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Oil and Gas Bank Draft
For many years, it has been the tradition of oil and gas companies to use the Bank Draft as the method of passing consideration for an oil and gas lease. First, what is an Oil and Gas Bank Draft?
A Bank Draft is a negotiable instrument that is paid through the collection window at the bank rather than a cash item. A check is an example of a cash item and can be presented to the bank and immediate payment can be obtained.
A Bank Draft is a collection item. The collection process goes as follows:
1. The payee endorses the oil and gas bank draft, just as if it was a check and presents it to the collection window at any bank (not just one in which he has an account).
2. The collecting bank then mails the check to the paying bank (the oil or gas company’s bank).
3. The paying bank then notifies the oil company that a bank draft has been presented and tells the oil company of the “drop dead” date that the draft must either be honored or returned.
4. If the oil company chooses to pay the bank draft, then a check is given to the paying bank by the oil company and a check is sent to the collecting bank. The collecting bank then issues a check to the payee and the transaction is complete.
There are several reasons for an oil company to use a bank draft, to wit:
· It allows the field personnel the ability to prepare a negotiable instrument rather than ordering a check from the company. This gives the landman the ability to close the deal on the spot, rather than having to wait for a company check.
· It allows the landman to buy a lease conditioned upon approval of title, lease form and contents. This gives the landman a competitive advantage over landmen who have to wait until “buy title” is run prior to contacting landowners.
· When the bank draft is issued as a condition of having the draft honored “with executed lease attached” then the bank is acting as an escrow agent for both parties.
· Some companies and/or landmen alter (improve upon?) the printed form draft to not allow the payee, drawer, lessor to recall the draft prior to payment for any reason.
However, the largest potential consequence of using bank drafts that are not to the landowner’s interest is that the landowner is “Cold Drafted” – which is where the Lessee does not pay off the draft. If the landowner is cold drafted and has furnished to the Lessee an executed and acknowledged lease which the Lessee has already placed of record, the landowner may have to sue to have the lease released and title cleared.
If you enjoy any acreage position, you should be able to insist upon and receive checks or cash rather than bonus drafts.
A Bank Draft is a negotiable instrument that is paid through the collection window at the bank rather than a cash item. A check is an example of a cash item and can be presented to the bank and immediate payment can be obtained.
A Bank Draft is a collection item. The collection process goes as follows:
1. The payee endorses the oil and gas bank draft, just as if it was a check and presents it to the collection window at any bank (not just one in which he has an account).
2. The collecting bank then mails the check to the paying bank (the oil or gas company’s bank).
3. The paying bank then notifies the oil company that a bank draft has been presented and tells the oil company of the “drop dead” date that the draft must either be honored or returned.
4. If the oil company chooses to pay the bank draft, then a check is given to the paying bank by the oil company and a check is sent to the collecting bank. The collecting bank then issues a check to the payee and the transaction is complete.
There are several reasons for an oil company to use a bank draft, to wit:
· It allows the field personnel the ability to prepare a negotiable instrument rather than ordering a check from the company. This gives the landman the ability to close the deal on the spot, rather than having to wait for a company check.
· It allows the landman to buy a lease conditioned upon approval of title, lease form and contents. This gives the landman a competitive advantage over landmen who have to wait until “buy title” is run prior to contacting landowners.
· When the bank draft is issued as a condition of having the draft honored “with executed lease attached” then the bank is acting as an escrow agent for both parties.
· Some companies and/or landmen alter (improve upon?) the printed form draft to not allow the payee, drawer, lessor to recall the draft prior to payment for any reason.
However, the largest potential consequence of using bank drafts that are not to the landowner’s interest is that the landowner is “Cold Drafted” – which is where the Lessee does not pay off the draft. If the landowner is cold drafted and has furnished to the Lessee an executed and acknowledged lease which the Lessee has already placed of record, the landowner may have to sue to have the lease released and title cleared.
If you enjoy any acreage position, you should be able to insist upon and receive checks or cash rather than bonus drafts.
Comment
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Comment by Buddy Cotten on April 24, 2011 at 12:32pm
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Dear Joel,
First, I would demand the original executed lease to be returned.
Second, I would make sure that the lease was not recorded.
Third, I would find out if they want to lease your lands. The decision on whether to lease to them would determine their response to 1 and 2. However, if it were me, the next lease would be on your lease form, not theirs - a renegotiatied lease form to better protect you. After the lease is worked out, have them pay by check. I would tell them that the first person to get a check to you wins. No more taking me out of leasing by a failure of promise to pay.
Best,
Buddy Cotten
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Comment by Joel on April 24, 2011 at 10:25am -
Buddy:
I had a bank draft that was not paid and I have notified the landman of that. I also have email and VM confirmation that they screwed up and did not pay me with 45 days. I have sent them notices of cancellation of the lease which is also confirmed by VM and email.
What if anything can I do to ensure that my lease is never recorded, it has not been to date.
I am in Golden Valley county in ND.
