Many people ask me if they should join a landowners’ group. The answer I give varies, but most often it is my least favorite answer to any question: “It depends.” To appreciate this answer, let’s examine two of the more common forms of landowner groups.

Grass Roots Groups. Some landowner groups are grass-roots efforts by local landowners who join together to promote education and the sharing of information in advance of low-ball leasing efforts of landmen and other industry representatives. Typically these groups charge only a nominal fee, if any, to join (often a few dollars per acre). Landowners are not asked to sign any documents which would be placed of record or which would otherwise encumber or burden their property. The group may engage in lease negotiations with interested producers for the best economic deal which is embodied in a form group lease. However, each member of this type of group is free to:
1) accept the offered lease “as-is”;
2) negotiate a different lease with the same producer (these separate negotiations are often not focused on the economic terms of the lease but rather on issues specific to the landowner or his property); or
3) negotiate a different lease with a different producer.
These groups serve the landowners’ best interests – primarily the gathering and sharing of information upon which deliberate and informed decisions are made – without any of the detriments of the other forms of groups. We support and work with these types of landowner groups throughout our footprint.

Marketing Groups. Other landowner groups are formed by a brokerage or marketing company as a way to attract customers. These groups charge for their services, typically on a percentage basis (we regularly see marketers charging from 4% to 10% or more). Most charge just on the bonus amount, but many charge on the future royalty stream as well. This often amounts to tens of thousands of dollars in cost to the medium to large parcel landowner. We do not recommend that our customers engage the services of anyone – professional or otherwise – who charges on a percentage basis for the negotiation of an oil and gas lease.
Special care must be exercised when the brokerage or marketing company appears to be owned by or affiliated with a lawyer or a law firm. These attorneys are often principal owners of or otherwise affiliated with the brokerage or marketing companies. These attorneys have made a conscious choice to NOT represent individual landowners as their legal counsel. There are many potential reasons for this; however, some attorneys have formed brokerage or marketing companies as a means to charge a higher fee as consultants than they would lawfully and ethically be permitted to charge as attorneys. Although some ethics commentators have recently suggested that Pennsylvania’s Rules of Professional Conduct may permit an attorney to take an ownership interest in a portion of the client’s property (e.g. a percentage interest in a landowner’s royalties), those commentators also agree that the percentage interests being charged by brokerage and marketing companies are excessive and unreasonable under the circumstances. Regardless, landowners MUST understand that lawyers who form or are affiliated with marketing companies do NOT represent them. Much confusion in this regard will almost certainly lead to litigation. In fact, this threat of litigation and the attendant efforts by the Plaintiff’s bar to invalidate the underlying leases have caused many major producers to become increasingly reluctant to negotiate with large groups, particularly those involving brokerage or marketing companies.

To be fair: the leases negotiated by these marketing companies are, on average, better than the leases which landowners typically wind up with when they try to negotiate their deals on their own. However, these leases may not always be the best leases for a particular landowner’s unique, individual situation. They are typically no better than the average, independent, attorney negotiated deal in a given area. Worse, working with non-professionals provides no security or sense of assurance which the landowner would otherwise realize from professional licensure, regulation, or malpractice insurance. We therefore encourage all our customers to seek the advice of a qualified, experienced oil and gas attorney before signing any document – be it an oil and gas lease, marketing agreement, or any other legal instrument.

NOTE: Attorneys, accountants, bankers and even some landmen working for the oil and gas companies have professional associations with prescribed rules of ethics governing their members’ behavior. Marketers and other such consultants do not.

