My father sold some farmland on a land contract, minimal down payment with a term of 10 years and then a large balloon payment. The buyers almost immediately signed a lease with an oil company. The oil company sent me (I legally take care of all my elderly father’s business) a ratification to sign regarding the oil lease, which I never signed as I never got a clear explanation from the oil company or the buyers of the land, as to what I was signing. Fast forward 18 months and now there are 3-4 active oil wells around the property and the buyers are pressuring me to sign the ratification. I am aware that we did not sever the mineral rights when we sold the land, but it just does not seem right that with a 6% equity in the land the buyers are entitled to 100% of the benefits of ownership by receiving royalties etc from the oil company, wether from pooling or drilling a well. Hence I still refuse to sign the ratification of the oil lease, in fact the oil company has already sold 40% of the lease to a group of third party investors. The buyers were going to split the revenues 50/50, but have since reneged on that. Without a signed ratification, does that have any impact on the oil lease?
Grant:
First, check the County Clerk's office in the county where the minerals are located to verify whose name is on the mineral deed. You stated that the minerals were not part of the land sale but you didn't say who owned the minerals, which I will guess that they were owned by your father. If so, and he is on record at the County Clerk's office, then the oil company should be dealing with your father or you, if your his legal representative. Go back and review the original contract or obtain legal assistence make sure the minerals were not a part of the land sale.
I could quite easily be wrong here, but it seems to me that the buyers could default on the contract and land and minerals could revert to your father. It may well be that royalty will not be paid to the buyers until and unless you ratify the lease. I understand that you did not purposefully sever the minerals, but was it your intent to sell the minerals? I think you need to speak to your lawyer for an opinion on your land contract. I don’t think a ratification automatically means there is something wrong from the oil co’s point of veiw, but they may have some doubts. I don’t see a downside to not signing the ratification. I would proceed according to your intent at the time of sale. Good luck.
Thank You Charles,
The title search showed that the mineral rights were never severed, and the lack of wording in the land contract to the effect that we were severing or keeping the mineral rights has led us to believe the mineral rights went with the land. I am not disputing that, but rather believe because of our equity position, and the buyers lack of a deed, (until they pay off the land contract) that our ratification is a bargaining chip if they buyers want to benefit from the oil lease. I am not being vindictive or have sour grapes, but my feeling is if it is important to the buyer and the oil company to have my signature on the ratification, then we also should share the benefits of any lease. I just do not know how integral the ratification is to the whole process.
Grant:
It may be to your advantage to obtain a legal opinion in regards to whether or not the signing of this ratification will be to your advantage. Good luck in your decisions.
Grant Willnow said:
Thank You Charles,
The title search showed that the mineral rights were never severed, and the lack of wording in the land contract to the effect that we were severing or keeping the mineral rights has led us to believe the mineral rights went with the land. I am not disputing that, but rather believe because of our equity position, and the buyers lack of a deed, (until they pay off the land contract) that our ratification is a bargaining chip if they buyers want to benefit from the oil lease. I am not being vindictive or have sour grapes, but my feeling is if it is important to the buyer and the oil company to have my signature on the ratification, then we also should share the benefits of any lease. I just do not know how integral the ratification is to the whole process.
charles s mallory said:
Grant:
It may be to your advantage to obtain a legal opinion in regards to whether or not the signing of this ratification will be to your advantage. Good luck in your decisions.
Grant Willnow said:Thank You Charles,
The title search showed that the mineral rights were never severed, and the lack of wording in the land contract to the effect that we were severing or keeping the mineral rights has led us to believe the mineral rights went with the land. I am not disputing that, but rather believe because of our equity position, and the buyers lack of a deed, (until they pay off the land contract) that our ratification is a bargaining chip if they buyers want to benefit from the oil lease. I am not being vindictive or have sour grapes, but my feeling is if it is important to the buyer and the oil company to have my signature on the ratification, then we also should share the benefits of any lease. I just do not know how integral the ratification is to the whole process.
Equity position means bupkis to this situation.
They could have just as easily sent a subordination agreement. The risk to the oil company is that if your buyer defaults, the oil company will have several wells and no lease. Therefore, on reversion of the minerals to the seller (you), you will end up owning the wells, which is not what the oil company would want to have happen.
