Hello All,
We are getting ready to look at a lease. We have a question. How does the actual transaction usually take place. Assuming there is just the O&G Co. and 1 mineral rights owner.
A. They send a check with the lease.
B. They send a check after we mail them the lease. (This one seems too scary...)
C. We all sit down in a conference room, sign and get a check.
D. Other.
How does this usually go down...
Dakota67:
I would insist on a check and not a bank draft as if you agree to a bank draft, you could be "Cold Drafted", where the lessee does not honor the draft and files the lease. In the past, I have taken care of the paperwork on my end and fortunately recieved a check several weeks later. I would not let the landman or company rep. push a bank draft in the lease deal. The only problems with meeting in person is that usually, there is a great distance between you and operator and the operator does not tweak the final phase of the lease such as verification of the true mineral owner until a lease has been obtained. There exists a bit of trust on both ends but the bank draft is not the way to deal.
Good question. We have a situation where I manage minerals for my own Family and extended Family members where there are 10 mineral owners. We have an Oil and Gas Attorney to handle the transaction with the landman who represents the oil Company. What our ATTY requires is that the Landman will bring the Company checks, not drafts, to his Office and exchange the signed leases there. This arrangement has worked well for us over many years of leasing minerals. It also saves time and effort for the landman as we coordinate with all mineral owners the signing of leases which they send to our ATTY. This may not be a practical approach for everyone but definitely require a Company check at the time the mineral lease is exchanged.
Mr. Igau:
I would have handled all of my leases in the manner you described but I reside in Texas and the company operations were too far away. Knock on wood, of all the leases I have been a part of, no problems ever arose.
Mike Igau said:
Good question. We have a situation where I manage minerals for my own Family and extended Family members where there are 10 mineral owners. We have an Oil and Gas Attorney to handle the transaction with the landman who represents the oil Company. What our ATTY requires is that the Landman will bring the Company checks, not drafts, to his Office and exchange the signed leases there. This arrangement has worked well for us over many years of leasing minerals. It also saves time and effort for the landman as we coordinate with all mineral owners the signing of leases which they send to our ATTY. This may not be a practical approach for everyone but definitely require a Company check at the time the mineral lease is exchanged.
I am 0 for 3. Three leases were recorded and zero drafts were honored. I have a lawyer dealing with these, and with a case of fraud where a lease agent my brother and I had been dealing with ( we have ample documentation ) for 9 months committed fraud. They petitioned the court for an emergency mineral trust, claiming they could not find us. I have had wells ( my ninth well is drilling now ) since the last time oil was $140 bbl in 2008, and have yet to recieve a penny from it, but I will. Small wonder I have zero trust for O&G co’s and lease agents. I think it likely the majority of drafts will be honored. I know that many are not. I recomend you do not accept a draft, that it is optional for them to honor, unless you are ready to pay lawyers out of your own pocket. The oil co’s want you to stick your neck out so far on trust. Standard leases contain words to the effect; (sharpie this out unless you actually have cash in hand) for ten dollars or more cash in hand, the recipt of which is hereby aknowleged. They expect you to lie, to say you have been paid, when you haven’t yet been paid. I can tell you it is not just a formality. They are preparing an arguement for court. Ask yourself, why would they be doing that? The point will only come up if they do not pay you! Look up Bakken Exploration. The N.D. State Attorney General filed a cease and desist order because their mode of operation was to lease and not pay ( from Legal Newsline.com ). My leases were not with Bakken Explorations. If you don’t mind paying lawyers out of pocket, by all means accept the draft, I’m sure your lawyer can use a new home theatre or large down payment on a new all wheel drive luxury suv. Or, you can work out some way to make sure you get paid. Good luck whatever you do.
Dakota, My answer is "D. Other".
If they'll send you a check in advance of you sending them the signed lease, do it. However, it is likely they'll want the signed lease before sending a check. So instead, accept a "BANK DRAFT".
They may also ask you to just mail them your signed lease in exchange for their draft. However, DO NOT DO THAT EITHER. Instead, use the bank draft the way it was originally designed to be used.