Landowners should beware of the following “characters”:
1.) The name dropper. “Do you know John Smith? Well, he joined our group…”
“John Smith” is usually one of the larger landowners in the community. John may or may not have joined a particular group; however, proponents of some landowner groups use a name dropping approach to attract members. Oftentimes John Smith has not joined the group (but maybe attended a meeting) and is surprised to hear his name mentioned. Work with professionals who abide by rules of professional conduct designed to respect and protect your privacy.
2.) The naysayer. “That grass roots landowner group, they’re about to fail…”
Typically this is from a marketing company complaining about a pre-existing grass roots landowner’s group in the area. A marketing company can only get paid if it can attract members. People who join grass roots organizations typically do not sign with marketing companies. If it sounds like “sour grapes” it probably is.
3.) The insider. “We know people in high places. We’ll get you a better deal.”
The reality is that the geology under your land dictates whether, when and on what terms you will get an oil and gas lease. It doesn’t matter who you know. Also, the old rule of real estate still applies: location, location, location. If your property is located near a major interstate gas transmission line, you are going to attract more attention sooner than the owner of a property located a hundred miles away from the pipeline.
4.) The retailer. “ Join with us and you’ll have more bargaining power as part of our group – the more acres the better the bargaining power.”
There is some truth to this one – there is some strength to be found in numbers. However, what the marketers don’t tell you is that not everyone is likely to get a lease even if there is an interested producer. Often, only some of the members of the marketing group wind up with leases. The other members of the group are left out in the cold. There is no “Three Musketeers” clause in these agreement (all for one and one for all…). Your neighbor may get a lease and you may not.
5.) The depriver. “Our landowner group was formed by an attorney who represents you – you don’t need to hire a lawyer, you can use ours.”
Beware anyone who tries to deprive you of the reasonable opportunity to consult with professional advisors of your own choosing. Attorneys who own or are affiliated with marketing companies do NOT represent you. You need professional, independent and objective representation of your own.
6.) The double dipper. “We work for you.”
The double dipper may be working for someone else as well. Most marketing agreements specify a payment arrangement whereby the marketer receives a percentage of the bonus and/or the royalty from the landowner’s share. HOWEVER, unlike attorneys and other professionals, marketers are under no prohibition or restriction from receiving compensation from the gas company as well. So, in addition to the money that you are paying him, the double dipper may also be getting paid on a per acre or percentage basis by the gas company, too.
7.) The bundler. “We have everything you need here.”
This is a variant of the depriver. Experience has shown that landowners need independent, objective professional assistance with their legal needs (lease negotiation, estate planning), accounting needs (tax planning and preparation) and financial needs (banking and financial and investment management). As these professional services are lumped together and cross-sold, they become less and less independent and objective.
8.) The paid celebrity endorser. “I was the first to sign on with them in this area, let me tell you why you should sign up with them:”
This individual is often a landowner and may take some or all of the other forms above when pushing the services of the marketing company. The motivation for the “hard sell” approach utilized by the paid celebrity endorser may not be readily apparent to the average landowner. At first, the paid celebrity endorser just seems to be an average landowner with some special information about the marketing company. However, the marketing company may in fact be paying a significant “finder’s fee” to the paid celebrity endorser if you sign up with them.
9.) The slacker. “We work hard for you.”
The sad truth is that many marketing agreements are structured so as to be recorded in the county in which the property is located. That way, the gas company representatives who would have contacted you, the landowner, contact the marketer instead. Little if any actual effort may be expended by the marketer who then “brings you “ a deal. Worse, many marketing agreements require payment to the marketer if the landowner signs a deal with any producer “to which the marketer has directed marketing efforts.” Affixing a 45 cent stamp on a letter and sending it to each of the major producers in a shale gas play practically ensures that the marketing company will demand payment on any lease signed by the landowner, whether or not such lease was the result of any actual effort by the marketing company.
10.) The gold digger. “We charge only a small percentage, and we only get paid if you get paid.” Do the math!!! Example: a 150 acre owner who leases for $4,250/acre and who commits to pay a marketing fee of 8% would pay $51,000.00 for their lease. Most landowners would realize a significant cost savings by using a qualified, experienced oil and gas attorney to negotiate their lease instead. Attorneys often charge on an hourly basis or on a flat fee basis, some for as little as $400 per lease review. The more land that you own the higher the total fee you will be charged – these percentage arrangements typically make the most financial sense for owners of very small parcels.

If you find yourself at risk because you have encountered any of these characters, we may be able to help. Feel free to contact us for a referral to a qualified, experienced oil and gas attorney.