A major company has offered me a top lease on my acreage that has 14 months remaining on a competitor's bottom lease. My current lease outlines that I have to make a formal notification to my current lease holder, and they have a 15 day window for right of refusal. If they choose to not match the top lease and it goes into effect, does that also mean the current lease holder has given up their right for first right of refusal to extend my current lease once it expires in 14 months?
Dave:
I have never seen a lease with wording as you described. I can tell you that I prefer to allow the lease to expire and stay away from the top lease matter. If the area is "hot", the current lease holder will most likely drill before the expiration of the lease.
My current lease has a stipulation that I must formally notify them of any top lease offer, and they have 15 days to meet any such offer to acquire a top lease on equivalent terms and conditions. The landman for the company offering the top lease stated if my current company chooses to not to accept the terms and match the top lease offer, they nullify their noted ability in my lease to extend the primary term of my lease upon expiration. It was relayed that due to the company not matching the top lease offer within 15 days, the top lease would automatically activate upon expiration.
The current lease holder, CHK, has no active drilling in this area, and there are 3 relatively landlocked landowners with acreage leased by CHK wherein the active drilling company in my area has attempted to acquire to no avail. I believe the top lease proposals are meant to press CHK to go through with a sale of the leases to them as the top leases are planned to be worded so that it wouldn't benefit CHK to match them.
Dave, I don't have your lease in front of me but the language I think you are paraphrasing and your lease may be interpreted more than one way. You say that Chesapeak has the "noted ability in my lease to extend the primary term of my lease upon expiration". It could be that your lease has conflicting clauses, in which case I would let the lease die a natural death. You would not want a court of law to make a determination of just exactly which language is controling.
If the top lessee is trying to put together a drill unit, they probably still will be in 14 months. These leases are for years for a reason, it can take years to lease up the property and make ready to drill.
If you are going to go forward with topleasing, I suggest you run it past an experienced oil and gas attorney. I would also make certain in advance of exactly how and when you are to be paid for the toplease. There are many people out there who have topleased and not been paid until their bottom lease expired and they lost potential bargaining power of being a free agent for no immediate gain. Many were never paid because the toplease company was merely speculating with a "free" toplease that they could walk away from because they paid nothing up front and the toplease contained language that the lessee could release the toplease and walk away with no money invested. I hope you are absolutely certain that the top lessee is a company that drills and operates wells. Make sure they are not just speculating.
If I were considering a toplease, which I generally would not because I agree with Mr. Mallory, I would demand a substantial up front payment of at least 1/3 before I handed over the executed toplease. There are several pitfalls I can think of in topleasing. I hope you get some legal advice.
[Edit] I see where you say it is a major company, sadly they speculate also. Make sure you get cash up front.
Thanks for the reply. The drilling company has 95% of all acreage in my area secured, and I was shown the well pad map today. Currently, there's a pad under construction within 150 yards of my property line with 11 drillings scheduled. Subsequently, there's a neighboring pad planned for land approximately 500 yards from my acreage in another direction (contingent on their acquiring the CHK leases either through a direct sale or through top lease acquisition) wherein 10 additional drillings are scheduled. 3 of the CHK leases are landlocked in this drilling area, and all of us were offered the same top lease agreements today. We'll contact a local attorney in the area for clarification, but we were all told if CHK doesn't match the top lease offer within 15 days, the top lease will ultimately take effect upon CHK's expiration as the first right of refusal and lease extension will expire with the forthcoming top lease notification.
Dave,
Why risk your large royalty right payment potential for a few dollars of top lease income? Top leases are NEVER to the advantage of the mineral owner and open up all kinds of mischief possibilities for the top lessee and lessee at the expense of the lessor. Top Leases also an attempt to circumvent the natural economic laws or supply and demand; the last thing an owner wants in a hot area. Understand that I'm not referring to Lease extensions as that is an entirely different matter. Turn down the top lease offer and you will sleep better at night. A lot can happen in 14 months in this business and you have already relinquished your control of your minerals rights. A top lease will to breath control back into your hands.
