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Permalink Reply by Skip Peel - Mineral Consultant on March 21, 2022 at 2:54

When ownership of mineral rights burdened by an existing lease are transferred in a sale, it is the responsibility of the new owner to contact the lessee, provide proof of the sale and initiate the change of owner in the oil company's pay deck.  This doesn't happen overnight and I've never seen an instance of splitting a month's worth of royalty revenue between two parties.  Depending on when the new owner starts the process, the oil company will determine an "effective date" if the parties to the sale did not agree to one.  The lessee or the operator may require the new owner to "ratify" the existing lease that burdens the mineral right.  The seller, who has been in pay, should contact the operator or lessee if different from the operator and ask for the most efficient manner in which to do this.  They are the owner of record and have an owner number.  I suspect that there may be a form that both parties may execute and notarize but I would also suggest supplying a copy of the deed of sale.

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Permalink Reply by Iris on March 21, 2022 at 6:09

I don't need to vouch for Skip Peel's answer, I am wondering though if perhaps the former owner's lease allowed surface rights which might encumber the new owner of property?  Might also be that lease about to expire and not worth the prior owner's hassle?

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Permalink Reply by Boomer on March 22, 2022 at 8:33

Skip, thank you for the info I have passed it on to the couple, and they will start the wheels turning.  Again THANK YOU!

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Permalink Reply by Dion Warr, CPL on March 21, 2022 at 7:39

Boomer:

Based upon the above facts, this is what usually happens:

1)  As Skip states, the new Purchaser is required to contact the present Lessee to notify them of the change of ownership.  Per the terms of most form leases, Lessee is not obligated to recognize the transfer of Lessor's rights under the lease until it is notified in writing and/or a copy of a recordable act evidencing such transfer or sale is provided to them.

-- Commentary - this should be done prior to May sales going out if at all possible (explanation below)

2)  Owner Relations for the current Lessee should be contacted ASAP - each company requires different documentation, but nearly all will require a copy of the Cash Sale evidencing the transfer of the property, which will show that there was not a mineral or royalty reservation and thus prove up the transfer for the Division Order Analyst.  At that time, the DO will usually also require a W-9 form for the new owner(s) and will likely send a package with same to be completed as well as a new Division of Interest letter to be executed by the Buyer, thereby owner information and SSN(s) / TIN(s) is (are) confirmed.

3) Settlement with the old and new owner is usually made based upon the nearest date of sale as opposed to the date of settlement for sales. Given your example, if the transfer was effected by the Lessee TODAY, the old owner would at least receive this month's gas production (typically companies are paying on January production starting around the 20th of March, whether actually sooner or later) as well as a payment in April (for February production).  The new owner in this scenario would definitely receive all royalty payments after June (pay on April production.  Payments on gas are usually 45-60 days after the date of physical sale - hence as the new owner is it better to act quickly and not wait.

4)  It gets a bit interesting on the March payment.  Some companies will book back to the date of the sale, and then pay the new owner on the first day of the forward month (being April production, paid in June).  Others will attempt to track production based upon daily production data and then split the March settlements (paid in May) based upon that.  I have not heard of a company splitting production on a pro-rata basis mid-month; wells do not produce at a constant rate and therefore the Transfer Order effective date is what is used.

5) If the new owner is errant in timely notifying the Lessee, the company can choose to rely on the language in the lease regarding notice of transfer, or sometimes will attempt to make best efforts to remedy the situation close to the date of transfer if (a) it can, and (2) the new owner is not so late in the notification that it cannot recover the royalties paid to the old owner.  In general if one can notify the Lessee within the month or so, you have a good shot of receiving all royalties due; if one is a year out from the sale, you'll start getting the paid on the next possible date of transfer.

6) In uncommon circumstances the company may adjust out of the old owner's royalty if either that owner is receiving other royalties elsewhere from the same Lessee or if the payment is large enough to merit recovery of royalties paid in error.  If it's small and the old owner was receiving comparatively little in royalty payments, they will likely make the adjustments the best they can out of existing revenues and go forward.

With regard to Iris' question - the new owner buys the property subject to prior agreements in force at the time of the sale. By the same logic that the new owner can collect on the benefits and proceeds of the lease (royalties), it also must live with the other terms and obligations under the same lease (ie, potential surface encumbrances).  It is possible for a new owner to challenge the lease only under certain circumstances, the primary one being effective notice.  In this case, the likelihood of the new owner not having sufficient notice is small (if the lease was prior recorded, basically nonexistent).  Consider - if one knows enough to know about and ask for the royalties, you acknowledge that the lease by which the royalty is created also exists.

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Permalink Reply by Boomer on March 22, 2022 at 8:35

Dion, thanks for the info!  It has been passed on to start the wheels turning.  Thanks a lot!

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