Oil and gas leases are an enormous nationwide business in the US. Powerful national and multinational companies lease gas and oil rights from either the federal or private landowners. Sadly, private landowners often find themselves powerless after signing long, complicated, and one-sided leases with huge oil development companies. Many landowners find out they cannot even terminate the lease or monitor the actions of their new “partner.”
Rural Ohio attorney Chris White works with private landowners to protect their rights against oil and gas producers and development companies. He represents many private landowners in the Appalachian Basin as that area continues to be developed. As new holdings and reserves of oil and gas are discovered across America, dealing with one-sided oil and gas leases is becoming a nation-wide problem.
Attorney White explains how to recognize the one-sided terms used by oil and gas companies so you can draft better contracts for private landowner clients.
Questions:
- Is this a real estate contract?
- Who can terminate this lease?
- Why are there absurdly long sentences?
- How damaging is the expansive language?
- Can you cancel the lease for a breach?
What Looks Like A Real Estate Contract, But Isn’t?
Attorney White explains the first problem landowners encounter in an oil and gas lease is they believe it is a real property contract and will be interpreted under real property law. While this contract does involve real property, it is a lease and interpreted under contract law. This lease is between a private landowner and Anadarko Petroleum, the $55 billion company bought by Occidental Petroleum in 2019.
Anadarko’s model was to approach the landowner and get them to sign a lease giving Anadarko the power to control and develop the land without ever owning it. Anadarko is the lessee and the property owner is the lessor. Anadarko took control of the land and the gas and oil rights, without ever purchasing or owning the land.
Anadarko then shipped oil or gas products from the land to a third party and shared the revenue. It all sounded reasonable until the landowner realized that the lease’s language left them virtually powerless against Anadarko. As attorney White states, this is definitely a lessee-drafted document.
Beware the Expansive Contract
Attorney White shows how producers use this lease to give themselves permission to take what is defined in the contract and anything else not defined and any adjacent property that may be wrapped up in the project. The most egregious part of these contracts to attorney White is that there is no meeting of the minds for the lessee. The producers build in expansive language that goes far beyond what the producer and the landowner discussed. The producer is saying, if we find more gas or oil, then we get more.
| 2 | Ancillary Rights |
| The rights granted to Lessee hereunder shall include the right of ingress and egress on the leased premises or lands pooled or unitized therewith, along with such rights as may be reasonably necessary to conduct operations for exploring, developing, producing and marketing Oil and Gas Substances. Lessee may use in such operations, free of cost, any oil and gas produced on the leased premises. In exploring, developing, producing or marketing from the leased premises or lands pooled or unitized therewith, the ancillary rights granted herein shall apply (a) to the entire leased premises, notwithstanding any partial or other partial termination of this lease; and (b) to any other lands in which Lessor now or hereafter has authority to grant such rights in the vicinity of the leased premises or lands pooled or unitized therewith. When requested by Lessor in writing, Lessee shall bury its pipelines below ordinary plow depth on cultivated lands. No well shall be located less than 400 feet from any house or barn now on the leased premises or other lands of Lessor used by Lessee hereunder, without Lessor’s consent, and Lessee shall pay for damage caused by its operations to buildings and other improvements now on the leased premises or such other lands, and to commercial timber and growing crops thereon. Lessee shall have the right at any time to remove its fixtures, equipment and materials, including well casing, from the leased premises or such other lands during the term of this lease or within a reasonable time thereafter. |
Ancillary Rights – the Blank Check Clause
According to attorney White, the ancillary rights clause makes the lease even more one-sided for the producer and equates to the landowner giving them a blank check. The landowner enters into a partnership with the producer, but this clause provides the producer with the authority to do just about whatever they want.
