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Permalink Reply by CBT on August 12, 2008 at 15:57

I've asked this question as well. Forgive me upfront, experts, if I'm not explaining this right, but from what I understand, it is a clause that allows another O & G come in and offer a lease on top of the one you already have in hopes that the original company can't drill or place a well in time before lease is up. However, in our lease, it states that we must give the original signing company a chance to meet the same conditions as the O & G wanting to lease on top of the original. IF, your land is not HBP (help by production-gas found on land and waiting for well) by the time your lease expires, the 2nd O & G will move in and take over on the conditions you agreed to when you (and the original leasee) accepted the terms. IF, your land IS held by production, there's not anything you can do. You're held long-term at the conditions you agreed upon in the original lease. In our case, it was $100 per acre. We were wondering if we needed to "shop around" for a top lease since we own a significant amount of acreage.

Experts want to chime in here? Please enlighten us?

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Permalink Reply by TRUCKER on August 12, 2008 at 16:18

CBT THERE IS NO PRODUCTION ON MY LAND YET THE OLD LEASE WILL RUN OUT IN OCT NO WELL ON LAND SO DO I HAVE TO KEEP NEW LEASE THE LAND MAN SEAD IT WAS FREE MONEY!!!

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Permalink Reply by CBT on August 12, 2008 at 16:21

Make sure you don't have an extension clause. Our lease ends in Dec. and unfortunately it has an extension clause that says if O & G co. wants to continue to hold on to our land (they will...) all they have to do is cut us a check for $25 per acre!!! (they will)...This will automatically extend our lease for an addt'l 2 years.

If you're not held to an extension...Blessings to you! Make sure you hold out for top dollar! Good luck to you!

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Permalink Reply by Dion Warr, CPL on August 12, 2008 at 20:10

CBT:

No I'd say you're doing fine on your own.

A "top lease" is a term which implies knowledge by the "top lessee" that the property being leased is already subject to an existing oil and gas lease, and will only become valid when the prior lease expires.

This is the reason that companies that top lease generally extend a fraction of the total bonus consideration to the lessor, the balance to be made up when their lease becomes good.

As long as the first lease may be kept alive by terms within the lease (including rights of first refusal), the prior lease primes the top lease. In CBT's example, if the first lessee pays $25 per acre in accordance with the terms of the lease, that will keep the first lease alive for two years. If the first lessee spuds a well the day before the lease expires, the top lease is no good until operations and/or production ceases, typically for a period of no less than 90 days. If the first lessee brings in a capable well but has no market (e.g. a gas well with no flowline or tie-in to pipeline), and timely pays the mandated shut-in payment, the lease is generally good for another year.

Know your lease form. Or retain someone that knows your lease form. Preferably, seek a knowledgeable consultant or counsel before signing a lease. If you cannot do this at this time (under lease), be ready for next time.

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Permalink Reply by Mister Z on August 13, 2008 at 2:59

There's another aspect to this I think you should consider, something I call etiquette. Simply put, I think that simple good manners dictate that if the operator of your existing lease has treated you fairly, you should let them know you've received an offer to top lease, in case they want to match it. You probably don't have a contractual obligation to do this, but anyone with good manners will.

By analogy, a real estate landlord with a typical lease in hand wouldn't have the obligation to renew with a current tennant if a better offer came along, but good manners dictate that he would at least give the current tennant a chance to meet the new lease terms.

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Permalink Reply by ETOilman on August 13, 2008 at 3:20

Usually a top lease is an offer to lease your land with a lease now, but with an effective date being the date that the current lease expires. Most of the time the companies will offer 10% of the bonus and pay the remaining 90% once the other lease has expired. They are gambling that the other lessee will not be able to drill their lease and thus it will expire. That is the reason for the 10% (or some other percentage of bonus money) is offered up front. If you choose this route, make sure that the initial bonus is NON REFUNDABLE. Or just sit tight until the other lease expires and make your best deal.

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Permalink Reply by The_Baron on August 13, 2008 at 4:21

A top lease is a new lease with its own terms and conditions.

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