It is not uncommon that a mineral owner is approached by a landman or oil company, requesting the landowner to execute an oil and gas lease, as lessor. The lessor is concerned that he or she is receiving the “going rate” for bonus, royalty, and any other pecuniary benefits provided for in an oil and gas lease.
The lessee will probably not divulge information as to its “best offer” to a potential lessor. Likewise, other parties who have granted oil and gas leases in the area may be reluctant or refuse to provide information concerning bonus paid, royalty, etc.
To attempt to assure that a lessor receive the “best” price paid for an oil and gas lease, and the “highest” royalty that will be agreed to by a lessee, together with an equal amount of any other pecuniary benefits that can be provided for in an oil and gas lease, it is not uncommon for the lessor torequest a “Favored Nations Provision” be added to an oil and gas lease.
Such a provision typically provides that if any lessor owning mineral interests within a specified area or distance from the landowner’s land, within a certain period of time, executes an oil and gas lease providing for a greater bonus, royalty, etc., or is granted or given a greater bonus, royalty, etc., than the lessor has accepted, the lessee will pay the lessor the difference, thus allowing the lessor to receive the greatest benefit available in the area provided for in the Favored Nations Provision.It is not uncommon for an owner of a small mineral interest in lands, rather than spend a substantial amount of time negotiating the terms of a lease, to accept the lessee’s form of lease and add a Favored Nations Provision as an addendum or rider to the lessee’s lease form.
With respect to owners who own substantially all the minerals in larger tracts of land, they may want to include a Favored Nations Provision in their lease in the event they determine owners of mineral interests in adjacent lands might acquire a greater financial or lease benefit then they had negotiated in their lease.
From the Lessor’s perspective, it would appear to be a tantalizing choice. Settle today for a sum certain with the guarantee that if other Lessors do better than you do, you will later be paid an equal amount of money.
It should be noted that MFN clauses are by no means a one-way street.
Thus, not all MFNs are designed to primarily benefit just Lessors. The inclusion of a MFN clause has a chilling effect on the ability of the Lessee to compete in active lease plays. Even if there is no competition, the Lessee will unjustly use the existence of other leases with MFN provisions to create a glass ceiling, with the Lessee using the existence of the previously negotiated MFN provisions to keep lease prices down.
At this point, the skilled negotiator is tied to the anchor of the MFN provisions because of the inept negotiators who preceded him in leasing.
At the end of the day, a bargain is a bargain and when struck, it should be what a willing buyer and willing seller has felt was a fair to both parties. You will never see a reverse MFN provision where if an offsetting landowner settles the transaction for less than you, you would return bonus monies.
As someone who feels as if they are a skilled negotiator, I abhor MFN provisions because I do not want to be tied to the anchor of a less skilled negotiator.