I am trying to help my elderly aunt, who has  1 acre of mineral rights which is in an undivided interest of a 40 acre tract in Texas within the Haynesville shale. All the other relatives who have mineral rights in the 40 acres have signed the lease, but as she is out of state the lease was mailed to her to sign.

However, when I looked over the lease one thing that caught my attention is that in the main body of the lease the amount of royatly to be paid states only 1/8 several times.


Then in the Exhibit "A" attached to the lease it states this: It is understood and agreed that wherever "one-eighth" (1/8th) appears in Paragraph 5 of this lease "one-fourth" (1/4) shall be and is hereby substituted therefor.

I guess my question is, with conflicitng statements will this be a problem? In the end, what royalty will be paid to all who signed this lease.  Will they get the 1/4 (25%) they think they are getting OR will they get the 1/8 (12.5%)? 

Also, any advice as to if this is a a good "Cost Free Royalty" Clause which is in Exhibit "A" as provsion 2 below.  Will all my relatives who signed this lease really get a cost free royalty they think they are getting or are there other hidden expense cost that will be deducted besides severance tax & production tax (what would the production tax relate to in Texas?)

There are only 6 provisions in Exhibit "A".  They are below.  How do they look?  Any problems?

Exhibit "A" Provisions read:

1. It is understood and agreed that wherever "one-eighth" (1/8th) appears in Paragraph 5 of this lease "one-fourth" (1/4) shall be and is hereby substituted therefor.

(what royalty % will end up being paid?)

2. Lessor's royalty provided for herein shall be calculated on the gross proceeds from the sale of production at the point of sale, and not withstanding anything to the contrary contained herein, it is provided that payments to Lessor for Lessor's royalty share provided herein shall never be charged directly or indirectly with any ofthe expenses of producing, storing, separating, dehydrating, compressing, transporting or otherwise making oil, gas, liquid hydrocarbons, condensate or other fluids produced ready for sale. Notwithstanding the foregoing, Lessor's royalty will bear its share of all severance and production taxes. It is intended that the terms of this section or paragraph of this lease be controlling, and not merely surplusage under the principles set forth in Heritage Resources, Inc. v. Nations Bank, 939 S.W.2d 118 (Tex. 1996). Lessee or its assigns shall immediately reimburse Lessor for any charges as mentioned above that may have been charged in error. This paragraph will hold precedence over any Division Order executed on this lease.

(Is this really a cost free royalty or not?)

3. It is understood and agreed that this lease covers only oil, gas and associated hydrocarbons and does not cover iron ore, coal, lignite and gravel.

4. At the expiration of the Primary Term, or upon the cessation of continuous operations as provided for herein, whichever is the later date, this lease will terminate as to all depths below 100 feet below the stratigraphic equivalent of the deepest depth drilled in a vertical well drilled on the leased premises or on lands pooled therewith, or it will terminate as to all depths below the base of the deepest formation penetrated by a horizontal well drilled on the leased premises or on lands pooled therewith.        

( Does this serve as a good Pugh Clause?)

5. At the expiration of the Primary Term, or upon the cessation of continuous operations as provided for herein, whichever is the later date, this lease will terminate as to all of the land lying outside the snrface perimeter of a pooled unit or units.

6. It is understood and agreed that Lessor warrants to defend title to said land against persons lawfully claiming same or any part thereof, by, through, or under Lessors, but not otherwise.                

(I was a little concerned about this one ... should I be?)
...................................................

Of course, the oil company has 20 provisons in the main body of the lease. And, I know the lease is always written to protect the oil company. But, will these 6 added provisions override any contray statements in the main body of the lease?


This is all new to me and I am just trying to help my aunt as she can hardly read the lease, much understand it all.  

I know it would be best to have an attorney look it over, but with only 1 acre of minearl rights I hate to advise my aunt to seek a lawyer.

The oil company has called her a couple times wanting to know when they will get the signed lease?   Should I tell her to sign the lease with the 7 provisions in Exhibit " A" or not?

Or, are there any changes which should be made, if even possible at this point?  I know it is too late for all the other relatives, but for my aunt are there any suggestions?

Thank you in advance for any advice I can share with her.

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Andrew--is there a implied covenant to develop in the lease or does it have to be written wording added to lease that the lessee must drill additional wells to develop the property as a reasonable prudent operator under similar circumstances would as long as it's is best interest of both lessor and lessee plus be profitable

Adubu,

I have attached a copy of LA Mineral Code article 122. The comments to the article are very illustrative on the topic.

The short answer to your question is that further development does appear to be an implied covenant in Louisiana, but the text of article 122 states that "Parties may stipulate what shall constitute reasonably prudent conduct on the part of the lessee."

Attachments:

Side note - unless you have a substantial amount of acreage (I would say multiple whole units, but at least the majority of one), you aren't likely to get this. I had an attorney absolutely refuse to lease without this once, but his client had 20 acres in a potential 640 acre unit. My client didn't lease them, and I doubt anyone other than the operator would be dumb enough to agree to that, so his clients are probably still waiting or force pooled.

Andrew--- thanks for excellent information. The Carter case in La. and Fox in Olk are good summarys. Good reason to have a good friendly business relationship with your Lessee so can openly talk about developimg property. One twist added to question. Older lease with small operator who leased for vertical wells only for multiple formation down to CV. No plans or ability to drill any deeper or to drill H wells. But denied request for release of deep rights even with proven off set H shale wells in area. Old lease without depth clause. Then I guess court only choice in this type case.I assume Texas has case laws similar to Carter in La.I know you are not a attorney but this is just talk and picking your brain based on all your experence in the business. Thanks again to continue my learning of the subject.</pO

There have been cases recently where Lessor's have tried unsuccessfully to get out of old leases on the theory that the original parties to the contract could not have contemplated the type of development required to produce HS, and so did not have a meeting of the minds. Those cases have failed, as far as I know.

As for failure to develop HS where there are multiple offset wells, that sounds like the Romero v. Humble Oil case mentioned in the document I posted under the heading "Further Development." You can't hold deep rights forever without developing them when the have been proved by others nearby. However, I would have a real hard time being convinced that anyone drilling a HS well today that they weren't contractually bound to drill is being "reasonably prudent," considering the low commodity price. I would guess you would be at the mercy of the Lessee's timing (which is probably good for both of you, since he's likely waiting for higher commodity prices).

Andrew--- yes understand not reasonable to drill a 8-10 million dollar well with minimum chance to pay profit but speaking when prices are favorable to drill and make 4-5 times return on investment

That's right. My point is that the best situation for both of you is a contract that allows the incentive/flexibility to drill when commodity prices are favorable. That way your royalty is better and their return is better. The goal of any contract negotiation is to seek scenarios where both parties win.

"Fair and reasonable" thinking, Andrew.

And some might call it Contract Negotiation 101.

The real pros, who truly know what they're doing (per proper training and decades of experience), never try to demolish the other party who's sitting across from them at the table.

Both sides should walk away from a negotiation as winners.

The Exhibit language overrides the main form so you have no worries there and that is a cost free royalty. On a 1 acre interest this is a very generous lease form and you should sign it.

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