I am in a good verifiable title situation as my grandfather homesteaded the property after WWI.
Joel
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Comment by r w kennedy on March 31, 2011 at 7:53am
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Mr. Wynne, I think that a cloud on the title would still exist with the unreleased lease even after the statement of fact was recorded. The statement of fact may allow you to lease and receive bonus payment, but i have grave doubts about receiving royalty payments. I believe the O&G co will hold royalty payments in suspense until the failed lease is released, or removed by court action by the lessor, as it is the lessors title problem. Holding royalty in suspense because of a cloud on the lessors title, the O&G co has no exposure, and after all, it's not their problem.
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Comment by William Robbins on March 25, 2011 at 1:54pm
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Buddy,
Just wanted to say thanks for all comments on the different web sites. I am very new at this and your responses to different people must be very time consuming. But I'm here to tell you and I think I speak for a number of people that you are very much appreciated. Thank you again
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Comment by layson johnson on January 13, 2011 at 6:01pm
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I am new to this but I just signed a lease and deposited yhe bank draft on the it said 15 banking days but when we call the paying company they tell us everhthing is going great but never give us a date hen they will honor the bank draft. What does this mean they say that that the bank draft has been approved but I have yet to see it.
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Comment by Bruce Bowe on August 12, 2010 at 11:36am -
What I have done for the last few years is totally refuse to even talk to lessees about drafts. Once the terms are negotiated, I have the send me the lease. I fax or email them a copy of the signed and notarized doc. They send me a check. I cash it. After a reasonable time (I usually wait 4 or 5 days), I send the original to them. If they won't go along with that, there is no deal. I have really had no resistance to that, although some usually will try you on for the idea of a draft.
Also, my local bank didn't charge me, but being in California, they weren't familiar with the process and I used to have to walk them through the entire thing every time. The big banks like Wells Fargo charge for the service.
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Comment by Larry G Smith P.E. on April 11, 2010 at 2:38pm -
I will NEVER accept another Draft for a lease again, the terms of payment "sounded good" but it nearly took an act of congress to get the money. Take the mans word, INSIST ON a Cashiers Check or Cash only. If they want your land, they will meet your terms.
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Comment by Philip Wynne on January 19, 2010 at 12:18pm
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Dear Buddy,
Yes, a release would be optional, otherwise it's a business decision, with little risk if the term is expired anyway. By the way, did you file the "Statement of Fact" in the public record or not?
As stated elsewhere in this forum, I had a situation where a Lessor lied about her late husband's heirship, and exposed her neighbor who signed the Affidavit of Heirship to criminal prosecution, so that she could exclude the stepdaughter from her share of the late husband's Estate.
Fortunately, the Decedent's name was unusual enough that I was able to prove from public records the existence of this stepdaughter, just a day or two before the Bank Draft cleared. If his name had been James Smith there is no way that I could have proven the old lady was a liar.
If I had offered her a company check, my client probably would have had to sue her to get the money back, and I probably would not have had that company for a client anymore. So I am a big fan of the Bank Draft.
Sincerely,
Philip Wynne
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Phillip, first, thank you for the kind words.
I do agree about the charges and the time taken to process drafts. As far as an Affidavit goes, that would be a curative measure that does not remove the cloud or slander of title. Curative measures are used to reduce, not eliminate, business risk. A release would eliminate the business risk of having an unreleased lease of record.
I had a situation VERY recently where the predecessor in title failed to pay a delay rental payment. The predecessor assigned the lease (after ipso facto termination) to a lessee who wanted to drill the prospect (and our acreage would have been in the unit). Prior to it being discovered that the lease was dead, my client granted an option on the acreage. My client prepared a "Statement of Fact" which set forth the history of the event and our optionee accepted the curative measure and exercised their option, even though the release was not forthcoming for at least a month later.
Kenny has asked me to pen a series on oil and gas educational issues and hopefully a nice readership will be obtained.
Buddy Cotten
www.cottenoilproperties.com
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Comment by Philip Wynne on January 18, 2010 at 10:18pm
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Yes, well written article. I agree with everything stated. I would add (1) that some Lessors' banks will charge a small fee to process the Bank Draft, while others won't, and (2) from my experience, the average bank draft clears in 2.5 weeks, and the average time to procure a company check is not much less than that, about 1.5 weeks, although if the company wanted the minerals leased badly enough I'm sure a check could materialize in hours.
And I would ask, "In the case of a mineral owner's being 'cold drafted,' wouldn't an Affidavit of Non-Payment filed in the public record under threat of criminal prosecution for untruthful statements be considered satisfactory from the title perspective to allow the mineral owner to lease the minerals again?" In other words, couldn't a mineral owner file the Affidavit instead of filing a lawsuit? I have seen instances where mineral owners filed Affidavits of Non-Payment to notice the public that a producer failed to meet the terms of the lease for extending the lease into the secondary term. Couldn't a mineral owner who was "cold drafted" use the same tool?
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