!["You're basically saying whatever [they] need to do and deem necessary, [they] have the right to do and that's a horrible partnership." Chris White](https://storage.googleapis.com/lawinsider-wordpress/1/2021/08/Youre-basically-saying-1024x576.jpg)
As an example, producers can go beyond the scope of what the landowner was contemplating and put a Walmart-parking-lot-sized pad on the property with pipes and electrical infrastructure. The producer can run the entire project with generators that get fuel from the landowner’s property with no compensation or accountability from the producer. The landowner has no way to monitor them, effectively creating a blank check for the producer.
The Never Ending Term
The lease’s primary term is three years, but the rest of the language gets expansive in favor of the producer. A significant problem with this lease, according to attorney White, is that there is no language giving the lessor the ability to interpret when the lease should end. This is entirely at the producer’s discretion.
The Power of Absurdly Long Sentences
Adding to the power of the oil company, the Anadarko lease has absurdly long sentences throughout, and this favors the producer. Attorney White says that some sentences are long enough and complex enough to need a sentence structure diagram to understand them. This opens up an area ripe for litigation.
The winner in litigation is the $55 billion producer and not the lone landowner. During litigation, the producer continues to operate the lease unless the landowner can enjoin him from doing so. The landowner would have to pay a bond, go to court and argue over the nuances of the sentences that could be deconstructed and reconstructed dozens of ways. The landowner may not be getting paid yet and has to foot an enormous legal bill while he makes his argument. Meanwhile, the producer keeps producing and selling.
Unfortunately for the landowner, the producer has no reason to write clear, concise language in this lease. The outcome from these long, confusing sentences is wonderful for the producers. The landowner gets less oversight while the producer gets less responsibility and less accountability to the landowner partner.
Royalties – the Home of Fuzzy Math
While attorney White has fewer complaints about this section than the others, he still says it is not a good royalty clause. The clause clearly states the lessor gets 20% of what is received by the lessee.
| 6. | Royalty Payment |
| For all Oil and Gas Substances that are physically produced from the leased premises, or lands pooled, unitized or communized therewith, and sold, lessor shall receive as its royalty 20.00% of the weighted average sales price (as defined below) of such Oil and Gas Substances, less this same percentage share of all production, severance and ad valorem taxes and less the same percentage share of all applicable charges after such Oil and Gas Substances are in a marketable condition and have reached a recognized market for same, including transportation from such recognized market to a different recognized market, if any. |
So, that is 20% of the net, or is it? The producer takes the oil and ships it to the end-user. The end-user pays the producer, who first pays the third party marketing, transportation, and sales company their fee. Then the landowner gets their 20% share of what’s left. But the transportation company can be, and often is, an affiliate or subsidiary of the producer. More money for the producer, less for the landowner. More money in the pockets of the producer and less money for the landowner.
But it gets worse. Often the producer lumps on top even more expenses to pay before applying the 20% royalty. Attorney White has clients who are operating oil and gas wells for more than six months with no revenue.The lessee can arrange the income stream, so they technically get only a fraction of the value of the oil passing through, and then the landowner only receives 20% of that fraction.
The Unaccountable Partner
With all the power drafted in favor of the producer, Attorney White is concerned there is no agency given to the landowner. He says the core of the drafter’s job in an oil and gas lease is to provide as much agency as possible to the lessor. In this agreement, the lessor has no authority to end the lease or adequately monitor the producer. Once the landowner signs this lease, they are at the mercy of the lessor’s books and accounting.
Their Hand in the Till? – You Still Can’t Cancel the Lease
The default clause states the landowner cannot bring a lawsuit for damages, forfeiture, or cancellation for any breach for 60 days after the breach – during which time the producer can cure the breach. Attorney White says this is like catching someone with their hand in the till, making them give you back the money they took, but then it is back to business as usual. This is like enabling their bad behavior.
| 13. | Breach or Default |
| No litigation shall be initiated by Lessor for damages, forfeiture or cancellation with respect to any breach or default by Lessee hereunder, for a period of at least 60 days after lessor has given Lessee written notice fully describing the breach or default, and then only if Lessee fails to remedy the breach or default within such period. if the matter is litigated and there is a final judicial determination that a breach or default has occurred, this lease shall not be forfeited or cancelled in whole or in part unless Lessee is given a reasonable time after said judicial determination (but in no event more than sixty (60) days) to remedy the breach or default and Lessee fails to do so. |
Since the landowner can’t cancel the lease, it can be transferred to a never-ending string of producers. So, even if a producer fails in their performance, they can just transfer the lease to a new producer. This default clause highly favors the producer and the landowner is again powerless.