This is poor land work. This should have been taken care of soon after the lease was acquired.
The lease form itself may give the Lessee the ability to discharge any mortgage.
Yeah, I know unfortunately equity means bupkis. But thanks also for the rest of your comments. The land contract has a clause that forbids pre-payment as long as my father is alive, providing him with steady income without a large influx of cash, so the lessee cannot discharge the land contract, unless my father passes away. Does assigning part of the oil lease to third parties without my ratification have any bearing?
Dear Grant,
The assignment probably started this ball rolling in the first place. In the assignee's due diligence, they noticed the potential problem.
Bad land work leads to lots of remedial work. Fact is, my tagline on my business card is "Oil and Gas Remediation Services."
If I were you, I would not ratify anything. I would create a new agreement with the current owners of the leasehold estate to dictate what happens in the event of default on the land contract - such as a bonus payment and a pre-determined lease agreement. Simple to do and solves all problems and you come out ahead either way. Another option would be a subordination, but that gives you no flexibility in the styling of the lease agreement.
FYI, many mortgages and deeds of trust and land contracts make provisions for oil and gas leasing and who gets what in the security document itself.
Dear Buddy,
I checked out your web site after I replied, so this type of thing is right up your alley. Your expertise is appreciated, thanks again, I will pass your information on to my lawyer. Best of luck to you sir.
Cheers,
Grant Willnow
Buddy Cotten said:
Dear Grant,
The assignment probably started this ball rolling in the first place. In the assignee's due diligence, they noticed the potential problem.
Bad land work leads to lots of remedial work. Fact is, my tagline on my business card is "Oil and Gas Remediation Services."
If I were you, I would not ratify anything. I would create a new agreement with the current owners of the leasehold estate to dictate what happens in the event of default on the land contract - such as a bonus payment and a pre-determined lease agreement. Simple to do and solves all problems and you come out ahead either way.
FYI, many mortgages and deeds of trust and land contracts make provisions for oil and gas leasing and who gets what in the security document itself.
Best to you,
Buddy Cotten
Dear Grant,
Thanks for the very kind words. If your attorney would like a consultation, have him contact me.
Grant Willnow said:
Dear Buddy,
I checked out your web site after I replied, so this type of thing is right up your alley. Your expertise is appreciated, thanks again, I will pass your information on to my lawyer. Best of luck to you sir.
Cheers,
Grant Willnow
A Land Sale Contract is a contract for a Deed. If the buyer pays as agreed and at the completion of payment in full, you must convey a Fee Simple Deed, free of any encumbrance whatsoever. As a Contract buyer, the buyer has all the rights (Bundle of Rights) as a Fee Simple Deed owner. The only rights or restrictions will be what you agreed to on the original Contract. Since you did not place a mineral right exclusion in the Contract, you must give the buyer a right to receive full mineral rights, or be in violation of your Contract. Equity has nothing to do with the buyer’s rights to property use (unless stated in your contract) as long as the payments and other conditions (if any) of the contract are current. If a 50/50 agreement was written outside of the contract for mineral royalty, you may have legal rights to income from royalties from that agreement. You need to take your contract to a lawyer to verify your contract rights. good luck to you.
Thank you Thomas, your explanation makes sense, I will have counsel go over the contract.
Thomas Mullins said:
A Land Sale Contract is a contract for a Deed. If the buyer pays as agreed and at the completion of payment in full, you must convey a Fee Simple Deed, free of any encumbrance whatsoever. As a Contract buyer, the buyer has all the rights (Bundle of Rights) as a Fee Simple Deed owner. The only rights or restrictions will be what you agreed to on the original Contract. Since you did not place a mineral right exclusion in the Contract, you must give the buyer a right to receive full mineral rights, or be in violation of your Contract. Equity has nothing to do with the buyer’s rights to property use (unless stated in your contract) as long as the payments and other conditions (if any) of the contract are current. If a 50/50 agreement was written outside of the contract for mineral royalty, you may have legal rights to income from royalties from that agreement. You need to take your contract to a lawyer to verify your contract rights. good luck to you.