Basic information about gas leases for property/mineral rights owners.

There are several important issues all property/mineral rights owners need to understand before signing a gas lease.

If not properly addressed, the property/mineral rights owner could be exposed to significant financial responsibility and/or risk.

Costs associated with these responsibilities can be high, maybe more than any income derived from the lease.

Terminology --

1. Lessee refers to the gas company offering the lease.

2. Lessor refers to the property/mineral rights owner.

Issues:

-- Monetary compensation or the bonus/signing payment. This is the amount of money you get for signing the lease. The biggest issues are:
(a) The amount per acre and the minimum amount per plated lot.
(b) How to define the lot acreage size. Generally, it should include the area to the center of the adjacent street(s).

-- You should get paid at the time of signing without any reservations.

-- Royalty Payments. This is how much you will get, as a percentage of the value of the gas produced. Very technical issues here, most importantly:

-- The gross percentage (the accepted standard currently is 25% of the gross value of oil/gas at the wellhead).

-- Post-production, transportation, etc. typically cost somewhere around 1%-3% (resulting in a net of 22%-24% of the gross value). A negotiation goal should be that the energy company pay 1%-3% of getting the gas/oil to market.

-- Fees for putting the lease into effect. You want to pay nothing to create the lease. These fees typically include attorney fees (it’s best to recover those fees from the energy company).

-- Mortgage company subordination fees. The main problem here is that all mortgage loans have a clause that says you cannot sell or otherwise convey (lease) any part of your property without mortgage company approval. These fees can be as high as $1,000 per lot. They need to be addressed during negotiations.

-- Miscellaneous fees, such as: title fees, processing fees, taxes, and any other item directly related to obtaining and making true the lease agreement should be paid by the energy company.

-- How long does the lease run and what are the conditions attached to it?

-- Initial term needs to be limited so that drilling and royalties will actually begin at some reasonable point in the future. There needs to be a specific limit and penalties if the energy company does not meet the limits.

-- Continuous development. This means that once they start, they need to “get on with it and get it over with.”

-- Other items that make the lease readable and enforceable in court.

-- Energy company shall be party to and signatory on lease agreement.

-- All agreed terms shall be specifically included in the lease agreement.

-- Deed restrictions that limit the lease need to be specifically spelled out in the lease agreement.

-- Mineral Rights: These are how you spell out exactly what you are giving to the energy company. Some legalese that will keep you out of financial and legal trouble.

-- Property/mineral rights owner DOES NOT WARRANTY mineral rights. Fee simple w/o warranty or title insurance. All liability shall be the responsibility of the Lessee. This means that if someone comes along years from now and disputes your rights, the energy company is the one who has to defend those rights and is financially responsible.

-- Mineral rights limited to oil, gas, and other hydrocarbons. No other mineral rights to be given. If the gas drillers find diamonds, Property/mineral rights owner gets them.

-- Texas law: We need to make sure that we do not run afoul of any laws and that the energy company complies with the laws regulations and codes of all public entities in Texas.

-- A subset of this is all the noise, dust, pollution, water, etc issues that need to be addressed. The most important issue here is the long-term impact on the city and the neighborhood.

-- Most drilling is complete in 6-8 weeks. The next 20-40 years are most important.

-- Trust: Nothing counts unless it is in writing. The first rule of property ownership is that everything must be written.