I have been aproached by several companies to top lease my expiring acres. Im trying to find out a couple of things, bc i have no idea about this topic. when top leases are filed, how payments are made and payment forms (first portion and second portion), etc. When will i get my money. Help please
Dear Mr. Jenkins,
There are several things which you need to be aware.
First, check your existing lease to ensure that you can indeed accept another lease offer during its term. Some say no.
Second, top leases, if not prepared correctly are invalid as they violate the rule against perpetuities.
Third, how long in the future is the top lease to come in? The longer the date, the higher the rate should be.
Fourth, make sure that they are obligated to take the acreage and not just call it a top lease when it is really an option.
Typically, a top lease, with short fuse, I get 1/2 now and the balance when it matures.
Buddy: This is a good topic and one that I have had personal experience with. My ATTY advised against top leasing because of potential legal issues or complications. I think you touched on that. I have also attended seminars where some issues were discussed as to the pro’s and con’s of top leasing. There is the extra bonus money but if the mineral owner is in a new area of exploratory drilling the value of the mineral property can increase significantly and the Operator, who topped lease, has locked in low or average terms relative to the potential higher value in an area of high potential. It comes down to a judgement call.
Buddy Cotten said:
Dear Mr. Jenkins,
There are several things which you need to be aware.
First, check your existing lease to ensure that you can indeed accept another lease offer during its term. Some say no.
Second, top leases, if not prepared correctly are invalid as they violate the rule against perpetuities.
Third, how long in the future is the top lease to come in? The longer the date, the higher the rate should be.
Fourth, make sure that they are obligated to take the acreage and not just call it a top lease when it is really an option.
Typically, a top lease, with short fuse, I get 1/2 now and the balance when it matures.
Best,
Buddy Cotten
Mike,
Top Leasing could go either way as a strategy.
From a landowner's perspective, it could be a valuable strategy. For example, if you knew a well was planned and the top lessee did not know, then you could get some additional bonus money. If the well was drilled and it was a dry hole, then if the form was like mine, you would have bound the top lessee to acquire a lease after potential condemnation. If you did not know that a well was on a schedule, it would take a lot for me to top lease as a strategy as a landowner, something like a well commitment or all the money up front.
As long as you steer clear of the rule against perpetuities and acknowledge and confirm the existence the bottom lease, you have created a good document.
Chris,
Carefully read and understand what Mr. Cotten has told you. If you think you found a bird's nest on the ground with a top lease, think again and call Mr. Cotten and pay him to tell you about the liabilities of top leasing. The reward, if you ever get it, is not worth the risk. Unfortunately, the more valuable your minerals are, the higher the probability that you will find yourself paying for some lawyer's child's education before you can enjoy the ownership of your minerals. My rule is to NEVER, NEVER GRANT A TOP LEASE.
However, there is one exception. If the existing lessee with leases in the area, and permits to drill, wants to top lease his own lease, say "no" to a top lease but consider a lease modification and extension. You can work our the sweetest deals for both sides and learn more about your minerals than is imaginable.
Dear Mr. Hutchinson,
I never say never on top leasing, but it has to be part of an overall leasing strategy. For the most part, the leasing strategy is more advantageous to the Lessee, as we all know.
But, there are times where it can be amazing. I, as a lessor on an undivided mineral tract, top leased the other minerals and I was long to his lease, so my lessee had to drill quickly, or I had his whole prospect. He could not protect the lease, so he had to deal with me. Now I was able to modify my lease for a higher royalty and an override on the top lease that they paid the balance of the bonus on. Of course they made a decent well.
I made an additional $400K for my client, for a $3K investment. Talk about being the exception rather than the rule. And you need a very savvy client to make this happen.
As a general rule, I do not favor top leasing nor extensions. But, if they keep piling Krugerrands on top of my desk, I do have my tipping point.
Gary L. Hutchinson said:
Chris,
Carefully read and understand what Mr. Cotten has told you. If you think you found a bird's nest on the ground with a top lease, think again and call Mr. Cotten and pay him to tell you about the liabilities of top leasing. The reward, if you ever get it, is not worth the risk. Unfortunately, the more valuable your minerals are, the higher the probability that you will find yourself paying for some lawyer's child's education before you can enjoy the ownership of your minerals. My rule is to NEVER, NEVER GRANT A TOP LEASE.
However, there is one exception. If the existing lessee with leases in the area, and permits to drill, wants to top lease his own lease, say "no" to a top lease but consider a lease modification and extension. You can work our the sweetest deals for both sides and learn more about your minerals than is imaginable.