Don’t Give A Warrant of Title
Attorney White warns that landowners should not give an absolute warranty of title to the quality of their oil and gas interest to the producer. That action would be transferring the duty of responsibility of a real estate issue to a contractual clause. This can create significant problems for your landowner clients.
Not every state has Ohio’s history, with subdivided oil and gas interests going back more than one hundred years. If your state had multiple phases of oil and gas development, having your client state they have 100% fee simple interest could be putting your client’s neck on the line. Attorney White recommends letting the producers do their own research and due diligence in this area. Let them assume the risk.
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Making It Less One-Sided
Oil and gas leases between private landowners and huge oil and gas development companies are extremely one sided in favor of the producer. Be on the lookout for these issues that favor the producer:
- Expansive Language that favors the producer
- The blank check ancillary rights clause
- Absurdly long, one-sided sentences
- Unclear Royalties and the fuzzy math
- No accountability
- The lease term and cancelation rights
The private landowner stands little chance of getting a fair and equitable oil and gas lease without the help of a knowledgeable attorney. Your contract drafting and review skills can make a significant difference in the lives of your landowner clients and their financial future. Knowing the one-sided contract language used in the industry is a good place to start.
Show Notes
THE CONTRACT: Paid-Up Oil & Gas Lease
THE GUEST: Chris’ practice focuses on the Oil and Gas development impacting Ohio, small business legal counsel, real estate, mediation, negotiation and general transactional work. He is honored to be on the Ohio Farm Bureaus list of trusted advisors to landowners dealing with oil and gas related issues.
THE HOST: Mike Whelan is the author of Lawyer Forward: Finding Your Place in the Future of Law and host of the Lawyer Forward community. Learn more about his work for attorneys at www.lawyerforward.com.
If you are interested in being a guest on Contract Teardown, please email us at community@lawinsider.com.
Transcript
Chris White [00:00:00] Saying, I would like to take what you own and develop, I don’t want to own it, I just want to take it and then ship it to somebody else who will own the end product at that point in time. So it’s very much a contract based interpretation and it gets a little deceiving because it deals with real property. And we think it is a real property issue. But for most of us, especially those of us in Ohio, we had to learn the hard way. This is a contract. This is just contract law and what we’re looking at.
Intro Voice [00:00:31] Welcome to the Contract Teardown show from Law Insider, where legal experts tear down contracts from some of the most well-known companies and high profile executives around the world.
Mike Whelan [00:00:45] In this episode, Chris White, an attorney in rural Ohio, tears down Anadarko’s Standard Oil and Gas Lease. It’s a study in negotiating power, carefully defined terms and breezy long sentences. Chris gives some hard earned wisdom about protecting rural landowners who are too often powerless. So let’s tear it down.
Mike Whelan [00:01:06] Hey, everybody. Welcome back to the Contract Teardowns Show. I’m Mike Whalen. The purpose in this show is to take contracts and tear them down, to beat them up and say things we love and don’t love and hang out with smart friends like my friend Chris over here. Chris, how are you today, sir?
Chris White [00:01:22] I’m doing well, Mike. Thanks.
Mike Whelan [00:01:24] Awesome. So, guys, what we are talking about, let me share my screen with you real quick. Is this document that can be found on Law Insider will make sure that the link is included in the show notes. It’s this paid up oil and gas lease as between PCI Holdings and and Endako. Is that right?
Chris White [00:01:43] Anadarko, Anadarko, Anadarko.
Mike Whelan [00:01:45] And these two companies are entering this oil and gas lease. So, Chris, why why are we talking about this document? Why is it important to lawyers? When are they going to run into this thing?
