A Montana land man contacted me about a month ago about Rockport’s desire to lease some minor mineral rights in McKenzie County. There were some peculiar mishaps along the way - proposed lease sent to wrong address, odd name of land man company, inclusion of warranty of title clause when it was supposed to be deleted, possible miscalculation of acreage owned - but nothing that I thought was a red flag. The lease terms otherwise looked okay, but then I told him he couldn’t have a wet signature until I had my money. He seemed to recoil at this, but said he would check with Rockport and get back to me. Today, he got back to me and said he couldn’t send my money first, citing some “race to the recorder” excuse. I told him I wouldn’t send a wet signature first, but was open to other suggestions that would protect both parties. The negotiations then ended (which is fine by me as I am getting other offers).
In looking back through my file, I saw where my father sent out a signed lease about 30 years ago, but didn’t get his money and had to deal with that. I don’t want to have to chase someone down in some out of state court, since I don’t live in ND. Years ago, this used to be handled differently (a payment order of some sort lodged with a bank), but the underlying problem remains.
What are other people doing?
How to smartly handle the Money transaction:
It is advisable to talk over this method with the leasing agent to make sure everyone understands.
1. Sign and get the original lease notarized, then send a copy to the leasing agent (as a notice of intention.) You, your banker, or your attorney, must hold the original. 2. The leasing agent should then send you a check. Take it to the bank and deposit it. 3. Once the check has cleared and the funds are available, make and keep a copy of the paperwork for your files and then mail the original signed lease to the leasing agent.
Oil and gas is a small industry, and reputation matters. In places like North Dakota, word gets around quickly.
A lease is not valid without payment. I’ll repeat that because it’s important. A lease is not valid without payment.
Also remember that a lease is not a contract until you sign it. Until the landowner signs the lease, there is no binding agreement. Why would they give you money before you make an agreement? Both sides have to trust each other.
North Dakota is a race-notice state, so recording documents promptly matters. Companies are not going to send thousands of dollars to someone who only says they “plan” to sign a lease. That would not make sense.
Companies should send a letter agreement or purchase and sale agreement (PSA) along with the lease, I would suggest not working with a company that does not include one. That document states that if title checks out, the company agrees to pay you and you agree to convey the interest. Once that agreement is signed by both parties, it becomes a legally binding contract outlining the terms of the transaction.
A common process is this: send the company a good scanned copy of the signed lease and letter agreement, so they can record it and begin their title review. The company conducts due diligence to confirm ownership. Once that is verified, they issue payment, and then you send in the original signed documents.
Landman 101: a lease is not valid without payment or a signature, takes trust from both parties.
Thanks.
I offered to send him a copy of the fully executed and notarized lease, but just not the wet signature until paid. He wouldn’t agree.
I agree with most of what Colorado says, and offered to do just that, but it didn’t work. You say that a lease is not valid without payment, so far so good, but that leaves the risk of it being deemed valid with minimal payment (shortchanging on acreage). I don’t care to buy a lawsuit over whether payment was made at all or whether the payment was what is valid.
As far as relying upon the alleged reputational risk as some sort of assurance, I have my doubts. Remember, this is the oil industry and these are largely southerners. Enough said.
Oh well, I am getting other offers - most recently last week.
Regarding the issue of whether a lease is valid without the bonus payment -
I have seen leases that do not mention a bonus payment at all. The bonus payment was set out in a separate document. That document said the operator/lessee has 90 days to make payment of the bonus.
But the lease contained what us lawyers call a “merger clause” which says there are no other agreements between the parties. So the agreement to pay the bonus stands on its own.
In that case you can run into real problems: You sign and deliver the lease without getting the bonus. The lessee then assigns the lease to a new operator. The new operator has no obligation to pay your bonus because it’s not in the lease. The original company doesn’t pay and, in a worse case scenario, files bankruptcy.
End result is your property is leased but you get no bonus.
Best to arrange an escrow arrangement with the lease or a simultaneous delivery of the lease for the bonus.
When you send the copy of the signed lease, be sure and mark over it in big letters “COPY DO NOT FILE” on every page, especially the signature page.
M_Barnes: Very good advice - to show that you intend to ultimately deliver a signed lease.
But at some point you will have to deliver the original lease - best to do that either through an escrow arrangement or simultaneous delivery of the lease for the bonus.
I’d also write on the copy (with the “COPY - DO NOT FILE” language) that the original will be delivered upon payment of the bonus. That may show even more good intentions.
It sounds like the leasing agent is not the most up & up guy, or he doesn’t have the funds to pay up front and is hiding it. I agree that if you send a signed lease, you may never see the bonus. Probably better to move on and wait for a lease with someone you can trust. Unfortunately, I have been in that situation, as have plenty of others, and its not worth the time & headaches.
Most companies (in the bakken) draft 10-30 days out, hold the original and send a copy if you feel like you won’t get paid. I haven’t heard of folks getting cold drafted in a long time. Concerning the net acreage differences, every landman is different, no one is perfect. If you feel like your acreage amount is set in stone, I’d have a broker run your tracts (with a run sheet) and have it on file then if the potential lessee comes back with different nets, you can have a say. Concerning the warranty clause, just strike it with a pen, initial it. What defines an odd name of land man company? Taco Bell Land Company or something like Menards Oil Company? Not sure about that concern. Anyways, it all sounds like standard practice.
Smart Landowner 101: Exchange a completely signed/notorized lease (signed by both parties), of which you keep a copy, in exchange for good funds, otherwise known as a cashiers check. This shakes out all the posers.
The lease itself contains forms of consideration (royalty rate and other terms). If the bonus is not paid you will need to separately sue the leasee as a contract matter. This exact situation happened to me. I sued the leasee for failure to pay the bonus in small claims court. The Texas small claims court limit is $20,000. I collected $18,500 from the leasee for unpaid lease bonus.
Thanks for the comment.
As it happens, my dad (a North Dakota attorney), mailed off a notarized lease on this same property in the early 1990s and got stiffed on payment. He prepared an Affidavit of Non-Payment and was ready to record it, but the culprit finally returned the lease. The interest is doubly cursed as it comes out of a settlement with a crooked oil man settled circa 1963 and another interest from the same source was the subject of an acreage dispute action which went up to the ND Supreme Court a few years ago. All of this makes me very wary.
I suppose I could record an Affidavit of Non-Payment if I got in a situation, but I’d prefer not to (I am also an attorney, but in another state). I know that ultimately having a winning legal position isn’t worth much if I run up $50K in fees to try to recover a $10K bonus payment from a dead beat in some other state.
I note some of the other comments come from oil industry people who urge we owners to just trust them and go along with the program. Nope.
As usual, Ms Barnes is on point. Thanks for cutting through the gaslighting.