For clarification, there are 3 leased CHK landowners who are completely landlocked by the current driller, and the first of 2 pads in the immediate area are currently under construction. The current driller has acquired and/or previously leased all acreage in the immediate area and in the permitted drilling units with the exception of the 3 CHK leases. CHK received an initial offer to purchase the leases, but CHK didn't accept the offer with stated terms and the deals expired.
I believe the current driller is offering the 3 of us substantial top leases in order to either force CHK to renegotiate a sale or ensure CHK won't match the top lease offer in order to acquire the acreage in 14 months when the leases expire.
Although the driller is probably using the top leases as bait for CHK, ultimately, I believe they're beneficial for us in order to force our inclusion in the drilling units. CHK will ultimately have to do one of the following:
- sell the acreage and we're ultimately included in the units under the terms of our current leases
- match the top lease offer with bonus and royalty increases and retain the acreage - even though they're not drilling anywhere in my part of the state
- not match the offer and the driller acquires in 14 months with the balance of the top lease bonus paid to us
I don't believe the options are worse than CHK doing nothing further and our acreage remains left out of the drilling units while being landlocked and basically exempt form any further drilling.
Thanks for the responses.
Dave,
Best check PA force pooling regs including implied commitment to develop found in the coal mining industry there. Again, the information you have may just be rumor and to act without any control whatsoever, may put you into a lawsuit where you don't have a chance of winning. CPK is the owner of the 3 leases you mention. It can now do whatever it wants with what it owns as long as it is lawful. For you to engage in a battle between lessees is a no win position. CPK is certainly smart enough to let the the surrounding operators prove up their position before drilling and now they know that there is always a deal to be had. Whether you top lease or not, CPK has a finite amount of time to explore. I wouldn't be surprised but what the proof of production as defined by your lease is also very soft.
Read about contract interference in the Texaco - Pennzoil Case and don't become a part of something like that by top leaseing.
Gary Hutchinson
Dave: This is pretty clear cut from a legal standpoint. Remember that you have an existing lease agreement. You should first read the rights of the current leaseholder regarding renewal. If renewal rights exist, the top lease is inconsequential. ONLY if the current leaseholder (CHK, right?) decides not to renew under whatever terms and conditions are already in your original lease would the top lease affect your situation going forward.
Only IF CHK's current lease says - regarding renewal - that they MUST match any other offer pending prior to renewal would your top-lessee-in-waiting have the right to swoop in and oust CHK.
Said differently, you seem to be contradicting yourself (in your explanation of what's going on here) or there is actually only a right of first refusal upon renewal. In which case - again - it's very straightforward. CHK will have to match your top lease offer or they are gone when the lease expires.
I have a tough time believing that your lease - unless poorly written - would say something to the effect that: "lessee must match a top lease offer within 15 days or will lose its right of first refusal irrespective of how many months of remaining term exist prior to renewal." But, this is what you seem to be suggesting.
CHK - if it has renewal rights - should have up until lease renewal to make any final decision as to whether or not to match any top lease terms and conditions. The crap shoot here is with the top lessee, not CHK. So really the top lessee is only gaining an advantage over all other parties EXCEPT CHK going forward if you sign this deal.
As for your specific concerns - as a rights owner and lessor - you should be thinking, first:
1) what if my rights are actually valuable? is the deal with the top lessee the best offer I COULD get? so the risk is you could be locking into a deal that is actually worse than you might be able to get from somebody else within the next 14 months.
2) this is a contradictory thought to the point above: if CHK must match any top lease then you COULD view the top lease as a good way to simply force CHK to have to renew on better terms down the road.
3) "out there" thought: Your top lessee offeror COULD be a shill for CHK. Doubtful, but possible. All is fair in love and war....
You need to figure out what the actual renewal terms state in your current lease, esp. w/r/t any requirement to "match" a top lease offer. This is the part you seem to be fuzzy on.
Not sure what you are saying here, Gary. There's no risk anywhere so long as the top lease is well-written and the top-lessee-in-waiting is of reputable quality, which Dave stated in the first 3 words of his IP.
Gary L. Hutchinson said:
Dave,
Why risk your large royalty right payment potential for a few dollars of top lease income? Top leases are NEVER to the advantage of the mineral owner and open up all kinds of mischief possibilities for the top lessee and lessee at the expense of the lessor. Top Leases also an attempt to circumvent the natural economic laws or supply and demand; the last thing an owner wants in a hot area. Understand that I'm not referring to Lease extensions as that is an entirely different matter. Turn down the top lease offer and you will sleep better at night. A lot can happen in 14 months in this business and you have already relinquished your control of your minerals rights. A top lease will to breath control back into your hands.