Chris White [00:01:56] This is oil and gas leasing and development is nationwide and it’s taken a hit here over the last couple of years. But it is constantly something that we need to keep an eye on for individual clients, corporate clients, whatever they are looking for, if they are owners of property or mineral rights exclusively, either one, that this is a potential for development because we’re finding new holdings and reserves of oil and gas across the country, all over the place.
Mike Whelan [00:02:25] And what about you? What’s your background? You’re in Ohio, middle of nowhere. We’re on Internet that has a rat on a wheel in the background making sure the, you know, absolutely megabits keep moving. Tell me about your practice, Chris.
Chris White [00:02:39] Let me feed the rat real quick. And there you go. We’re good. And the my practice is a general for general practice firm in northeastern Ohio. We serve about twenty six counties from Franklin County, which is Columbus, all the way to the Ohio River. And we’re about a ten year old firm. There’s eighteen of us. And right now I am the chief of the tribe, running everybody from here hither and yon over over our network. I spent my time early on working with landowners and what we call lessors in these leases, the owners of oil and gas, mineral rights against national and multinational oil and gas companies that were coming in to develop the Appalachian Basin. And so since that time, we’ve expanded well beyond the energy law sector. We do a lot of things because we are general practice. We have about twenty four distinct practice areas that we focus on firm wide. But our goal is to run a little bit different firm than our competitors, very client centric, very goal oriented and reaching and creating accessibility to justice and legal resolution and problem solving across a wide market
Mike Whelan [00:03:52] of rural practice. Everybody go read the book lawyer forward. It’s all about how I broke my rural practice. What cool. Chris, what we’re going to do then is I’m going to jump over to the document real quick and we’re going to go sort of through it point by point a bit. You’ve given me a highlighted range of things to talk about. So let’s go through this thing. I as a side note, I took on the bar exam because I practiced in Texas a section on oil and gas. But everything I know about oil and gas law, I learned from The Beverly Hillbillies. So we’re going to contextualize this a little bit. Tell me a bit. I’m looking in the very early section about who the parties are, what exactly they’re doing. Talk to me about this early this first paragraph that sort of lays out the context. Jed shoots outside. He’s a poor mountaineer, barely kept his family fed. There’s a rabbit, right? Yep. So what’s the context in this first paragraph for who the parties are and what’s going on?
Chris White [00:04:53] Yeah, absolutely. So traditional contract language which deceives you into thinking it is a contract about real property, which in it’s a contract that involves real property. And so we interpret this under contract law. So you have lessor for the person who controls the asset, an interest. And a lessee the person who is seeking to develop, extract whatever it is, is a traditional contract language, lessor lessee the structure. In this case, it was PCI Holdings and Anadarko, which we actually ran into Anadarko in Ohio. They were working on the fringes of some of the Appalachian Basin play and we ran into them a little bit. And so Anadarko is approaching like anybody would a lessor saying, I would like to take what you own and develop it. I don’t want to own it, I. I just want to take it and then ship it to somebody else who will own the end product at that point in time, so it’s very much a contract based interpretation and it gets a little deceiving because it deals with real property. And we think it is a real property issue. But for most of us, especially those of us in Ohio, we’ve had to learn the hard way. This is a contract. This is just contract law and what we’re looking at here.
Mike Whelan [00:06:08] Yeah, and it talks early about it’s for the purpose of exploring, for developing, producing and marketing oil and gas, along with a bunch of broad terms that oil and gas substances. But it says that this is the lease premises and it covers accretions in any small strips or parcels of land. Now we’re here after it starts to get really expensive. So in this first paragraph, that’s just setting sort of the background. Do you like this language? Do you feel like this gets too broad for the sake of the lessor?
