We have a lease in Ward County, TX that expires in February, 2018. The company that has the lease has offered us a lease extension for one year because they will not be drilling by February. I have had several calls in the past from companies that were interested in this area and I told them it was leased until February. Are companies other than the one that holds the lease allowed to make an offer before this lease expires? Just want to make sure I get the best price.
Donna, I think it's good that the operator is proactive as some wait to the last minute but I question whether it would be better to SELL the operator a 1 year extension because I highly doubt they will pay as much for the one year as someone else will pay for a 3 year lease.
Frankly, If I know it's going to be drilled within 18 months, I want to sell them a 5 year lease and charge for every bit of it in the bonus.
If you allow your lease to expire without an extension you are in a better bargaining position because you can lease at will to other companies and even your present lessee will be competing for a 3 year or greater lease.
Donna, it is not a matter of if the companies making lease offers right now can lease you right now, it is a matter of if you have the right to top lease? You must check your lease to make sure you are not prohibited in any way from Top leasing or required to give the current lessee the first right of refusal.
As I understand it... Top lease is a current grant of rights for a set period of time but contingent on your current lessee failing to save their lease by operations, production or other rentals such as shut in payments as set forth in your current [ bottom] lease.
In my opinion Top leasing is bad business. You need disclaimers that the Top lessee does so at their own risk and that the lease is totally void if the Top lessee has not paid the agreed bonus by a certain date. You need your own lawyer working on that.
The biggest failure point of Top leasing is the lessee treating the Top lease as an unpaid OPTION to try and flip your lease at a profit to someone else. Many people send in the executed Top lease expecting that they have a deal and will be paid or send it in and deposit a draft which is not honored and in both cased they are subject to having their lease recorded and their title clouded, no bonus payment and having to go out of pocket in legal fees to force the Top lessee to record a release of lease. This will not be an instant process and if it happens to you, you will undoubtedly miss opportunities.
Considering all of the above? I would wait for my lease to expire and then negotiate the best deal I could. I wish you a safe and happy 4th!
R W - are you saying that if a leasor has a lease with option to extend that the leasor has the right to refuse the extension hoping there will be more leasees interested? I thought since the company holding the lease has the option to extend that it was their decision only, not the landowner. I may be wrong OR does it depend on wording in the lease? We have a couple of leases expiring soon, so this question is timely. Thanks
Ron
Ron, I was speaking specifically to Donna's case. If the operator had the option to extend the lease, they would most likely not be contacting Donna to get a 1 year extension. I suppose it's theoretically possible they have the option to extend for 2 years and are merely seeking to get the option at half price? I consider that to be a low order of probability.
If the lessee has an option to extend in the lease, the lessor has no right to refuse the extension.
Donna, was asking whether all the companies contacting her with several months left to go on her lease had the right to do so? They have the right to ask, my point is Donna may not have the right to agree until her lease expires. I hope that clears things up.
I seriously doubt you will find a poorly worded option to extend in a lease, at least not beyond a typographical error and as they mostly try to stick to standard forms, even that would be rare.
Thanks RW, that helps
ron
Let your lease expire and open lease negotiations. I would not top lease it. If the company is approaching you, I doubt there is extension language in the lease. More companies competing for your lease is better for you in negotiating bonus, royalty and terms.
Donna, others have given you good advice. One more point is that if, being in Ward County which has a number of tracts of Relinquishment Act tracts, you cannot top lease a State lease. But i agree with the general tenor that unless you lease requires an extension, I wouldn't do it. Remember, they will have had it for 3 years and done nothing, so expecting them to do anything after a one year extension is unlikely, except to flip to another operator. Nice to be loved. :)
Dear Ms. Esterline,
If you are looking to get the best price, it is generally advisable to wait until you have lands that are not encumbered with an oil and gas lease.
I generally do not advise my clients to grant lease extensions. The main reason is that for most people, the base lease that they are being asked to extend is not the best form that might be available to be negotiated. (Why have a lease modification to provide for a 4 year term rather that a 3 year term, with no other changes to royalty, etc.?)
It is cleaner to start with a fresh lease (even a 1 year term lease) in 2018 than a lease modification now.
Another point. Some are referring to "top leases." That is not the same thing as a lease extension, which is generally a lease amendment as to lease term. Don't get confused with the jargon.
Best,
Buddy CottenThank you. I appreciate the information.
Thank you for the information, it was very helpful.
I'd let you lease run it's course and negotiate a new lease.