Gary L Hutchinson
Minerals Management
My CHK lease has the specific wording: "Right Of First Refusal: If at any time within the primary term of this lease or any continuation or extension any bona fide Top Lease, CHK has the continuing option by meeting any such offer on equivalent terms and conditions....CHK has 15 days after receipt to advise Lessor (me) in writing of its election to enter a lease on equivalent terms and conditions. If Lessee (CHK) fails to notify me within the 15 day period of its election to meet any offer, Lessor (me) shall have the right to accept said offer."
In addition, my lease states the verbiage that CHK may extend the primary term for an add'l 5 year term as the same terms and conditions stated in my original lease.
The top lease company has stated in the event CHK chooses to not match the top lease after the 15 day notification period, they forego their legal ability to extend the lease at expiration as they didn't exercise the Right of First Refusal upon notification of the offer, and the top lease becomes effective upon expiration. They made the same proposal to all 3 of the CHK land owners, and they've stated they're going to draw the top lease up with wording so that it wouldn't be advantageous for CHK to match (i.e. no surface disturbance - since the acreage is landlocked by top lease driller acreage, CHK couldn't do any drilling except vertical, and they couldn't access our land without some right of access in place on neighboring acreage.
Provided CHK does legally give up the lease extension option by not matching the top lease, I can't see how it's not a win-win situation for us 3 CHK lease holders.
Subsequently, the drilling company stated they'd like to have all 3 of us agree and notify CHK at the same time over the holidays as it's not expected many decision makers would be working while the 15 day window would be ticking after notification.
Dave: See inserted comments below:
Dave said:
My CHK lease has the specific wording: "Right Of First Refusal: If at any time within the primary term of this lease or any continuation or extension
<RIGHT HERE>
Is this literally what it says? Because it appears some words are missing or mis-writ. For instance, is the word "of" missing? If it says "of any bona fide Top Lease" that would imply that a top lease already exists.
If there is no "of," then does it really say (or mean) "... [comma], any bona fide top lease [shall be presented to lessor, then in that event] CHK has the continuing option (what option are we referring to... the option to RENEW? Is this more explicit... for instance, is this ROFR language within a section having to do with renewal or is it directly relative to or ancillary to same?)
IF this is what is not just implied but directly and clearly stated, then really what the lease provides (surprisingly) is that, seemingly at any time during the primary term, you could entertain another, higher offer and force CHK to accept those terms.
Further, if this language is in the lease, then there should be derivative language that discusses what happens next if CHK does NOT agree to those terms. Are they simply not permitted to renew? Is the lease immediately terminated? What. That will shed light on this.
any bona fide Top Lease, CHK has the continuing option by meeting any such offer on equivalent terms and conditions....CHK has 15 days after receipt to advise Lessor (me) in writing of its election to enter a lease on equivalent terms and conditions. If Lessee (CHK) fails to notify me within the 15 day period of its election to meet any offer, Lessor (me) shall have the right to accept said offer."
In addition, my lease states the verbiage that CHK may extend the primary term for an add'l 5 year term as the same terms and conditions stated in my original lease.
The top lease company has stated in the event CHK chooses to not match the top lease after the 15 day notification period, they forego their legal ability to extend the lease at expiration as they didn't exercise the Right of First Refusal upon notification of the offer, and the top lease becomes effective upon expiration. They made the same proposal to all 3 of the CHK land owners, and they've stated they're going to draw the top lease up with wording so that it wouldn't be advantageous for CHK to match (i.e. no surface disturbance - since the acreage is landlocked by top lease driller acreage, CHK couldn't do any drilling except vertical, and they couldn't access our land without some right of access in place on neighboring acreage.
Provided CHK does legally give up the lease extension option by not matching the top lease, I can't see how it's not a win-win situation for us 3 CHK lease holders.
Subsequently, the drilling company stated they'd like to have all 3 of us agree and notify CHK at the same time over the holidays as it's not expected many decision makers would be working while the 15 day window would be ticking after notification.
