Just wanted to put this out there: If you are a mineral owner and receive a lease offer, at the very least you should ask to strike the Right of First Refusal to Purchase clause. Any Lessee that includes this won’t think twice about removing it yet they continue to slip it in there because they know owners will sign.
The issue is, if you ever wanted to sell, this gives you little to no negotiation power because all they have to do is match the offer. They don’t even have to beat it. This deters most groups completely from even making an offer because it would likely be a waste of time. In turn, that depresses the value of your property and makes it an extremely unfair bidding process, leaving you with essentially 1 potential group you can sell to.
Thanks for highlighting this. You are 110% spot on. A Right of First Refusal is an incredibly de-valuing encumbrance to a mineral interest. Only the uninformed fall for this - but I’m afraid there are a lot of uninformed…
If you think education is expensive, try ignorance.
Personally, I question the legality of these ROFR clauses in leases as you are essentially encumbering the actual property via a traditionally non-encumbering agreement. As in, you cant create an easement on a property without a SPECIFIC modification to the deed, not just a lease agreement. It’s like an apartment tenant including in his lease with the landlord, that the building cant be sold without a ROFR - I’d imagine it’d be thrown out in Court.
I don’t know why a restriction on selling land wouldnt fall into this category of specific additions to the deed, rather than an unrelated lease agreement. I hope someone takes this to court
It will all depend on state statutes and case law. However, generally courts view contracts as having been negotiated between knowing parties who intended that the clauses be enforced as written. So I would expect it likely to be enforced. And lawsuits are very expensive and time consuming. As always, the point is that mineral owners should not sign leases without fully understanding every clause. Getting legal advice up front often saves money in the long run.
Definitely agreed. Having said that, most mineral owners are not sophisticated owners and in this case there should be a responsibility of the state to protect them from more permanent clauses that are not directly related to the lease agreements. Especially, when you’re dealing with small interests where going to an attorney doesn’t make a lot of financial sense.
Above my pay grade, but this is a “Spirit of the Law” issue and certainly significantly hurts an owner if they sign a ROFR clause
Sorry, but “spirit of the law” is not going to be a basis of for revocation of the terms of a negotiated lease agreement. Mineral owners, like all property owners, have an obligation to educate themselves or to obtain competent legal advice, before engaging in legal contracts and transactions. The state cannot pick and choose how to protect people from their own actions. Otherwise the state would need to intervene to set all the lease and contractual terms for everyone at all times. I would not trust state or federal legislators, who are funded by corporations, to set out statutory contracts which adequately protect my interests. Every day we are all presented contracts - by doctors, by cell phone service providers, by electricity company - and how many people read these and delete unfavorable provisions before signing? And yet, if there is a dispute, you will be held to all the terms.
I agree with all of that. I just wanted to make a public notice because I think most owners don’t think about that clause and typically the easiest clause to strike in the agreement. It does not materially change the value for the Lessee. It only limits the Lessor from having more options if they wanted to sell.
Royalty language, among other terms within the lease requires a different discussion. Especially when talking about royalty and deductions, that has material implications for both parties and that should be part of a negotiation. Depends on the area, economics of the potential well, current market, etc.
Agreed. If they don’t drill during the lease term, why do you expect them to in the next 3-5 years? And what will the value be at the end of the term? It could be a lot higher. In any event, the lessee hasn’t acted so I want to be done with them.
I don’t think an extension option is a deal breaker by any means. I’ve seen many times where your second lease is less favorable than the first. You could argue that letting it expire and then having to go through lease negotiations again (and potentially waiting another few years) vs getting that payment on a schedule could result in a more favorable return on your minerals. The market changes, it goes up and goes down. If the market is down at the expiration of the primary term, the Lessee may go ahead and extend even though the terms you have might be above current market.
That’s why every mineral owner who has any significant mineral interest should join NARO, go to their state or Natl conventions and get an education there. They also have books on mineral management and courses for becoming a mineral expert. NARO has a partnership with this website. check it out.