Prospective mineral owners seeking a sale need to be especially careful when considering whether to execute a Purchase and Sale Agreement (PSA).  A PSA is a legally binding agreement that sets the price to be paid by a buyer per acre.  It does not guarantee the number of acres that the sale will cover.

Mineral companies send lots of offers and lots of PSAs with only cursory title work.  This makes sense to them from a business perspective because until they have that binding agreement, they have no assurance of a purchase.  A PSA is part of every mineral sale and there are obvious business reasons for a buyer to require one.  The potential problem is with the acreage and the total sales price presented.  Many mineral owners may think they know how many acres they own.  Very few actually do.  Conveyance documents whether for succession documents like a Judgement of Possession or a Deed are more than likely not informed by a modern survey.  Those documents may list a tract as 40 acres when in reality it is 38.25 by modern survey.  Very few tracts are exactly 40 or 80 or 320 acres, they are something more or something less.

Minor differences in the conveyance acres and a modern survey acres are the norm however some mineral companies attempt to take advantage of the fact that mineral owners think they know what they own when they don’t.  A recent example shows how unethical companies can take advantage of this.  The following is a hypothetical example based on real offers.  A mineral company sends an owner an offer for $500,000.  It may be a cover letter or it may be in the form of a PSA.  The price per acre is set but the number of acres is not.  The PSA language guarantees the per acre amount but the actual number of acres is unknown at that point and would not be determined until a buyer does a full title review. Such a review is a prerequisite for a sale and can be time consuming and expensive.

Under the scenario above, the mineral company has stated and the mineral owner expects to be paid $500,000 but when the title work is complete the acreage is less than what informed the offer amount.  That just might be intentional.  The actual number of acres may be less which adjusts the purchase price lower.  The seller can not void the sale without a threat of litigation from the buyer.  Where this is unethical is the cases where a mineral company deliberately overstates the acreage in order to get a PSA signed.  Let’s say the difference between the acreage used to make the PSA offer is 20% less than what the title review confirms.  Then the sales price is now $100,000 less than what the seller expected.  I am aware of one instance where the acres for the purchase price were twice the actual acres.  That would indicate intent by the buyer to provide an inaccurate purchase price to induce a mineral owner to sell.  And place the seller is a precarious position should the buyer threaten to force the sale under the terms of the binding PSA.

The mineral business is incredibly competitive and the urge to cut corners and to increase purchases is constant.  The people making these offers on behalf of the companies they work for are often under a lot of pressure to get PSAs and close purchases.  No mineral owner should consider signing a PSA without getting some professional assistance to make sure they are not painting themselves into a corner.

I spent about three months back in 2018 lobbying the state to require that unit operators follow the state regulations and send in the unit surveys that were created before the first molecule of gas was sold and royalties paid on Haynesville Shale wells.  The regulations called for a unit survey to be submitted within 90 days of first production.  Back in 2018, by my research, there were 850 unit surveys missing from the state database, SONRIS.  Many of those surveys were 6, 8 or 10 years delinquent.  That was intentional on the part of the industry and a strange case of regulator malpractice.  The unit surveys list the exact acreage of each tract in the unit and the total unit acres.  For a mineral owner, that is the acreage that a sale would be based on, not what appears on any conveyance instrument filed in the public record.  Additionally, there are many royalty statements with incorrect eight-digit payment fractions.  The math to determine the correct eight-digit fraction is simple math but a mineral owner must know their surveyed tract acreage, the unit acres and the royalty fraction in their lease.  Upon doing the math, there are often slight discrepancies in the fifth through the eighth digit because of rounding.  From a payment perspective that is not a problem that should create a problem as the decimal is then getting into the 100,000ths.  I look at a lot of royalty statements and find many discrepancies.  Some are within the range of rounding errors in the math.  Some are not.

Not only should a perspective seller Beware, they should be informed before considering a sale.