- We three siblings each have a 1/3 undivided mineral rights on the same tracts. Can we each lease our undivided 1/3 interest on the same tract to different oil companies or do we all have to agree to lease our interest to the same company on the same terms?
- If we have each signed leases with a company but have not received a payment yet for our leases, is it all right for us to talk to other companies about the same tracts that are in our signed leases to find out if another company would be interested in leasing any of them?
Dear Wilson Inc.
1. Yes. They are your minerals in indivision, so you may do what you please. That, however, is not always the best strategy in Texas.
2. There is a court case that allows just that situation. The landowner was paid by draft and a sharp landman bought the lease in cash and told the landowner to recall the draft. The oil company did not return the draft, but instead paid it. There was a lawsuit of course. The draft was an unaltered Pound Printing Draft Form. In that form, it conditions payment upon approval of title or mineral deed or lease and contents (I don't have one in front of me), WHICH made the draft itself a conditional payment, which allowed the second company to come in and lease the property. They made a well, too.
Thanks for replying with great infomation.
What is generally the best strategy in Texas?
Buddy Cotten said:
Dear Wilson Inc.
1. Yes. They are your minerals in indivision, so you may do what you please. That, however, is not always the best strategy in Texas.
2. There is a court case that allows just that situation. The landowner was paid by draft and a sharp landman bought the lease in cash and told the landowner to recall the draft. The oil company did not return the draft, but instead paid it. There was a lawsuit of course. The draft was an unaltered Pound Printing Draft Form. In that form, it conditions payment upon approval of title or mineral deed or lease and contents (I don't have one in front of me), WHICH made the draft itself a conditional payment, which allowed the second company to come in and lease the property. They made a well, too.
Best,
Buddy Cotten
Dear Wilson Inc.
There is no best, or even better strategy in Texas. The results of Intelligence Analysis will give great insight to the better way to go.
Dear Buddy Cotten,
We are inexperienced in O&G leasing and have no idea what "Intelligence Analysis" is. An explanation will be greatly appreciated.
Buddy Cotten said:
Dear Wilson Inc.
There is no best, or even better strategy in Texas. The results of Intelligence Analysis will give great insight to the better way to go.
Best,
Buddy Cotten
Dear Wilson Inc
Simply put, Intelligence Analysis is the process of removing (or moderating) the ambiguity of ambiguous situations. In many cases the ambiguity is created on purpose. That is what Harrison Ford's character did in the Hunt for Red October. Dad was OSS during WWII and he taught me a wonderful analytical approach to problem solving.
Do not think for one instant that the more information that is acquired by the negotiator, and his ability to separate wheat from chaff is not a tremendous negotiating advantage (determining the strategic, operational, or tactical importance).
Done correctly, it is like playing Texas Holdem when you can see the other players cards.
It can potentially be somewhat expensive to do for the average landowner, but in some extreme cases, it pays for itself 100,000 fold.
I hope Buddy will correct me if I am wrong, but I think if the first company paid by draft and recorded the lease, even if they haven't honored the draft yet, would own the lease, because recording would be notice that the mineral owner wasn't entitled to lease the property at present. The mineral owner would still be tied up by the lease even if the draft was dishonored until you convinced the lessee to release the lease, or filed suit and won. Even if the draft was never honored, it's not illegal to owe someone money. Contract law does require consideration from both sides for a contract to be valid ( you have to sue at this point, which is where I personally am ). Tx is a Notice state and not a RACE to record state, but I think it has much the same effect in such a case as the company that records first has priority, even if they haven't paid, yet. I know now it's bad business to let an executed lease out of your hands, very bad. I hope others can learn from my mistake.
Buddy, I have barely scratched the surface of drafts, the different kinds, stipulations and the effects they have. I was just today inquiring into the privilege of redraft, which seems to allow the IOU to be very open ended. I can’t say I like the courts descision in that case, but I can’t fault their statement that site drafts are one of the customary ways to tender payment in an O&G lease, regardless of the fact that the privilege of redraft could make them an eternal IOU. The above was from a ND supreme court case. The Tx case I looked at probably wasn’t definitive, but did contain the elements of a lessee recording a lease they had tendered a draft for which had not yet been honored and a second prospective lessee that actually paid and recorded a lease. In that case the court gave the first lessee priority based on constructive notice. It was not a Tx supreme court case, I can’t even say whether it was appealed or not. I could see it going either way in a lower court, based on how effective ones lawyer was.
Dear Bob,
I had lunch with Frank Spellman one day in the mid 1990's at the "Empresario" - a restaurant so bad in Goliad, we called it Kavorkians.
Frank Spellman was the unfortunate landman in the infamous Spellman v. Lyons Petroleum, Inc., 709 S.W.2d 295, 297-98 (Tex. App.-Houston [14th Dist.] 1986. Frank and I spent some time over some bowls of chili and Tums going over the case. In a nutshell:
When oil and gas companies enter into an oil and gas lease, they frequently reserve the right to consider the lease and review title for a period of time before they become obligated to pay. This type of arrangement is sometimes referred to as a “free look” contract.
Often the means used to accomplish this is the exchange of a bank draft for the lease, including standard
language like the following in the draft: This is an extraction of the Pound Form that Frank used:
"On approval of lease or mineral deed described hereon, and on approval of title to same by drawee not later than xx days after arrival of this draft at collecting bank,"
If the oil and gas company decides not to fund the draft in the time stated, “the deal is off.”
That would be a cold draft.
Of course, the best approach is to get the deal you want up front, rather than relying on the “free look” time frame to reconsider, particularly since that time will expire as soon as the oil and gas company does honor the draft.
But just in case, the lessor should be aware of the lessor’s right to withdraw during the “free look” time period.
Remember, I am only talking about Texas right now. I do not know the law in other states re free looks.
Thank you, Buddy. ND being an immature state in oil matters, copies much of their law, from other states ( sometimes it looks like they pick the worst of what they see elsewhere ). I wont hold what you have told me to be gospel there, but it gives me a reasonable comparison for search.
Thank you Mr. Cotten.
Buddy Cotten said:
Dear Wilson Inc
Simply put, Intelligence Analysis is the process of removing (or moderating) the ambiguity of ambiguous situations. In many cases the ambiguity is created on purpose. That is what Harrison Ford's character did in the Hunt for Red October. Dad was OSS during WWII and he taught me a wonderful analytical approach to problem solving.
Do not think for one instant that the more information that is acquired by the negotiator, and his ability to separate wheat from chaff is not a tremendous negotiating advantage (determining the strategic, operational, or tactical importance).
Done correctly, it is like playing Texas Holdem when you can see the other players cards.
It can potentially be somewhat expensive to do for the average landowner, but in some extreme cases, it pays for itself 100,000 fold.
Buddy Cotten