The lease of our mineral rights expires in a few months and the lease contains the option that the lease can be extended for an additional 2 years with no mention of price. Am I obligated to extend the lease or can I negotiate with others if I don't like their offer?
Thanks for any help.
You may want to read it again. There may be no dollar amount specified, but it may state that it may be extended for an additional two years at the same terms as the original lease, or words to that effect.
If in fact you are reading it correctly, then I would think that the clause may be unenforceable. The best thing to do would be for you to post the exact wording of the clause.
Bill: Typically if a mineral owner negotiates a lease with an extension, the bonus amount should be included in the lease at the same bonus rate of the primary term or preferably higher. If a Company exercises its option to extend they will usually pay the option bonus amount agreed too at least a month before the expiration of the primary term to drill. Most mineral managers I have talked with advise against agreeing to an option to extend and leasing no more than a 3 year primary term with no option to extend. I would suggest checking your lease again and see if you may have an addendum attached specifying an option bonus amount. I would contact the Company and obtain clarification of the lease agreement on the option to extend provision.
Bill, I believe you when you say that the addendum doesn't have a specific option bonus amount. You have told us that. I was just thinking that maybe since you aren't a lease pro, that maybe there was some language which read that the extension would be the same as the original amount paid per acre for the lease, and that you didn't recognize it.
Would there be anyway that you could post the exact wording of the extension clause?
I agree with Dave that the lease extension may not be enforceable, the flip side of that coin is it may be enforceable because you agreed to the terms of the lease and the courts do not protect you from bad business decisions, except in a case of unconsionable bargain, a free extension could stand. Also, if indeed you did give a free extension, just complaining to the lessee may not be enough, you would probably need to lawyer up and go to court. The legal bills would be yours, because I doubt you would recover them even if you won. I also think it highly likely that should you win, you would only recover 2 years worth of lease bonus. If your original lease was for 3 years, I think your recovery would be just 2/3 of the lease bonus you received for the 3 year primary term, In my opinion. I hope you are mistaken or that you can work it out.
You are obligated to extend the Lease if proper consideration is proffered (assuming that is required in the terms of the Lease).
Many thanks to Dave, Mike, RW and Pete. You've been most helpful in pointing me in the right direction.
Bill
We were glad to help you out, but next time be a little more complete with your question. If you have a clause that troubles you, post the complete clause. I like to learn things too about how others in the industry do things. In your case, it appears that something didn't pass the smell test, but I was unable to specifically identify it due to your reluctance or refusal in posting the complete clause. I personally don't recall seeing an addendum clause without some mention of consideration, but I guess it could happen. That is why I wanted you to post the exact wording of the clause. There are also perpetuity issues. Meaning that an extension clause could easily violate the Rule Against Perpetuities if not drafted properly (and often do).