I was offered a lease for Sect 29-T8N-R9W For 3 years, but if it stays in production, it never stops. Is this a normal or should I insist on 3 years only, do I have a choice?
The “primary term” of the lease (usually 2-5 years) is the time in which the operator “can drill” but does not have to drill (unless the lease says so. If the well is successful, then the lease moves into the “secondary term” which lasts as long as there is production under the terms of the lease.
From a company prospective they would not want to spend millions to drill a well if they did not have the guarantee that they would be entitled to revenues as long as there is production. You will not find a company to make a “secondary term” clause usually “so long as oil or gas is produced”. Leases can last for decades and are binding on heirs, devisees etc. That is why it is important to have good lease terms from the outset.
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.
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Since most of those items are in this contract, and I feel way over my head, do I look for an attorney to tell me if this contract is in my best interest? Should they be located in the state that I live in or the state of the property?
State of the property. Doubtful the attorneys where you live have a license to practice where your interest is located.
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If you contact me at [email protected] I can get you information on a very good attorney. He helped us out greatly when my mom died, getting us set up with our counties. I don’t want to state his name or number in a public setting.
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