Chris White [00:06:37] I think this is definitely a lessee drafted document. So they are the producer and they are trying to be as expansive as possible and what they are giving themselves permission to take, which is not to be unexpected and some of the more complex deeper plays because like unlike Jed, who shot the ground and was able to puncture an oil and gas well right there, these are deep plays and they are complex hydrocarbons that are involved with them. So it should not be unexpected that, yes, we’re talking about oil, we’re talking about gas. We’re talking about natural gas liquids and hydrocarbons, you know, of different sections. So that’s not necessarily bad, but it is getting more and more expansive as the paragraph goes along and you throw back to law school. This is basically a Mother Hubbard clause. This is basically saying not only are you leasing to me what we’re defining here, you’re leasing to me anything else that’s not defined here or any other adjacent properties that may be wrapped into this and what they’re doing, it is by contract. They’re saying not only are we getting what we defined, we’re getting anything else that might be available to us adjacent to what we’ve defined. And that’s really if you’re talking about drafting for this, that’s one of the most egregious parts of an oil and gas lease, is that you don’t truly get a meeting of the minds because the the lessee, the producers will often build in language that is expansive, that expands beyond what they’re talking about in the moment to say, well, if we find more, we can get more. And that’s that’s so unique to the oil and gas play. It’s so unique to that. So that is one of my first problems with this lease is it starts talking about things that you’re like, OK, yeah, I can see why, but then it starts getting further and further afield from the specifics of what you’ve been talking about.
Mike Whelan [00:08:31] Right. Not only can we have this land, we can have any land that you imagine in the future that might exist. It’s like a sci fi play, really.
Mike Whelan [00:08:39] Hey, everybody, I’m Mike Whalen. I hope you’re enjoying this episode of the contract tear down show. Real quick. I want to ask you to do me you really a quick favor. Look down below. You’ll see a discount code to join the law insider premium subscription. When you do that, you get access to more content like this. You’ll see webinars, daily tips on contract drafting, not to mention access to the world’s largest database of sample contracts and clauses. It will help you write better contracts faster if you want to do it. Right now, there’s a code below. So get there. Also, if you’re part of a larger team, if you’re in-house or in a law firm, just email us where at sales@lawinsider.com. We’ll make sure you get a deal as well. Come join us in the community. The code is below. Let’s get back to the show.
Mike Whelan [00:09:25] So I’m looking down at the ancillary rights. And as an aside, this reminds me of a plotline from the TV show Justified, which is awesome. And about this coal company and their operations. You know, you looking at aciliary rights and they say we’ve got to be able to get in and out. We’ve got to move equipment in and out. And, you know, a plot point and justified was they couldn’t get their coal in and out because they had to build a road. So talk to me about the reality in these rural communities where these oil stakes are happening of just getting in and out. Do you like this? No. To this section two.
Chris White [00:10:00] I don’t. And here’s why. Oil and gas leases are basically partnerships. You’re entering into a partnership with this producer, but what you are doing in a paragraph like this is giving them a blank check. You’re basically saying whatever you need to do and you deem necessary, you have the right to do. And that’s a horrible partnership. You end up with developments on your property that may have gone beyond the scope of what you were contemplating when they thought, oh, we’re going to come in and we’re going to put down a Wal-Mart parking lot size pad on your property. And by the way, we’re going to run telephone lines and power lines and we’re going to bury them through this area and we’re going to run pipelines off this direction. And I have. I’ve highlighted there in the fourth sentence we’re going to use off of this property the natural gas that’s produced to run generators on this property and what it doesn’t call for in that is how that’s going to be measured. And so what are they blank check using on your property that you’re not able to effectively monitor? And that is so key when you enter into any partnership, let alone an oil and gas leases. How do you monitor your partner? How do you monitor what’s going on?
Mike Whelan [00:11:14] Hmm. I’m thinking of number three here, the terms of the lease moving on to that. They talk about their primary term being three years and any time after that, basically, in which there’s any kind of oil and gas, again, pretty expansive. This seems like you’re you’re you’re getting into this for basically forever.