As for the rest of your comments, it's also worth noting (which Gary the other commenter isn't giving appropriate credit for) that the competitor offeror has read your lease, is fully apprised of the details (which - as is obvious from my above comment - I don't see the whole picture), knows what they are getting into, and how to navigate around certain terms. They would not want to waste time, $$ or resources pursuing this. And you say they are a major.
So continuing, I think you have probably concluded exactly correctly. I would see little risk, and obviously some significant upside (assuming you don't think you could do even better within the next 14 months). There will be no legal "battle" as Gary seems to fear. The lease is the lease and the terms are the terms and this is business. Period.
Last thought is to just make sure that you are getting paid something significant up-front for your troubles and for giving the competitor this opportunity. They must value this deal highly to want to engage in these crafty tactics (holiday decision-making timing!! Har!) Don't do this on the basis of future promises and performance alone. And I presume it goes without saying that you WILL have looked at the credibility and ability to perform of the top lessee and have finagled - hopefully - favorable terms besides mere $$ into what would become a new lease. Don't give up the fort to gain a few shekels, so to speak.
Best of success.
Gary: FWIW you have mixed a lot of apples with oranges here. This is clearly not TI (tortious interference) or such if Top Lease rights are specifically contemplated by Dave's lease! C'mon.
There is no "battle." This is literally a condition anticipated by the language of the lease.
Commenting on proof of production is... oblique. However, it is valuable for Dave to consider that any NEW lease have at least as favorable terms as the existing lease, if not better terms, in this regard.
Forced pooling? Coal mining? Lawsuits? Really not sure why you introduce these thoughts.
Gary L. Hutchinson said:
Dave,
Best check PA force pooling regs including implied commitment to develop found in the coal mining industry there. Again, the information you have may just be rumor and to act without any control whatsoever, may put you into a lawsuit where you don't have a chance of winning. CPK is the owner of the 3 leases you mention. It can now do whatever it wants with what it owns as long as it is lawful. For you to engage in a battle between lessees is a no win position. CPK is certainly smart enough to let the the surrounding operators prove up their position before drilling and now they know that there is always a deal to be had. Whether you top lease or not, CPK has a finite amount of time to explore. I wouldn't be surprised but what the proof of production as defined by your lease is also very soft.
Read about contract interference in the Texaco - Pennzoil Case and don't become a part of something like that by top leaseing.
Gary Hutchinson
This is true.... but unclear as to the consequences. The primary lease would describe what happens in this event.
charles s mallory said:
Dave:
I have never seen a lease with wording as you described. I can tell you that I prefer to allow the lease to expire and stay away from the top lease matter. If the area is "hot", the current lease holder will most likely drill before the expiration of the lease.
The new driller is the largest active driller in my immediate area with numerous wells drilled within a 5 mile radius. With that, in reference to specific wording in my lease, the paragraph in question, which is completely separate from any statement of Primary Term Extension wording is:
Right of First Refusal: If at any time within the primary term of this Lease or any continuation or extension thereof, Lessor receives any bona fide offer, acceptable to Lessor, to grant an add'l lease ("Top Lease") covering all or part of the Leasehold, Lessee shall have the continuing option by meeting any such offer to acquire a Top Lease on equivalent terms and conditions. Any offer must be in writing and must set forth proposed Lessee's name, bonus consideration and royalty consideration to be paid for such Top Lease, and include a copy of the lease form to be utilized reflecting all pertinent and relevant terms and conditions of the Top Lease. Lessee shall have 15 days after receipt from Lessor of a complete copy of any such offer to advise Lessor in writing of its election to enter into an oil and gas lease with Lessor on equivalent terms and conditions. If Lessee fails to notify Lessor within the 15 day period of its election to meet any such bona fide offer, Lessor shall have the right to accept said offer.
As mentioned, the new driller states that if CHK does not choose to match all details of the Top Lease, it legally becomes fully valid upon expiration, and with this refusal to accept, CHK also foregoes any ability to extend the current lease upon completion provided they haven't done anything prior to expiration (i.e. partial drilling) that would automatically validate the current lease and keep it in place. As I noted, with all surrounding acreage currently leased to the new driller, CHK couldn't access my acreage without some right of way access agreement negotiated through the new driller, and with the top leases in place, they wouldn't permit access to any of the current 3 CHK landowner's acreage.
