Help interpreting landowner agreement

I’m a new member and would like to get some advice about joining a landowner group. I am in Morrow County, Ohio, and we have been presented with a landowner group agreement with terms that I wonder about. The landowner group claims to be nonprofit and its officers consist of four men, two of which are attorneys. Below are the actual quotes from the contract:

  • Fees charged by the association are 4% of the upfront bonus payment. The landowner will not be charged any additional fees by the Association or its legal counsel.
  • Also, There will be no charges against Landowners’ royalty payments other than a set-aside of one percent of the payments that will be placed in an interest-bearing account to serve as a legal “war-chest” to be used to pay litigation costs in the event of lawsuits by oil and gas companies against the Association or its Landowner members. The war-chest funds will be returned pro-rata to the Landowners, with interest, at the termination of their leases.
  • By signing this Agreement, Landowner is not obligated to enter into the form of oil and gas lease obtained as a result of the Association’s efforts; provided, however, that if Landowner declines the Association’s lease, Landowner shall not subsequently enter into any oil and/or gas lease for 24 months after the effective date of the declined lease.

Since there is quite a bit of collective knowledge on this board I would be interested to hear some opinions.  My first inclination is to do nothing and wait.

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Permalink Reply by Kevin Kasson on March 20, 2012 at 4:55am

Sounds WAY too high, 4%.  Waiting never hurt anybody, and can only benefit you.

Check out this link, this group only charges 1%:

 

http://www.daggerlaw.com/oil_and_gas_info.html

You definitely want an oil & gas lawyer to write your lease.  VERY IMPORTANT!

 

Permalink Reply by oildude on March 20, 2012 at 6:18am

James

I would NEVER join that association. If you decline the lease they bring you then you can not lease for 24 months. I think you might miss the " goldrush" that is coming within this year. I think you need to be able to sign a lease at ANY time you get the deal that you like. Kevin is right. You definitely need a lawyer.

Permalink Reply by Kathleen on March 20, 2012 at 6:18am
I read that link last night and thought how were they making money until I added up the acreage.
What are the penalties if you sign in that 24 month period somewhere else and how would they really know. 24 months rubs me so wrong.
Will they give you updates as they are building the lease and shopping it around? What if you just don't agree with the lease they build, your stuck for 24 months? Plus what is the estimate for them to have a lease ready to shop around.
There is no way this is a nonprofit and if they say they are than ask to see their 501c. We looked into a consultant in December and he wanted 5% for a single landowner and he was for profit. These guys want 4% for a landowner group with maybe thousands of acres. No way are they nonprofit! It's big profit.
What would be neat to try and do is not sign on if possible but find someone who did and get the details as the lease unfolds, than if you like what you are hearing, jump in so your 24 month risk is not there anymore since you know you will sign. Is there a cut off date to sign on? Again every bone in my body says this not a nonprofit. I guess a good lawyer could bill that huge amount of money to show it all went to overhead and costs to call themselves a nonprofit. Remember even a nonprofit group is allowed to take a salary. I guess they just want a big nonprofit salary for everyone that works in that firm including the office cat if they have one.
If you like the lease don't get hung up on the nonprofit lie since the objective is for you to get a lease you feel good about. Sorry about going on about the nonprofit nonsense at 4% that just bugged me.
Permalink Reply by james on March 20, 2012 at 6:28am

You guys are definitely echoing all of the red flags I see too.  Have you ever seen this "war chest" clause?  I thought that you NEVER give away any percentage of your royalties! What are the chances that anyone is sued by the O&G company, anyway?  More of a chance of the opposite happening.  Also says it will be returned with interest at the end of your lease.  Couldn't the lease contiue to roll over in the case of production?

Permalink Reply by Ben Elmore on March 20, 2012 at 6:31am

Yes, which means you might not see that 1% of your royalties for years and years.  I would also want to know who gets the 4% within the group.  The officers?  The lawyers they hire?

Permalink Reply by Ben Elmore on March 20, 2012 at 8:33am

There also seems to be somewhat of a conflict of interest of the officers.  They are wearing one hat as officers of a non-profit looking out for the best interests of the landowners, but they as officers agree to pay themselves wearing the lawyer/consultant hats a fee that sounds like a windfall to them depending upon how many acres they sign up.  Percent on bonus is one thing, but percent of future royalties is overreaching.

Permalink Reply by Kathleen on March 20, 2012 at 9:00am
If they are a real non profit they would have to have a mission statement filed. I am in no way gunning for this group but their mission statement could say they are looking out of the best interests of of the landowner.
Permalink Reply by Ben Elmore on March 20, 2012 at 9:23am

Most of them that I have seen do, which is what I was referring to.

Jim ShoosPermalink Reply by Jim Shoos on March 20, 2012 at 7:55am

Four percent is on the high end, particularly given the amount of information that can be gleaned from sites such as this, especially the availability of lease forms.  I can't see giving attorneys that kind of money.  The real value is in the potential contacts with buyers that an association leader possesses.  If that leader were one of the landowners... I would highly doubt his/her contacts, but you never know.  Perhaps they plan to advertise on behalf of the association.  That can be costly.  As for the one percent set aside...that's a joke.  One percent of what payments... the initial bonus payment or ongoing royalty payments, or both???  Return it to you at the termination of the leases... what if the leases get HBP's and are in effect for 30 years or more.  You really think anybody is really going to come look you up to hand you back your money 30 years from now?  I doubt it, law firms come and go in and out of existence. 

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