Chris White [00:11:33] It is. And here’s the problem. There is no place in here that gives the lessor in any ability to interpret when this should end. This is completely at the lessees discretion, in fact. And some Ohio leases, especially the older ones, you’ll see this been clause that so long thereafter, as in the sole discretion of the lessee, and especially when you see language like that, you’re abdicating control over the lifetime of this lease. You no longer have the ability to determine that. And if you actually drop down to number four, I highlighted one of the undefined terms that are so key in leases producing and paying quantities, because that is something that is an ill defined term at law most places, because this is contract law, they do not have a defined what paying quantities is. And you’re all the time fighting about this in court when there’s a problem, because at the end of the day, they’ll be like, you know, it’s in paying quantities, but we’re not paying you because we’re paying everything it takes to operate this well site on your property. And so the landowners bearing the burden of having this production, having this operation on their property, and they’re just basically the oil and gas companies just operating it on the back of the landowner for the benefit. Yet there’s no benefit to them
Mike Whelan [00:12:54] passing through for ever. That’s a sandlot reference. Speaking of number four, these are some of the longest sentences I think I might have ever seen. Let’s talk about the operations and and basically what you were talking about as long as they can be there. Talk to me about the sentences in this. I’m assuming you’re feeling how I’m feeling about these absurdly long sentences
Chris White [00:13:14] when I cannot remember how this sentence started. By the time I get to the end of it and I have to create a sentence structure diagram just to figure out what’s going on. By the time there is, you are only opening up an area ripe for litigation. And here’s who wins in litigation. The producer. The producer continues to operate the lease during, of course, of a litigation unless you can somehow enjoin them, in which case, how is the landowner going to pay the bond to enjoin the production of an oil and gas operation to shut it down? So the producer is going to continue to operate and continue to do this and delay tactic all the way through this and then fight about these nuances that are this sentence could be deconstructed and reconstructed one hundred ways because it’s so long. You’ve got to figure out how to do that. And, you know, I’m not a grammarian. I but I know when I read a sentence that is ambiguous at best.
Mike Whelan [00:14:13] Well, but tell me about, you know, one of the things that we talked about in advance of having this chat is, you know, most of our viewers are drafting. Would you like what’s the argument for the drafter who is presumably representing the producer, right. What’s the argument for them to keep these sentences legible? Does that help them avoid litigation as well? Would you lean towards clarity? I mean, I’m assuming they do this in part because they want to pull something over on the on the person who’s the landowner. Right. Like, what is the argument for them to write this better?
Chris White [00:14:49] The argument is not for them to write it better, because, as I said, the very beginning, as the paragraph got more and more expansive about what they could do, the longer these sentences get, the more it gives them the flexibility to operate how and their own discretion. There’s less oversight, less responsibility and less accountability to their partner. And so there is not, from a producer’s standpoint, the interest to create concise, well-defined terms by which they can be held accountable to. And some of them might say, well, it’s because we don’t know what we’re going to run into, which, OK, give credit where credit’s due. You’re drilling a mile underground and in some ways five miles out horizontally. You won’t know what you’re going to run into. But that doesn’t mean that you can’t do better in the sense of giving the lessor something to stand on, to understand how to keep their partner accountable in these scenarios. And these sentences are so long, they’re just so long that you’re just opening up a ripe area for confrontation. Which litigation means that your client, who may not be getting paid what they were supposed to get paid in the first place, is now having to pay to keep their partner accountable and argue about the nuances of grammar simply because we didn’t tighten it up enough.
Mike Whelan [00:16:06] Well, jump it down to six under the royalty payment. I see similarly long sentences. What are your feelings about the royalty payments section?
