Proportionate Reduction Clause

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If you have ever signed an oil and gas lease before, it is likely that it included a proportionate reduction clause or lesser interest clause.

All oil and gas leases include some kind of provision to protect the operator (i.e. lessee, the oil and gas company) in the event that the mineral owner’s interest is less than what is initially specified in the lease. This post explores how the clause could potentially impact your royalty.

In your oil and gas lease, a typical proportionate reduction clause should look something like this:

“If lessor owns an interest in the oil, gas, or other hydrocarbons in our under said land less than the entire fee simple estates, then the royalties and rentals to be paid Lessor shall be reduced proportionately”

If the operator determines that your mineral interest is less than originally specified in the lease due to a title defect, or break in the chain of title, then that triggers the proportionate reduction clause, which ultimately impacts how your royalty is calculated. The operator amends its error by either leasing a new mineral owner or sometimes re-negotiating lease terms with an existing lessee for the determined interest.

Bonus Payments and the Proportionate Reduction Clause

If you ever find yourself in a position where your mineral interest is reduced, there could be a silver lining.

Refer back briefly to the proportionate reduction clause highlighted in bold. Notice that there isn't any language specified about bonus payments, which is often the case. So, if you signed a lease with similar language, and the oil company paid you a bonus, based on the acreage initially specified in your lease, then you technically can keep all of your bonus money.

Don't be surprised if the operator requests the money be re-paid. In some instances, particularly if legal action is threatened by the operator, it may be worth it to pay the money back. However, if the lease is void of language specifying the re-payment of bonus money, then there isn't always a legal obligation on the part of the lessor to re-pay. If you find yourself in this situation, consult a good oil & gas attorney.

In no way is this blog entry intended to give legal advice

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Actually, there is a court case in Texas that required the repayment of bonus dollars even after the warranty provision was struck on the lease, The ruling was based on the doctrine of the Covenant of Seisin.

Best

Buddy Cotten

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Thank you for the insight Buddy. Could you share more details about this case here, or in a private message?

Best,

--

Kirk

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When I find it, I will let you know. There is rampant misinformation this board. One example is the lease valid without a bonus being paid? In Texas, the answer is yes, under the common printed forms that provide for XXXX dollars and other good and valuable considerations and the covenants and conditions contained herein.....

Just a smidgen of knowledge is a very dangerous thing.

Buddy

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Hey Buddy,

Haven't talked to you in a while. Just reading your post below. How about in Oklahoma, is the lease valid without a bonus being paid? My lease is on the common printed form but says, "..for and in consideration of Ten and More*****Dollars....". It makes no mention of a bonus. I signed this lease on May 3, 1991.

Thanks Buddy.

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You also have a breach of warranty issue if the warranty clause has not been struck. Don't assume you don't have to repay bonus monies if you are later found not to be in title. Address upfront during lease negotiations.