Approached to Lease Land We Didn't know We Owned

My deceased father had mineral rights to a parcel of land in Bradford County. . . about which he told us (kids) nothing. We have just been approached by Chief Exploration and Development to lease the property. They propose to pay us 1/8 of the revenues from the sale of either gas or oil. My questions about this proposal are:

  1. Is this amount (1/8 of the revenues) low, normal, or high?
  2. The property is 173 acres. Is there any way to estimate how much gas (I wouldn't expect them to find any oil) might be produced from a property this size and what the revenues from the production would be?

I realize question 2. is hard to answer, but we'd like to have some indication of the averages in Bradford County.

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Permalink Reply by bo boboski on March 6, 2018 at 3:41am

LOW_BALL!   1/5th would be more like it. 

Permalink Reply by Mickgyver on March 6, 2018 at 3:54am

hello i am in belmont county ohio but the 1/8 offer is about the minimum they are allowed tyo pay .Here in our county many received a lease with 20% royalty and ithe per acre price started small but I know the prices paid to many was $5000 per acre then $5700 ,$6300 and it went as high as $8000 plus per acre . I would suggest you locate people or neighbors near this property and see if they signed leases starting in 2013 to now to see what they agreed to . Many landowners formed groups so they could negotiate better leases starting in 2012 in our area when the companies were trying to lease up everything over here .Also before you agree to anything try to appoint one of the family members everyone trusts and have them consult a local attorney familiar with gas and oil rights. With that much property involved it would be wise to work with an attorney familiar with gas and oil .There is an attorney named lancione in bellaire ohio but you may find one you like near you. Remember to ask what there upfront fee is and do not allow anyone to take any future royalties you may get for negotiating your lease . It is best to pay a set fee if you opt for an attorney . Unless you are familiar with all the lease terms it is easy to get taken for a ride . Also there are many places that would buy your mineral rights outright if you dont want to wait for any wells to be drilled. Depending on your location ,some companies pay over $10,000 per acre to buy you out . just remember if you sell these rights you will never get anything else from the property .good luck ,i hope this information will encourage you to do your homework before anyone signs a lease .I am not sure if West Virginia passed a law .but in ohio if we dont agree to sign a lease ,the oil company can file with the state to do what is called force pooling .This is a law enacted so a landowner cannot hold up other neighbors from having their properties produced for gas and oil . Again an attorney can clear up all your questions and generally they dont charge much or any for an initial consult.

Permalink Reply by Donald K. Taber on March 6, 2018 at 5:21am

I just noticed two other aspects of the lease proposal. Why they have the "1/8 of revenues" is a mystery, because toward the end of the document, it says that the 1/8 in any part of the proposal is actually replaced by "15%". 1/8 is 12.5%, so why they didn't just use 15% throughout is odd. I also just discovered that the very last page of the lease agreement allows for a "payed-up" lease via a single up-front payment. Because of the rather complex situation with the heirs, each heir will not receive the same % of the payment. The mineral rights were taken out during my father's 1st marriage. That marriage produced one child. For that reason, that heir, who is still alive, would receive 50% of the payment. His 2nd marriage produced 3 children, of which I am one, so each of us would get only 16 2/3% of the payment. The total payment offer for the entire 173-acre property is (I assume) $173,606 (~$1000/acre). In round numbers,16 2/3% of that is just over $28,900.

I take it that if we do not take the up-front payment, we gamble that the company will find oil and/or gas. If they don't, the lease is worthless. If they do, we get 15% of the revenues AFTER EXPENSES. But we get it only as long as we're alive. . .which adds another complexity. I'm within 6 months of becoming 80 and my wife will be 77 shortly thereafter. We're moving to a CCRC next year. Are we better off taking the "bird-in-hand" or gambling on the potential one "in the bush"?.

Permalink Reply by G.H. on March 6, 2018 at 5:59am

It's common to add an addendum to amend the royalty.  I believe it's so that they don't have to go through and change the full document every time.  They are proposing to pay you 15%.  There are usually two options, paid up or delay rental.  In paid up, they pay you for the whole term of the lease.  Delay rental they usually pay you for year one, and then annual payments of the same amount as year one for every year after, as long as they decide to keep the lease.  Here's the catch, with delay rental they can stop paying at any time and the lease is cancelled, or, if they drill a well and start producing, they no longer have to pay the delay rentals.  If the paid up option is the same as the annual delay rental times the number of years in the primary term of the lease, then it is a no brainer to take the paid up.  If they are offering you more money on a per year basis to take the delay rental, then you have to weigh your options and gamble.  (Paid up/delay rental applies only to the "bonus" and should not affect royalty)

