It is very common today for oil companies to record a Memorandum of Oil, Gas and Mineral Lease in place of recording the original, signed oil and gas lease. This is permitted because of the reason for recording into the county deed records any document affecting real property interests.
A Memorandum of OGML is recorded instead of the original lease because all the oil company must do to protect its rights as the Lessee is to put the world on notice that they have taken a lease covering the Lessor’s mineral rights in the lands described in the original lease. We call this “third party notice” in the industry.
An oil company prefers to file a Memorandum instead of the original, signed oil and gas lease for one primary reason: the original, signed oil and gas lease contains terms that the oil company doesn’t want the world to know. Specifically, they don’t want other owners (still unleased) in the area to know what terms this Lessor received; they will demand the same. This can cause a leasing budget to get completely out of hand (and sometimes even shut it down entirely) so a Memorandum allows the oil company to negotiate with each landowner separately, without each of them knowing what others have already negotiated. There’s nothing ethically wrong with this, and it in no way cheats one landowner out of something just because another landowner got it and they didn’t.
Terms of an OGML that are most sensitive and disruptive to ongoing lease negotiations in an area are: royalty rate, term of the lease (6 months instead of 3 years, for example), and a long list of special provisions in an Addendum that creates special handling for the lease for its entire life. Usually only the larger landowners, those who own at least 10% of the total mineral rights in what will eventually be a pooled unit, have the clout to negotiate big leases like those containing 25% or even 30% royalty rate. In fact, rarely have I seen leases with a royalty rate greater than 30% royalty that did not cover at least 50% of the total, pooled mineral rights in the entire producing unit.
Owners should not be nervous allowing an oil company to file a Memorandum of OGML instead of the original, signed OGML, except they should understand that they can never get a copy of their original, signed, full-length OGML from the courthouse in case they lose the original they are given at signing. For that reason, it’s extremely important for a mineral rights owner with an unrecorded lease to store that lease in a very safe place, forever. Leases sometimes can last for decades, for as long as that lease continues to produce oil or gas. And, the owners should understand that they can never file their copy of the lease into the county records without the probability of serious legal problems with the oil company (or current Lessee owner of the lease).
You included term of lease as one of the things not included in memorandums. Maybe it’s different in some states but the majority of memos I see recorded in Texas do state the primary term and whether the lease includes an option to extend. I don’t know that it is required by law but it’s not uncommon to see.
Even having access to full leases typically wouldn’t give any insight on the lease bonus that was paid. But the fact a memorandum with much less information than the lease is generally what gets recorded is a reason forums like this where mineral owners can share information and help level the playing field in negotiations are important. IMO that’s also not ethically wrong unless the lessor agreed to non disclosure.
A memorandum I saw recently had wording at the end I plan to press for in the future, “This lease is subject to an addendum containing special controlling terms and provisions numbered __ through __.”
The leases I’ve worked with that use a Memorandum for filing instead of the original, full lease have a special clause in them. The clause says that the owner agrees that a Memorandum may be filed of record instead of the original, full lease, and that the Lessor agrees that the original, full lease will never be filed into the courthouse records. That’s why I said that in my post.
I’ve never seen a lease using a Memorandum that did not contain a promise by the Lessor that they will not file the lease itself into the county records. That promise is not in the Memorandum, it’s in the original, full lease the Lessor signed.
The problem for the landowner (or more likely their heirs) is that loss of the original lease. If it becomes lost or discarded the company in possession of it must be relied upon to produce it (assuming they kept the records).
You are correct, the length of the lease IS included in a Memorandum. This will teach me to not post to Mineral Rights Forum in the middle of the night when I’m suffering from insomnia!
But concerning the term of the lease, if the lease contains a clause for an automatic option to extend (by Lessee simply paying the option fee to trigger the extension), I’ve never seen the option mentioned in a Memorandum of OGML. So a Memorandum that says the primary term is for a period of 3 years could be correct, but anyone reading the Memorandum from the county records won’t know that it could actually be a 5-year primary term because of a 2-year option to extend that requires no further action by the Lessor.
And as a footnote to your post, depending on how old the unrecorded lease is, it is very possible that the current leasehold owner (Lessee) doesn’t have a copy of that lease. I’ve suffered through countless Acquisitions & Divestitures in the industry where paper records were digitized and then the paper documents were destroyed by the Seller or Seller’s predecessor-in-title (including unrecorded leases!). Working for the company on the Acquisition side of such a transaction, that situation can be difficult for both a lease analyst and division order analyst. Not to mention the heirs of the deceased original Lessor who cannot locate a copy of the unrecorded lease in the decedent’s records.
I really wish the royalty had to be included in the Memo too. Memo’s make running title a big pain when figuring royalty interests and the like across dozens of owners with separate leases!
I’ve heard that filing a Memorandum of Lease makes the lease less litigable, and it is therefore a concession that should in good faith be compensated. Can anyone comment on compensation and litigability?
The Memorandum is not a transfer of minerals, but rather a document that creates an Inquiry Notice that a good title man would make good notes on so that the examining attorney can make whatever title requirement that he sees fit,
I am curious as to the basis of litigation. It should be interesting.
I have never heard of a Lessor requesting compensation for the execution of a Memorandum.