Dave,
I understand the right of first refusal contained in your O&G lease quite well. Amoco was the first company to start implementing the clause in there leases in ND in the '80’s. The reason Amoco introduced the clause was to maintain control of prospects. They started getting tired of spending a year or so buying leases and putting a prospect together, followed by spending another year or two conducting extensive seismic and scientific research and ultimately plan to drill a few wells. Many times when they arrived at this point they realized there had a couple key leases they needed to renew only to discover top-leases recorded at the courthouse and thus killing the prospect and all their work and investment. I think it a wonderful clause for the lease owner and I use it in every lease I acquire.
I’ve always had one concern with the clause. I have not seen your lease but it usually says that upon receipt of the notice then the Lessee has fifteen days to respond and accept the same terms and conditions. Question - if my lease is for a term of 5 years and I’ve put this clause in my lease, doesn’t that mean that my lease can now run for 5 years and 15 days. This means that the term and the right of first refusal are in conflict with each other and may thus nullify the entire lease. I’m just saying - it’s never been challenged but may someday.
All that aside, I think you should consider top-leasing, although I disagree with the supposition offered by the top-leasing company. If your current lease states that the lease may be extended for the same.terms, if the Lessee renders a bonus payment on or before the expiration of the primary term equal to the first bonus payment, then you are committed. End of story. Where does that leave you?
What you may want to consider:
Get as much of the top-Lease bonus up front as possible. I doubt if you will ever see the 2nd (balance) payment. With the amount of activity taking place by your property now, I think it is very doubtful that the bottom lease will not be drilled. 14 months is a long time. Regardless, CHK has every right to extend the current lease. So when you receive your check in 13 months from CHK you might as well cash it. Again, get as much bonus from the top-lease company as possible.
VERY IMPORTANT: Be sure to cross out the Warranty Clause on the top- lease…
So Dave... Dick offered some good insight and perspective into what was the original intentment of the language in your lease regarding the top lease ROFR.
I would agree that all things considered - EXCEPTING the point you made about CHK not having access to your acreage (but check whether or not your acreage has been made (or could be made) part of a larger drilling "unit" which would obviate your thought (and the thought - apparently - of your prospective top lease lessee) about the competitor driller having the ability to "checkmate" CHK on the drilling access before primary term lease expiration...) - that since you are in a good area, with competition, CHK would absolutely commence drilling prior to primary term expiration and your initial lease will continue.
That said, if your neighbors can block access to your acreage, and you can't - by right pursuant to the current lease - be made part of a larger "unit" for purposes of drilling - then you are sitting pretty and will circumvent this (without actively doing so).
I made the point earlier and Dick made it again.... get as much up-front compensation as possible before signing the lease.
Last - YOUR PROSPECTIVE TOP LEASE LESSEE IS driving the train here, clearly. They know what they are getting into, and tying up your acreage is very important to them - clearly. You will have no issue asking them for "the moon" metaphorically speaking. Your issue seems to boil down to 3 things:
1. Can your acreage - through unitization - be effectively "drilled" upon even though there is no access. If this is the case, game over and your new top lessee should know this. So I'm going to assume this is a known non-issue.
2. DO NOT place yourself in a position of working in cohoots with your neighbors adverse to CHK on the access issue. In other words, if you are simply "lucky" - meaning CHK's competitor has identified your acreage as being uniquely inaccessible AND top-leaseable - GREAT. But if you can be clearly shown to be actively conspiring with your neighbors and CHK's competitor to block CHK's access (meaning, you could actually provide the access but choose not to) so that they can't fulfill their drilling obligation, that is where trouble could arise (Hey... Gary may have had a point to make after all!). So this said...
3. Make SURE that your top lease lessee (CHK's competitor) agrees to fully "indemnify, hold harmless, AND DEFEND you in case of any litigation with CHK. This would mean agreeing to pay/reimburse ALL of your legal costs, expenses, any damage claims, etc. AND, that you can choose your OWN attorney (you don't have to agree to use theirs). If you get this in your top lease, you are in a much stronger position.
Best of success.