Chris White [00:16:14] This section, actually I, I have less complaint about this one. Now, this is not a great royalty clause in and of itself, but it very clearly states it’s 20 percent. And then as you skip down to the second paragraph of what is received by the lessee, it does actually state the reality of the situation very well. Here’s what’s happened in very short drilling. Producer takes product from property, transfers it to third party marketing, transportation and sales company who transfers it to end buyer. The money from end buyer passes back through third party marketing and transportation and sales company who take their cut. And then the net proceeds come back to the producer and the landowner lessor is getting 20 percent of not the end product. They’re getting 20 percent of the net. And so what is calling out here, and that is not explicitly said, and if you don’t understand how the oil and gas industry works, it can very much thinkwell barrel of oil is sold for one hundred dollars a barrel. And I’m supposed to get 20 dollars of that. No, you’re getting the net proceeds after the third party marketing transportation sales company has taken theirs. And this guy has released a list that it can be an affiliate. This could be a third party. Marketing and transportation and sales company is owned by the mother company. And so the mother company owes the producer who owns the third party company. And all the money is flowing in the same direction they’re getting theirs. But on the back of the landowner getting now 20 percent of instead of one hundred dollars, you’re getting 20 percent of 70 dollars
Mike Whelan [00:17:53] or even, you know, if the company is operating at a loss, you know, they’re only making three percent now. You’re getting 20 percent to three. But, you know, they’ve got a lot of math that’s different than you average homeowner, that they can take a loss on particular properties or whatever. And it balances out and the you know, in their whole business and you might be getting nothing again
Chris White [00:18:13] for that is that is the bad royalty clause is where we are in the appellation business. And right now we are in a place where we have operators who are operating oil and gas wells now for six months and the landowners have not seen a dime. Yeah, they’re basically paying the companies to sell the product off their property and not seeing any of the proceeds coming off of that due to the costs that the oil and gas company is lumping on top of that and the way they distribute that distributed that across to other companies so that at the end point, the lessee is getting such a fraction of what it what the value of the product is that there’s almost nothing passing through to the landowner.
Mike Whelan [00:18:55] Well, jump down to 11. You know, there are a couple of sections here at the end about ending this thing. 11 is the release of the lease lessem at any time and from time to time deliver to lease or file of record a written release of this lease. What about this section is moving, you
Chris White [00:19:13] know, disturbing me as well as it should be. As you can tell, there is no agency given to the lessor. The lessor has no authority to end this lease and has no agency in this lease whatsoever. And that is you get to the core of a drafters job in an oil and gas lease. You need to establish as much agency as possible for your client, the lessor, because once that’s done, they are at the complete mercy of the lezzies, books, production, everything they touch nothing between. After that point in time, the lease comes, they see a check that May has a royalty stub that they can’t understand, and the lessee is taking everything at that point in time. It has complete control over it. This lease does not give the lessor agency. They are simply a participant, which gets to the point of a legal issue of fiduciary duty, which in most states, because this is a contract and an arm’s reach contract, they do not imply a fiduciary duty. So if there’s no implied a fiduciary duty, if there’s no agency, you’re less or is left in an ambiguous situation with no rights to check on their partner and only the ability to go sue, which when you get to paragraph 13, that’s where it becomes a big problem, too.
Mike Whelan [00:20:39] Yeah, I want to read this because thirteen is about breach and default. This sentence, no litigation shall be initiated by lessor for damages, forfeiture or cancelation with respect to any breach or default by lessee here under for a period of at least 60 days after Lessor has given lengthy written notice, fully describing the breach or default. And then only if Lessie fails to remedy the breach or default within such period gives a lot of power again. What do you think about this breach section?
Chris White [00:21:12] It says this. It’s as if you and I had a deal, Mike, and I find your hand in the till when I slap your hand and then you turn over the money that was belonging to me. I can’t do anything about the fact that you’re going to put your hand back in the till. I can not hold you accountable to this. This is basically saying you’re enabling bad acts until such time that you tell them they’re acting badly and they agree with you and they pay you for that. And then the lease just continues to go. That is a toxic relationship.
Mike Whelan [00:21:44] Like I’m reading this. If the matter is litigated and there is a final judgment, determination that a breach or default has occurred, like we know there’s been a breach, this lease shall not be forfeited or canceled in whole or in part unless unless he is given a reasonable time after the determination, again, to remedy like they have this really great. Ability to keep the thing going on forever.