Permalink Reply by Jed Clampett on March 6, 2018 at 7:27am

I would insist on the % matching in the entire document.  Try to get the "After Expenses" clause removed, otherwise you will get very little as they will charge any and every expense possible to keep more of your money.  I don't understand why you would only get royalties while you are alive, you own a share of the minerals, thus is would become part of your estate for your heirs.  The Paid Up lease, means they are paying the full amount of the lease (5 year term?) - paying for all 5 years up front.  Saves them having to pay you each year, and you get the cash in advance.  There is probably an extension clause saying they can renew the lease for another term at the same payment rate.  This lease payment (often called signing bonus) is separate from the royalties that would be earned from a producing well.  The $1000 per acre to sign sounds a little low, but that varies with the market price of gas, location, how "bad" they need your land, etc.

it is not an either/or situation with the lease payment and royalty payments.  They are 2 separate items/payments with the term/amounts spelled out in the lease.  The Signing bonus/upfront payment is what they are paying you to sign the lease and give them the exclusive right to drill on the property (or include the acreage as a pool of a well nearby).  The royalty is the payment for your share (15% for all heirs - I would prefer 20%) of the gas/oil they extract once a well is drilled.  If you (all heirs) sign the lease, then the upfront lease payment will be send in a few months - if they never drill a well and let the lease expire that is all you get, the upfront payment.  They may renew the lease and you get another "upfront" lease payment to extend the term.  once they drill a well and it is in production you get royalties but not further lease renewals. The production/royalties keep the lease active without separate/additional lease payments - this is called "held by production".  I am not an attorney, just very well researched on gas leases since the day a man walked up to my front door and offered $250,000 to lease my gas rights for 150 acres (I paid $200,000 to purchase the farm with a house and barns) I didn't sign, and have since learned a lot.

I also suggest finding a good attorney familiar with oil and gas leases - pay them a one time fixed fee to review/negotiate the leas e terms.  All the heirs should/could go to the attorney as a group since everyone will have to agree and sign.

Ask questions and read post on here if you want to educate yourself.  Talk with the other heirs and talk with neighbors to the property to see what is/had gone on in the past.  Educate yourself and make a wise choice - and be prepared to educate the other heirs so you all get a good deal.

Permalink Reply by Donald K. Taber on March 6, 2018 at 8:23am

To all who have responded: MANY thanks. It is rare to get knowledgeable responses so quickly on a lot of forums. This is obviously are really good forum.

Permalink Reply by JK on March 6, 2018 at 5:46am

Get an attorney you trust to review, negotiate and advise on a lease for you.

There are so many aspects to any lease that must be discovered for your benefit.

1/8th equates to 12.5% royalties and is the lowest they can pay by law.

So there are no favors coming from the drillers.

I also agree with Mickgyver and bobobski.

Permalink Reply by Donald K. Taber on March 6, 2018 at 8:30am

As I say, the 1/8 is a non-entity because of the addendum that says, "ROYALTY INTEREST: Notwithstanding anything to the contrary contained herein, every place in the Lease where the phrase 'one-eighth (1/8th)' appears shall be changed to read “FIFTEEN PERCENT (15%)”. As G. H. says above, the "1/8" appears in most agreements because it's the default and instead of changing it to some percentage, they leave it as the default and change it one time in the addendum. So the agreement is not 12.5%, it's 15% throughout.

Permalink Reply by bo boboski on March 6, 2018 at 9:29am

I"d say at this point, just laughing out loud at them, then hanging up ,or walking away would be best. that would show them how ridiculous their offer sounds to you. It would show them that you are not ignorant on the subject.Trust me, they will come back with a better offer. I'm not an attorney,or landman,. but I did stay at a Holiday Inn Express last night.

Permalink Reply by Freestar on March 6, 2018 at 11:20am

Do not do anything until you have found an oil and gas attorney to work with Chief. You have way too much acreage to work with them directly. An oil and gas attorney will get you the highest royalty and bonus Chief will pay. Could amount to the difference of hundreds of thousands over the life of the lease.

Permalink Reply by jett on March 6, 2018 at 11:38am

The oil & gas co usually offer a very low upfront payment and royalty %. Royalties are now regularly negotiated to 1/5 or 20% of the gross productions.

I strongly suggest not to accept a Market Enhancement clause because this is a way for massive deductions to be taken off of your royalty payments. With this type of clause the co deducts expenses they paid to get the oil/gas sold. Sounds fair but how it sounds is not how it plays out.

The upfront bonus payment can be negotiated up, up. Many mineral rights owners have signed for a whole lot less than they could have gotten. 173 acres is a great amount to have for negotiating! We had good results from hiring a good oil/gas attorney. We also found that being patient and not wanting to rush into an agreement paid off.

I agree that a paid up lease is much better for the reasons Donald K. states.

Hoping for the best for you!

Permalink Reply by David Allen Lilly on March 6, 2018 at 2:54pm

I have often heard the horror stories associated with the market enhancement clause. My lease has one and it hasn't hurt me, but it is all in the wording.

My lease states that in no way am I to get less with market enhancements than I would have received without (paraphrasing).

My lease is a 20% gross with no deductions.

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