That is the banks (yours and theirs) act as independent third parties for you and the Lessee. In effect YOUR signed leased will be held in 'escrow' until THEY are satisfied with your title, and THEY have exchanged their draft for actual payment.
Here is the process. Make sure YOUR bank handles it this way and you will be protected against fraud.
1. Sign and notarize the lease and take it along with their bank draft to YOUR bank.
2. Have YOUR bank hold the signed lease, as they submit the bank draft to THEIR bank for payment.
3. The drafts specify how long the Lessee has to confirm title and honor their draft (30 days, or 45 days...)
4. When YOUR bank receives actual payment (a check, wired funds, etc...) from THEIR bank, YOUR bank informs you payment is received, and then YOUR bank sends your signed lease to THEIR bank.
5. YOU are protected against having a lease recorded before paying, THEY are protected in that a signed lease awaits them once they have sent payment for it.
6. If they fail to honor their draft, YOUR bank returns the signed lease back to you.
7. The Lessee never holds the lease until payment has been made. You never send them your lease in exchange for their draft, they only receive it upon payment.
If you live in "oil country" many banks are familiar with this process. If you live elsewhere you may have to explain the process to your banker. Banks do charge a nominal fee for this service ($25...$50?) but it is well worth it.
This is the traditional and proper use of the "Bank Draft" as payment for a lease. Tell your Lessee this is how you are going to handle it and often they'll also pay the bank fee on your end. Dakota, that is my two bits.
That would fall under the 2nd from last line of my reply " Or, you can work out some way to make sure you get paid ". If you escrow that way the draft is irrelevent, not so? You can tell the bank in writing not to deliver the lease until a payment of a certain amount is received. I have also seen several leases and never has an O&G co or lease agent suggested that escrow be done. Why not? They do suggest that you submit the draft to your bank for payment. All the lease offers I have had suggest you return the executed lease to them. I consider the drafts they send with the average lease offer to be a deceptive business practice, to give the appearance of being paid. If they were honest, wouldn’t they suggest the escrow arrangement? Oh! Wait, that’s too much to ask. Should we have a poll to see how many people had the escrow suggested by the lessee or his agent and how many were simply told to return the executed lease in the postage paid envelope provided? All my wells are economically good in good areas. Areas that I knew were good when I executed the leases. I never dreamed they wouldn’t pay the paltry sums I signed for. These leases were in N.D. The one experience I had leasing minerals in Tx. I was paid with a check immediately, no problems. Leads me to wonder what’s wrong in the northwest.
Mr. Kennedy,
You are right, any more they say, "Send us the signed lease and submit the draft to your bank." I doubt we need that poll to determine how often they suggest any alternative to that. However, a bank draft is nothing more than a promise to pay within a specified time, IF THEY CHOOSE TO. That is why I would discourage anyone from ever doing it the way they suggest. If you send the signed lease in exchange for their draft; They hold your O&G Lease, while you hold a glorified I.O.U. which specifically states they may decide not to honor it. The actual paper "draft" does still serve a purpose as it is their written confirmation of what they intend to pay, if they accept your lease.
Yet when a "bank draft" is handled as it is designed to work, it protects your interest. While I describe it as having your lease "in escrow", technically it may not be an "escrow". However, it's a similar function. It is a process which came about years ago for use with oil and gas leases for the very purpose of protecting both the Lessor and Lessee involved in a long distance transaction.
Today almost all leasing agent, or Lessees, wants you to handle bank drafts as if it's a post dated check. It is not. Yet a bank draft is an effective way to receive your lease payment when it is used as it was designed to be used. The two banks (yours and theirs) provides the missing layer of "trust" to the transaction.
I have used the process described above to sucessfully collect lease payments via bank drafts. I have done so for years, including two separate leases in the past four months. The only problem most folks might have is finding a bank which is familiar with handling drafts. Though if the Lessor and the bank follows the proper process you can be comfortable with them. Bank Drafts are effective when handled properly, they're a potential fiasco when not.