Chris White [00:22:06] Absolutely, and it makes it accessible for them to transfer, it creates what I said earlier, it creates a transferable asset like it’s real property, but under contract terms. And it creates this thing for this company to be a bad actor, even fail at its job and then subsequently transfer it to somebody else because they can’t cancel this. So you get in a string of decades of different producers who inherit the ability to keep you locked into this in perpetuity.
Mike Whelan [00:22:39] Well, before we close this thing up, what about 14 warranty warranties always come up, but especially because you do have this strange real estate overlap. What are you thinking about the warranty of title section?
Chris White [00:22:50] This is not a bad section in this in this instance, but there are, as a drafter needing to watch out for this. If you have a lessor who is giving a absolute warranty of title to the quality of their oil and gas interest under their property, you just stop right there and you stop because that lease is now transferring the duty of responsibility on a real estate issue to a contractual clause that can that can create major problems for your owner. Not every state is going to struggle like this with Ohio, where you’ve got Rockefeller, who started in 1880, developing oil and gas and you have subdivided oil and gas interests and royalty interests that go back. Now, one hundred and thirty years in history, not every state has that same problem. But if your state has had multiple phases of oil and gas development, unless you’re absolutely willing to put your client’s neck on the line to say that it’s good because they have one hundred percent fee, simple interest. And this don’t warrant do not warrant this interest. Let the producers satisfy themselves that you have the interest and they take responsibility for that. So that’s the note on that. That’s this clause in itself is not horrible, but that is the thing to watch out there to
Mike Whelan [00:24:05] watch out for. Yeah. And as we close, I’m thinking about general principles. Right. Some of it that applies to oil and gas leases more generally. And you pointed to some of that, but also the principle that might relate to drafting in general. And I’m thinking about the power relationship in a transaction, you know, that leverage is always so important about who’s drafting and who’s not right, who’s who’s like what you have to sign off on and just agree to and what you have the flexibility to draft in. Is there a principle to draw from this in terms of you as the little guy, your power to redraft a document like this?
Chris White [00:24:44] And that is that is the point you like put your finger right on it. If you this PC, why they actually have a significant amount of acreage, which gives them some leverage when it comes to negotiating with other oil and gas company. The smaller amount of acreage you acreage you have, the less leverage you have because they’re after a product which is determined by an acreage size. If you have less acres, it becomes increasingly more difficult to negotiate for changes in language and greater agency than if you have twelve hundred and eighty acres and you can kind of swing the stick around a little bit. The general principle that being aside, that’s a negotiating just reality of oil and gas leases, that being a side. The best principles to take from this is instill as much agency as possible in your client, the ability to check up to know what’s going on, to have the ability to exercise their rights inside of this and then keep the terms as concise as possible. Don’t let them ramble on for a paragraph in one sentence and then say, oh, well, that’ll never become an issue, because that will be the exact place they will hedge their argument that things are OK.
Mike Whelan [00:26:01] If a sentence has a sub clause seventy, you’re in trouble. So I think the lesson here is that Beverly Hillbillies is fiction. Yep. Don’t watch that. It’s not a documentary, but it can be marvelous. Chris, if people want to get in touch with you to talk more about these kinds of things and your practice. And it’s really innovative and interesting if if somebody wants to reach out to you, it’s the best way to get a hold of you.
Chris White [00:26:23] You can get me on my email, which is my initials, CMW@theWhiteLawOffice.com. I’m on Twitter at @Jthreeeeight spelled out. And I think about Facebook too someplace. And so you can just catch up with me wherever it needs to, wherever it’s best for you to find me.
Mike Whelan [00:26:41] Chris. Wherever you have to. Guys, if you want information on this contract, this document and on any of the stuff that we talked about in this episode, just go to the show notes for this episode there at Lawinsider.com/Resources. And if you want to be a super nerd hanging out with me like Chris on the contract tear down show, just reach out to us we’re at community@lawinsider.com and we will see you guys next time. Thanks, Chris.