A 1% overriding, royalty interest; can someone explain what this means?

I might sign an agreement for someone to market some land.  They have this in the agreement and i want to know what other people think it means

A 1% overriding, royalty interest on production obtained pursuant to the oil and gas lease covering the land. 

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Permalink Reply by SA Frank on December 26, 2012 at 4:29am

Schnoozie,

This is a good analogy, but I don't think it is technically correct. 1% override would give that entity 1% of your royalty, but they won't be able to stop you from being developed.  They have only rights to royalty payments and will not have any control over the lease or mineral rights.  Overriding interest is fairly common in the industry any many folks probably had an override on their older mineral rights and may not have even known.   However as landowners have become more educated, they are learning that the override should be theirs not the middle man.  I agree with everyone that says...stay away from that situation if you can.  Why give an agent part of your future income.

 

SA

Permalink Reply by Schnoozie on December 26, 2012 at 4:48am

We lease our building, long term from a real estate development company.

That development company has investors, who are all partial interest owners in that building.

We pay the development company rent for the use of our building, the rent we pay under the terms of our lease goes back to the investors who built and maintain the building.

Lets say the develpoment company decides to sell the building we rent, in the terms of their sale meaning the asset of the buliding will include the lease to the current tennant, meaning us. The value of our lease, dollar ammounts we pay will be there, details of our lease also as a valuation of the property. If one of the parties says no, I dont want to sell my portion.

No deal, or buy me out at a different rate.

When you make an arrangement where the leasing company is not 100% in control of the lease, there will be problems. Someone who is an Atty. or does leasing can probably amswer this better than me but I am to believe this is the case.  

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on December 26, 2012 at 5:25am

The leasing company is never 100% in control of the lease, at least not for very long.  That thing gets chopped up and sold off constantly.  That's how the business works.

Permalink Reply by Schnoozie on December 26, 2012 at 5:53am

My point is if one of the parties says no, then it will slow things down.

Let's say Seneca has 84% of the royalty interest in our lease, we have the other 15%, and the marketing company we so foolishly engaged has 1%.

84+15+1=100

Seneca decides to assign their interest, to get some money, to a partner on the well to another company, they enter into an arrangement to sell off out of their 84% a 30% interest. Under the terms of my lease with them they are allowed to do this and it wont get in the way of development, the new partner has the same arrangemet with Seneca but not with the 1% interest owner.

No deal, untill you satisfy all parties.

I can't sell my business, that has five partners if the 1% interest owner that we bought the machine from as I mentioned earlier does not agree to the terms of the sale.

Permalink Reply by SA Frank on December 26, 2012 at 6:05am

The overridding royalty (1%) has no more rights than the landowner. So Seneca as the 84% owner of the lease will have all control and you and the overriding interest party have none  They can sell it, produce it, or whatever as long as you get your 15% and the override gets 1% of any royalties.  you are confusing the 1% with actually being in partnership with Seneca.  They are not, and they would be more like the landowner.

Permalink Reply by SA Frank on December 26, 2012 at 5:54am

Schnoozie,

 

You seem to be over-complicating this for the landowner.  In the scenario above, you say that you are a long term renter. If the terms of your rent are defined by a contract, it does not matter who owns its or if they decide to sell.   Your terms are set.  You would not any say in the selling of the property.   You need to be happy with your terms and not worry after that.

 

So, in the case of an override...if you sign a lease for 15% royalty and there is a 1% override, then the operator (leasing company) will have 84% of the production to either produce or sell.  The 1% override has no say in what they do with the production rights anymore than you would.  Whether they have additional partners should never effect you.

 

Anyway hope this helps.  just avoid giving a 1% override if it can be helped.

 

SA

 

Permalink Reply by Schnoozie on December 26, 2012 at 6:06am

Maybe I am, it's just hard to see how things would be easier if you gave up a full percent of anything that was yours. Would you as a landowner have to send these people a check each month out of your royalty? Or would it come directly from the drilling company, it would seem that they would also have to sign off on the arrangement.

Not for me or my family...thank you very much.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on December 26, 2012 at 6:26am

This has gotten past the point where it makes sense.  No, you wouldn't have to send them a check every month. What in the world of contract law would make you think that?  They have a 1% ORRI, which would have to be assigned to them by the landowner (they don't just get it by having you sign a magical marketing agreement).  It's then up to them to establish ownership of said ORRI to the operator in order to receive payment from any future production.  If they object to anything during the life of that ORRI they may voice said objection as loudly as they want but they HAVE NO LEGAL RIGHT TO ANYTHING OTHER THAN 1% OF PRODUCTION.  This isn't a working interest, they're not investors, they're not operators. 

It's fine that you don't think that this marketing company should get a ride.  In fact I agree with that sentiment.  But it sounds like you don't have any idea why you don't agree with it, as you don't fully understand how these contracts work.  It's ok, there's plenty to learn and there's no shame in needing a little help.

Permalink Reply by Karl Schraut on December 27, 2012 at 8:30am

See a lawyer!

Permalink Reply by bo boboski on January 14, 2013 at 10:46am

If The broker or Marketing company can get you 21% royalties,instead of the 20% your neighbors got, would"nt a 1% override royalty fee net you the same $$$ for the life of the well. And if they can get you a few hundred more per acre on the bonus $$$, would'nt be actually a better deal?

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