When reviewing a lease, in addition to the royalty and the bonus (which is a one time payment) the following are key items to review:
- Whether there is a depth clause, this protects you if there are formations that the lessee does not develop.
- Top lease clause. Many leases provide cumbersome procedures in the event that you wish to lease different formations to new lessees.
- A Pugh Clause. This protects in the event of certain spacing issues.
- No Deduction Clause: This maximizes the royalties by requiring the producer to bear to cost of transportation, dehydration, and other expenses. Some modern leases have things titled “no deduction” but really do not protect the landowner.
- Special warranty. Owners do not want to warrant that they have title to the property, the special warranty limits the owner’s liability in the event failure (or partial failure) of title to the minerals.
- Cessation, Drilling and Reworking. Places time limits for the lessee to rework the well after production has ceased.
- Free use or oil, gas or water: Clarifies how a lessee can use those items and possible royalties if used for production of electricity, crypto currency. etc.
- Commencement to drill. Should require a rig on site.
- Shut in royalties. Best to limit term that shut-in royalties can be paid.
I recently ran into proposed lease with the following language:
It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas and other proceeds accruing to the Lessor under this lease or by state law shall be without deduction for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting and marketing the oil, gas and other products produced hereunder to transform the product into marketable form**; however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements.** In no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.
I view this as a fake non deductions clause.
This post is not legal, tax or investment advice. Reading or responding to this post does not create an attorney/client relationship.