found some oil and gas attorneys in Midland TX are very knowledgeable about both NM and TX laws, customary practices, etc. I have used FindLaw to pull up attorneys who specialize in oil and gas, and then I scrutinize the listings there plus the websites of the firms and the bio’s of the specific attorneys to zero in on a particular person. I generally like to go for the best, but another way to approach it is to look for somebody who has 10+ years of experience and is young enough to still be “hungry for billable hours”. (I always pay legal bills immediately, so as to remain a “good client”.) (I do think O&G attorneys earn most of their money from individuals and business entities who lease/drill/produce, so the attorney’s sympathies may lie there. However, this means that your attorney won’t suggest mark-ups that the Lessee just cannot tolerate.)
I have been on both sides of this fence as both a mineral own and as a Landman with over 40 years experience. I would not sign a lease with delay rentals that low nor would I agree with the option to extend the same. There is probably a lot of other things that I would also find objectionable. Do you own both the surface and minerals?