Tied to the Anchor - the Most Favored Nations Provision

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.

I am negotiating a lease on our families undivided one-half mineral interest in two sections in Terry County and the landman just said if I don't go ahead and accept their offer and accept a sight-draft and lease then they might move the interest area to another area and we will miss out on the lease.

Are you familiar with this statement; or the ploy to "force" a lease? We have already agreed on the terms and were finalizing the lease form so they would send their final package when he made this statement this morning.

Thanks for your feedback.

I don’t like threats and ploys. These type of landman want us to believe that we are going to miss out if we don’t jump. The oil company and their geologist decides where their interest is, and not the landman. Leasing your land is very serious business and not to be entered into lightly. I would take however much time that I needed to get the lease form/addendums like I wanted them and not give in to ultimatums and deadlines. All of my family, except for me, leased their land and I heard a similar statement from the landman that they could just leave me out. Eventually the company had another landman call me, who was very courteous, and I took an additional two-three months getting the lease form put together whenever I had time to work on it, and had my attorney review. Then the oil company and I negotiated my lease form, I finally executed the lease, and received a 7 day draft (which I requested, opposed to a 30 day draft). I am just curious, did you counter their offer for a better deal? You should really consider getting a board certified oil and gas attorney to review the lease and addendums before executing. The fee will be well worth it in the long run.

To 6th Gen and others --

When landmen use weak-ass techniques on me, I just go over their head and ask the company man is that what they really want to say to me - because I need to know if I am going to be dealing with a company that uses these techniques and personnel -- and I want to know if his words were authorized by the company.

If the company landman balks at the language being used in the field, I tell him that I will not negotiate with the field landman. I will only negotiate with him, so that gentlemen will hopefully equal motivations can come to a business arrangement.

I did that just this week. Cut our the broker. I bet his is still steaming.

I was surprised to learn that oil co's can act like 7 yr old children also. Because i wouldn'y buy lies and pressure tactics from their landman and VP for land, they eventually asked if their CEO could call me. When the CEO called me he made a fairly good offer. I was surprised they had to go that far to find an adult. I was pretty soured on dealing with this co and needed time to think it over. I received a call 2 days later from the CEO to show me the stick to go with the carrot offer. More lies. They hadn't learned after all. They could have had a lease from my brother and I, if they hadn't kept lying to me and if their third offer was as high as their final offer. I turned them down. I'm disabled and can use the money, but I don't need it that bad. It's not like I won't make anything from the oil anyway.

I'm currently having the same experience as 6th Generation Texan had with a landman who is treating me like a naughty child because I refused to sign a lease with Chesapeake for minerals in Wyoming. I have become a fast-learning student of Buddy Cotten -- he says this type of lease is "insane" -- it was a 4-year lease with a 4-year extension. I have 7 sisters who pretty much sign most any of the terms they give them, but I crossed out the 4-year extension, as well as that they could not take out well costs from my royalties. This landman tells me that is "unacceptable" and that he's received all the rest of the family's back and that he'll send me new documents to sign when I'm ready.

So, Buddy, what would you advise me to do next? My portion of this parcel, a total of 160 acres, is 20 acres, and their offer was $200 an acre, which is as much as we've ever gotten from them -- but in 4 years that could very well change with all the activity in this part of Converse County. Thanks.