I am glad I searched on this forum for the topic of "top leasing". Until yesterday I , being an inexperienced surface and mineral rights owner, had never heard this term. Our lease expires in Oct 2011 on our two sections in Reeves county, Texas. Since last August we have had two inquires on leasing when available.. Another possible offer was made this past week with the thought of a "top lease". It was explained to us as an option so we would agree to lease with him in Oct. He offered $1500 per acre with 25% royalty at 3 years. He said he would check with his company for a dollar amount if we agreed to a "top lease" . Do I understand this to mean it could be more than the $1500.00 per acre if it is legal according to our lease and/or if we wanted to lock in at that price when in 6 months it may be worth more??? Any additional help on this topic would be greatly appreciated.
Marie
Dear Marie/Kenneth L.
You are in a very good area for leases right now. I manage a lot of acreage just to the North of you in Eddy and Lea Counties, NM as well as Gaines CO TX to the NNE of you. It is in an area of multiple zone production and the long established operators do not have to rely on the Unconventional Shale plays exclusively. We haven't begun to see the peak of lease bonus amounts yet so there is no incentive for you to grant an option or top lease at today's prices. You don't need the extra risk. Also, you do not want to back your existing lessee into a corner as it may do something under the terms of your lease to hold your acreage to your disadvantage. Since you profess to be "inexperienced" your existing lease may have some loopholes for the operator. Because you are in such a great basin geologically, you may want to better understand the geologic potential between now and October then offer a lease you are comfortable with to the parties that have made overtures to you after October when you have a release recorded, Get the bids then negotiate with the best operator in the area. Remember that "Haste makes Waste"
Dear tfarming,
This confirms what I have said before. The operators working in North Dakota right now do not conduct business in the same way that oil companies do in more mature areas of the country.
I once had a landowner look in me in the eye and told me "I will skin you if I can." Well that was fair warning in our negotiation. The oil companies in ND are not even giving you that fair warning.
One explanation that seems to be working is the proven psychological and off used negotiation tactic of "fear of loss" of the big bonus dollars being paid.
Another explanation is a not well informed mineral owner base. The mineral owners in North Dakota, going straight up to the Industrial Commission are sorely uninformed as to what the oil companies can and are willing to do economically.
The Industrial Commission through their backward laws are doing an amazing disservice to the mineral owners of the State. North Dakota has created an operator's paradise.
They need to hire a team of consultants, consultants from far away from North Dakota, from mature providences and show the Industrial Commission how they could increase the state coffers from leasing and development five fold, while still serving the needs of industry.
At least in my case, and on one deal, because I live out of state and wouldn’t lease my acres in McKenzie county for $75 acre and 1/6. The lease agent went to court, claimed they couldn’t find my brother or me, and had a mineral trust set up from which they could lease. The claim that they couldn’t find us was fraudulent of course. The court will not grant a mineral trust if you state that you are in contact with the owners. We still have family in the area so they had to get the court to waive notice in the paper, and of course there was no affidavit of due diligence saying they even tried to find us but couldn’t. We have phone records, lease offers, drafts, 1 check and several letters with lease agent employees signatures on them and the envelopes with the post dates on them for 8 months predating the trust. You don’t mail checks at random. I look forward to seeing the lease agent in court. If you don’t live local and own the surface you need to keep a close watch on operators and lease agents. I know that if you won’t cave in at least 1 lease agent is willing to do something illegal to get controll of what they want. Mineral acres in our part of Mckenzie county ND were going for at least $500 per acre and 20% in early 2008 when oil was climbing toward $140 per barrel. The lease company wasn’t raising it’s lowball offers over several months of negotiation so we blew them off and forgot about them. Our only mistake. I am so glad I never throw out anything related to an offer. I was replying partially to tfarming, but I think it’s an important example in it’s own right. Sorry for being off topic.
I have a couple questions? If my lease in williams county is expiring in july of this year, If I top lease how will I be paid by the oil and gas company. Will they pay me my full amount upfront or will they pay me a percent upfront and then the rest when my lease expires?
It would be a percent upfront and the rest when the current lease expires…if the O&G co decides they still want your lease. I have not seen your offer, but I think it likely to be worded as an option.
I signed the top lease on Dec. 29 2012. I asked them point blank if this was only their second option if they did not hold me by production. They stated that they wanted to change the language in the existing lease. I don't buy it; I am betting the lease will never be honored and I will be HBP in the next month.
The top lease states that it takes effect "on the surrender of the existing lease or on May1, the last day of the primary term. It is understood that this lease is subordinate to the existing lease"
Pad is in developement on the neighbors property- set to horizontal me soon I presume.
I was in a position that if I did not sign I would definately been HBP. I am in the center of the plan scheduled for 3 wells- they were not going to let me go. I got a great deal on the Toplease; I just don't think it will ever matter. I believe it was set up just in case they did not get in in time. I guess I will know in about a month if they wasted my time and lawyer fees!
To top lease or not to top lease has it's pro's and con's depending on each individuals situation. I have top leased on several occasions but I have successfully negotiated bonuses and % royalties which I precicted to be in the ballpark upon lease expiration.