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5) OTHER LEGAL CONSIDERATIONS
Other Lease Provisions
Most other provisions found in a modern lease are probably unnecessary, at best, and harmful to the interests of the lessor, at worst. Thus, knowledgeable legal counsel should review all provisions of a company-offered lease form for provisions that are not in the mineral owner’s best interest.
One “other lease provision” that is important to the company is the assignment clause. Typically leases contain a provision permitting both the mineral owner and the company the right to assign their lease interests to another party. An assignment clause facilitates common industry custom and practice.
For example, a customary practice in the oil and gas industry is for independent landmen to lease a large area and assign (sell) it to an oil company. Consequently, the ultimate developer-producer may not necessarily be the original company or person leasing the mineral rights. At times the mineral owner may find the original lease tract being subdivided among several developers. During the long duration of a productive the lease, the lease may be assigned several times.
Because of the nature of the oil and gas business, companies need to be able to assign their leases; however, to keep better informed about assignments and to assure that assignees are responsible, capable, and solvent, the mineral owner should consider the following:
- Deny the right of assignment without first securing the mineral owner's written consent, which must not be unreasonably withheld. If this is not acceptable to the company, then provide that any assignment is not valid or binding on the mineral owner until he or she is duly notified in writing. In either case, the mineral owner should keep a permanent record of each new assignee for his or her files.
- Provide that the company (assignor) is not released from liability for any default or harm caused by the new company (assignee). In case of a partial assignment, provide that any default is default that applies to the entire lease.
- Provide that accompanying each payment there must be an identification of the governing lease (or assignment thereof) and the provisions of the lease for which payment are being made.
For example, see paragraph 14 of the State lease.
Serhienko v. Kiker, 392 N.W.2d 808 (N.D. 1986) – “However, inherent within the concept of "reworking operations" is a duty to continue operations with due diligence after "commencement;" the activities must be conducted in a bona fide effort to restore the well to production as soon as possible. For example, also see paragraph 7 of the State lease: “this lease shall remain in full force and effect so long as such operations continue in good faith”).
Time Limit to Settle Violations
The mineral owner should provide for the recovery of reasonable attorney fees and other legal cost in the event that the mineral owner must seek judicial or regulatory relief related to the mineral owner’s lease rights.
Security against Claims
Mineral owners may want to require the company to give security against future loss, save and hold the mineral owner harmless from all claims, demands, and causes of action stemming from activities undertaken by the company or the company's employees, agents, contractors and subcontractors during operations conducted on the leased premises (e.g., see paragraph 12 of the State lease). If possible, require the company to post bond and carry comprehensive liability insurance of a specified amount as added security from such claims.
Top Leasing
Top leasing is a highly competitive practice whereby oil and gas interests that are already subject to existing lease are leased again. In general, this method of mineral leasing is used in areas where existing leases will expire in the near future.
In the typical top-leasing situation, an advance payment, usually considered part of the bonus, is offered the mineral owner when the top lease is signed. When the existing lease expires, the new lease becomes binding and the balance of the bonus money is paid. The top leasing company should lose the advance payment if the company owning the existing lease saves or perpetuates it with drilling and production; however, to be sure that this loss occurs, the mineral owner should delete any warranty provision in the top lease and expressly disclaim any title warranties.
In areas of intense competition where the primary term of leases is short, a company may insert an “anti-top leasing” provision in the lease, usually in form of a preferential right to purchase a top lease if any third party offers to acquire a top lease. This and any similar provision concerning a right or option to acquire a new lease should be deleted.
Top leasing benefits the mineral owner in that increased competition for leases enhances his or her bargaining position. Companies also benefit. The practice allows them to lease certain areas showing a high potential for oil and gas production without waiting for existing leases to expire. It also allows the company's land crews to be more efficient in covering a given area in a shorter period of time.
Occasionally a company holding an existing lease will want to top lease itself. This occurs when the company is concerned that it may be unable to save or perpetuate its existing lease. This situation should give the mineral owner significant bargaining power to negotiate favorable lease terms, but any top lease issued under such circumstances should become effective immediately and replace the existing lease. Otherwise, the company may still save its existing lease and be subject to its terms and not to the more mineral owner oriented terms of the top lease.
The decision to top lease is largely a business judgment, but a mineral owner should only due with the assistance of a knowledgeable attorney.
Related Lease Provisions
Initially, the mineral owner must be concerned with the length of the lease term (Length of Lease), how much will be received in the form of a bonus, delay rental payments, if any, and royalties (Payments Received), and what form of legal protection may be needed (Legal Liability). What does this mean?
A few of the lease provisions related to the drilling process include rights and restrictions on how the surface of the land may be used (Surface Use) and what happens when the term of the lease does not match the drilling program (Length of Lease – Drilling Operations Clause).
Some of the more important provisions related to production include how to handle gas from a producing well that cannot be sold (Length of Lease -- Shut-in Clause) and how production is divided equitably when a well is producing hydrocarbons that are attributed to several tracts (Pooling). Also related are provisions concerning the use of various resources by both the landowner and the company during the production phase (Resources Use).
Tighthole Provision -- mineral owners should be aware of the company's right to request a tighthole provision on any well. The provision must be requested, in writing, from the Industrial Commission. If approved, all information concerning the drilling and production of the well is kept confidential and will not be released to anyone other than the operator of the well for six months (see N.D.A.C. §43-02-03-31).
A sample of a general oil and gas lease can be found on the North Dakota State Land Department’s Mineral Management website: Sample of Oil and Gas Lease.
CONCLUDING REMARKS ON LEASE NEGOTIATION
Always remember -- no one may be forced to sign a lease or to lease to a specific company. Also remember that lease provisions are negotiable. And remember that a company offered lease will be favorable to the company’s interests and is unlikely to contain provisions favorable to the mineral owner.
The variety of topics discussed on another page of this web site points out the many factors that should be considered when negotiating a mineral lease. The list is by no means complete nor will all factors pertain to every mineral owner. However, the need for knowledgeable legal advice in negotiating a lease should be evident.
Before making a final decision, the mineral owner and attorney should work through the possible outcome of each leasing situation. They need to select those lease provisions that will adequately protect BOTH the mineral owner's interest and the company's ability to carry out an effective development program.
Perhaps the most practical way of amending a company offered lease form is to attach an exhibit that contains provisions that supersede the company-offered lease form, but the body of the company-offered form must refer to the exhibit: “This lease is subject to the provisions of the attached Exhibit A and the provisions of Exhibit A control over the provisions of this lease in the event of any conflict.”
Another web page contains sample Exhibits with provisions that are favorable to a mineral owner -- DOES THIS MEAN BOTH MINERAL AND SURFACE OWNER? These sample exhibits address matters not fully discussed on this web site, and some of the provisions may also be somewhat inconsistent with the advice offered on this web page. The exhibits represent provisions that are favorable to the mineral owner. Whether these provisions can actually be included in a lease will depend upon competition for leases and on the lessor’s bargaining power. Remember, no company may force a mineral owner to execute a lease.
Next Pages
Mineral Lease -- Introduction and Habendum clause
Mineral Lease -- Granting clause
Mineral Lease -- Royalty clause
Mineral Lease -- Saving clauses
Mineral Lease -- Other clauses and Closing Thoughts
Surface owners also want to consider the implications of oil exploration and production.
Last updated July 26, 2010
Email David.Saxowsky@ndsu.edu
This material is intended for educational purposes
only. It is not a substitute for competent legal counsel. Seek appropriate
professional advice for answers to your specific questions.
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