Order for Payment No Better than a Bank Draft

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Orders for Payment seem to have replaced the bank drafts of yesterday on oil and gas leases; however, these Orders for Payment have not replaced the downsides or difficulties of those bank drafts a generation ago. While exchanging original document for a certified or cashier's check is always the best policy, you may run into resistence to doing so, and in that event you should be aware of certain conditions and provisions in the Order for Payment

Days in an Order for Payment

Orders for Payment generally include a time period that the lessee relies on to complete title work before issuing bonus funds. The shortest time periods is generally thirty calendar days with the longest of Orders of Payment at 120 business days. It is worth noting that the use of business days drastically extends the time period for payment—compare 120 calendar days which is approximately 4 months to 120 business days which is approximately 6 months. Try to negotiate this time period down either by reference to calendar days instead of business days or just less days. What time periods on Orders for Payment have you received?

Subsequent Written Notification by Lessor

Nearly all Orders for Payment also include a provision that if payment is not made, that the Lessor is responsible for notifying the proposed Lessee in writing about non-payment and that Lessee then has so many days to make payment. This provision can unknowingly stretch out payment especially if communications are primarily verbally with the leasing agent in that the obligation to pay would not be triggered until that written notification is received by Lessee. Have you seen this language and how many extra days are allowed for payment?

The Oil & Gas Lease Bonus Can Still Change

Just as the old bank drafts included the amount of payment to entice signing so too do Orders for Payment. However, just as bank drafts could be adjusted downwards, the same is provided for in Orders for Payment. You might see a reference in the Order for Payment that “Lessee may, without notice to Lessor, increase or reduce the consideration payable hereunder proportionate to the actual interest owned by Lessor or render title unacceptable at its sole discretion.” To date, I have never seen an increase, but rather only reductions, and often unexplained reductions. Were you entice to sign by a large dollar figure only to later have that reduced?

All of this dictates that if you want to be paid in a boom and bust market or you want to be out from under a lease in a fast moving market that you avoid the use of Orders for Payment, or in any event, also negotiate the terms of the Order for Payment just as you an oil and gas lease. After all—isn’t the bonus money the reason you signing?

Jenna H. Keller, Esq.

Attorney at Keller Law, LLC. (www.kellerlawllc.com)

Jenna H. Keller defends property rights and provides legal services to farmers, ranchers, rural property owners, and severed mineral interest owners in the areas of estate planning, natural resources (oil, gas, wind), real estate, and water.

The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.

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Jenna

What is the best means by which to consummate a transaction? The land men are always claiming to need such and such amount of time to check title before they pay.

dj

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You might ask a local title company or bank to hold the original documents for a specified amount of days and to only release to the company if the funds arrive in so many days of at least a certain amount. Alternatively, additional language can be added into the lease or order for payment specifying what happens if payment is not received. A couple of key components are the minimum amount of payment and a set number of days. Try to hold onto your originals somehow or specify what happens if payment doens't come through. If you're utilzing an attorney for negotiations, be sure they are addressing this issue for you as well and often the companies may allow the attorney's office to hold originals during a check of the title as well.

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I fail to see why they cannot do their title work after receiving the signed lease and then send a check. Making you wait another 30 days for a draft to clear is ridiculous.

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Mr. Nystel, the problem is that after receiving your executed lease, you are now in limbo and they don't have to do title in any set time period. They may record your lease without paying you and cloud your title and not release it until you go to the expense of a slander of title suit. If you did not even have a draft or order for payment to place with your bank, there would be no set time period in which the lessee would have to check title and either send payment or reject the lease of your minerals. You need some form of escrow so the lessee does not have your lease before you have payment. It's the only way to be safe. The lessee needs to check title on their own time.

The sending of a copy of an executed lease, boldly marked COPY, should show enough good faith from your side for the lessee to make the effort to check title. It would also give the lessee incentive to check title quickly because many states are race to record or notice states where you are not bound to lease to any lessee until they have recorded your lease, and they can't record a copy. It all comes down to, if they want to lease your minerals all they have to do is work out a deal, check title and pay you. The check itself will have the legal descriptions of the minerals to be leased and it will say payment for the execution and delivery of an oil and gas lease.

If you cash that check, you are agreeing to the oil and gas lease, the lessee has a copy of the notarized lease. You would be leaving yourself open to legal action if you did not send the original lease. On the other hand, the lessee should not be able to record a copy of your lease boldy marked copy. This method is pretty simple, provides protection for both sides and encourages the lessee to complete his title check in an expeditious manner and should prevent a mishap of the recording of your lease without you ever having been paid. What could be more fair and likely to be faster than that?

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The advent of "Order of Payment" is simply a way for a Lessee to obtain your signed lease prior to payment. When used properly at least a "Bank Draft" allows the Lessor to withhold the signed lease (in the hands of their bank) from the Lessee until payment has been received by their bank.

As Mr. Kennedy points out, the Lessor has lost virtually all their leverage once the Lessee holds the signed lease. It may all work out in the end, however many very bad and expensive outcomes are more likely. As the Lessor you must insist on payment in exchange for the signed lease. A legitimate operator will always agree to either cash up front in a physical exchange, or a traditional Bank Draft with the exchange done by the bank upon receipt of payment. If a Lessee insists they WILL ONLY do it via an Order for Payment then you should suspect their motives and refuse the deal. That is my two bits.

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When so many bank/sight drafts weren't honored in North Dakota, and the word got out that you should not accept them in exchange for your lease, the order for payments showed up. People actually were bragging that they had Orders for Payment and not bank/sight drafts, as if they were any better for the mineral owner than a draft. Same situation with a different name.