On a lease agreement I have provided to an oil and gas company, there are two clauses the oil and gas company wants to strike from the lease. They are:
Assignment and Interest. I have a very small nma (2.878788) and the company wants these stricken from the lease because of the size of the nma.
The Assignment clause, in essence, says that if the Lessor assigns the nma, the Lessor must be provided certified copies of all assignments, mortgages & other encumbrances, including mailing addresses.
The Interest clause, in essence, says that royalty oayments due must be paid to Lessor within 90 days after the last day of the month for which said royalties are due… with exception for the first production and then talks about interest that will be incurred if the royalties aren’t paid on time, etc.
My question is - is this a reasonable request based upon the small NMA? Thank you!
I’m going to assume this is in Oklahoma since I remember you posting in some Oklahoma groups, because so many things are state specific.
My opinion on these answers is based on generic overviews and is not meant to help you negotiate your lease. I’m sure not an attorney and how these things might impact you might be best discussed with an attorney.
Assignment:
- In layman’s terms, what exactly do you expect to gain or prevent from the assignment clause? How will you be “damaged” without these notifications?
- Why do the documents have the be certified?
- What penalty do you expect if they are not in compliance?
- Are you willing to litigate if the lessee fails in the performance of that clause?
- Why would you care if the Lessee places a mortgage on their ownership of their lease.
Interest.
- What are you gaining from the clause that the Oklahoma Production Payment Standards Act does not already cover? OK §52-570.10.
- What penalty do you expect if they are not in compliance? And how do you expect to enforce it.
- Are you willing to litigate it?
Some people seem to think some of these clauses will make their lease invalid automatically if the lessee is not in compliance with some of these clauses. I also see them place clauses that might be less restrictive that implied covenants or statutory governance that already define this. Does this mean their clause has less “teeth” than it would otherwise have if the clause was not there?
So lets say they drill a well with a 640 spacing. with 2.878788 NMA and 3/16 lease, you would have a Decimal Interest in the well bore of .00084339 If they sell $10 million in product over 24 months, your payments would average $351.41. At a 12% rate, 1 month interest would be $3.51. How much is your time worth to argue on a late payment and to try to collect $3.51? Sure that first 6 months of production might be closer to 1/2 of all of the total 12 months of production. So you would be getting $4216.97 on that first check. One months interest on that total would be $42.17.
And the bottom line is, are you willing to stand by these provisions so strongly that you fail to reach an agreement with the lessee? I feel the assignment clause places an unnecessary and costly burden on the lessee in most cases. A lessee that agrees to this clause, might not have any intention of ever fullfilling the requirement of the obligation and rely on the lessor to enforce or attempt to enforce it. I don’t think you would ever find an attorney that would advise trying to use failure to perform these clauses to break the lease.
2 Likes
Rick - Yes, it is McClain County, OK. Thank you for shedding some light on things I hadn’t considered. (more accurately - what I didn’t know.) After considering your insight, I think I will go ahead and strike those clauses… If nothing else, they are not worth losing the lease over - I don’t have a lot of hope of it ever being drilled… but I guess miracles happen… Even with a miracle, there won’t be a lot of money coming in on it! Certainly won’t be getting rich! 
Thank you, again!!! I keep learning things every time I go through this… and I so appreciate your responding to my post. Thank you…
Every lease is different and it is all a negotiation process. Neither one of those seem to be a show stopper if it was my personal lease. However, I might be trying to trade those for something that was to my advantage as part of the negotiation process. A better commencement of operations clause, a better definition of Force Majeure, less warranty exposure, etc. Or just getting to be able to get a lease might be enough of an advantage. Everybody’s situation is unique.
Best of Luck!
Rick - I appreciate your comments. I am on a BIG learning curve and there is so much to learn and take into consideration when doing a lease. As a newbie, it is overwhelming to me and your comments help so much. Thank you, again.