Oil and Gas Lawyer Blog

The recent volatility in prices for oil and gas leases has raised issues with the time-honored custom in the industry of paying lease bonuses with drafts. Problems have arisin because companies have refused to honor the drafts or because lessors have sought to cancel the transaction after signing and delivery the lease and lessor's deposit of the draft. When someone wants to back out of "the deal" after a lease has been exchanged for a draft, the lessor and lessee run to their lawyers to find out what legal rights and obligations have been created by the exchange. No one is happy.

As I have written previously, it is generally my advice to avoid using drafts for payment of lease bonuses. My practice is to hold my client's original signed lease until I receive a check for the bonus from the company, then send the check to my client and the lease to the company. I find that most companies are willing to close the deal in this manner.

But most lease transactions are consummated using a draft. So, herein is an additional discussion of problems arising from use of drafts..

Continue reading "Accepting Drafts in Payment for Lease Bonus - A Ticking Time Bomb?" »

Three law firms in Dallas have joined to sue oil companies who backed out of leases covering lands in Arlington, Texas last fall. The three firms -- Petroff & Associates, Riddle & Williams, P.C., and Mathis & Donheiser, P.C. -- have so far filed two suits on behalf of two lot owners who say they had binding deals with companies to lease their property. The law firms have created a website at www.ntxleaselitigation.com, and are organizing meetings of landowners who believe they had lease deals with XTO . The interesting part of the two lawsuits filed so far is that they name as defendants not only the company that allegedly had agreed to pay for leases of the two plaintiffs' properties, but also multiple other companies and their leasing agents who were leasing in the Barnett Shale.  The suits claim that all of these companies conspired last fall to revoke their outstanding lease offers and to drive down the bonus price for leases, in violation of antitrust laws. For a story in the Fort Worth Star Telegram on the cases, see http://www.star-telegram.com/804/story/1593837.html . According to the suits, the plaintiffs were in an area of Arlington organized to negotiate leases for its landowners called the Southeast Arlington Coalition of Texas (SEACTX). SEACTX claimed that it had a deal to lease to XTO Energy for $26,517 per acre.  Here are copies of the two petitions:  08-06-09BoothOriginalPetition[1].pdf and 08-31-09MylesOriginalPetition[1].pdf

Exploration companies have traditionally used bank drafts to pay bonuses for oil and gas leases.  Since drafts look a lot like a check, they can be misleading to mineral owners.  Some mineral owners' recent experiences with dishonored drafts have highlighted the problems with use of these financial instruments.

 A draft is like a check, but different.  It is an order issued to a bank to pay a party, conditioned on the happening of a specified event.  As used by exploration companies, it is an order issued by a company or its landman to the company's bank to pay the bonus to the mineral owner.  Typically, the draft provides that the company has a period of time - 30 to 90 days - from the date its bank receives the draft to "honor" the draft - that is, to tell the bank to pay the bonus to the mineral owner.  The draft typically has language like the following:

On approval of lease or mineral deed described herein, and on approval of title to same by drawee not later than 30 days after arrival of this draft at collecting bank.

In other words, the company has 30 days to approve the oil and gas lease being paid for and to approve the mineral owner's title to the minerals being leased.  If the company does not approve the lease, or if it determines that the mineral owner does not have good title to the minerals being leased, it can refuse to pay the draft.

 Use of drafts to pay for leases would seem to be a good way, in theory, to facilitate the lease transaction.  And in fact, drafts are used every day in hundreds of lease transactions, without incident.  But there are problems with its use, and those problems can put landowners at risk.  My advice to landowners is to avoid using drafts if possible.

Continue reading "Use of Bank Drafts for Bonus Payment in Oil and Gas Leasing" »