Category Archives: Why You Should Hire an Attorney

Sneaky West Virginia Mineral Buyers: Sellers Beware!

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Over the last few months we’ve begun to run across a new tactic that mineral buyers are using here in West Virginia.  It’s sneaky and underhanded, more than one company is doing it and more seem to be doing it every day, so we thought we should bring it to peoples’ attention.

When a company decides it’s interested in buying your mineral rights (not leasing), it will have someone contact you to find out if you’re interested in selling.  In the past, they would send you a Purchase and Sales Agreement to sign and then they would go do title work.  It was pretty obvious that you were getting yourself into a binding agreement to sell your mineral rights.  That’s no longer the case.

Now the company representative will convince you to sign an agreement that “allows them to do title work on your mineral rights”.   That statement is very deceptive, but it’s also a truthful statement.  Here’s why.

First, the company can do title work on your mineral rights without you signing anything.  Anyone can walk into the courthouse at any time and look at the deeds, wills, affidavits, and court cases that affect the ownership of your property.  They are public records.  Public records are not restricted or protected in any way.

Second,  title work is expensive.  It typically costs at least $10,000 to have title run on any particular piece of property.  Some places and some properties can be significantly more expensive than that.  Before a buyer puts a lot of money into title work, he typically wants to make sure that he will be getting something back for his investment.  In this scenario, that something is your mineral rights.

Third, when you sign the agreement “allowing” them to do title work, the agreement legally binds you to sell the minerals to the company regardless of what the company representative may have said or not said to you.  That removes the risk of the company losing all the money it puts into title work in the event you back out of the deal after they’ve done the title work.

What that all adds up to is a reason the company can say that the agreement “allows” them to do the title work — once you sign that agreement the company has a guaranteed return on investment.  Since they have a guaranteed return on investment their investors will “allow” them to spend money on the title work.  It’s tricky, but it’s true.

We talked with one man who signed one of these agreements.  The company representative had told him that his signature was necessary to allow them to do the title work on the property.  The company representative hadn’t told him that the agreement bound him to sell once the title work was done.  The agreement said that the property was to be sold at $1000/acre.  He didn’t want to sell at $1000/acre, and would not have signed the agreement if he had known he was tied to that price.  But the agreement bound him to sell.  He called us for help.  Luckily, the company missed a deadline and we were able to get him out of that agreement.

However, it’s not just the price that is important.  One woman we talked to signed an agreement like this at a very good price.  However, once the title work came back it turned out she owned a lot fewer acres than she thought.  The amount of money she would receive would not accomplish her goals so she wanted to get out of the deal but the company would not let her.

In general, don’t ever sign an agreement for anything without understanding what that agreement says.  In particular, do not ever sign an agreement that “allows” a company to do title work on your mineral property.  It’s a sneaky and underhanded way of binding you to sell your minerals, sometimes without you wanting to.

 

Lease Terms: Confidentiality Clause

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DocumentThe subject of a confidentiality clause in an oil and gas lease has come up a few times in the last couple of months, so it seems like a good time to write about it here.

A confidentiality clause says you can’t talk about the terms of your lease with anybody.

While a confidentiality clause technically means that you can’t talk about the lease terms with your family, friends, and neighbors, or even your spouse, the company doesn’t really expect that to happen.  It’s pretty unlikely to enforce that aspect of the clause except in very egregious circumstances.  For example, if you were to negotiate a totally awesome lease and then go start a landowner’s group using your lease as the base lease, then they might take you to court to enforce the confidentiality clause.

The real reason for the confidentiality clause is that the company wants to keep the lease from being recorded at the courthouse.

The company doesn’t want to file the actual lease for a couple of reasons, the most important being that they don’t want to start bidding wars.  If all the terms of all of their leases were on file at the Doddridge County courthouse, for example, nobody in Doddridge County would have settled for less than $2,500 per acre for the bonus or less than 18% for the royalty.  Everyone would have gone to the courthouse, looked up recent leases, and seen that someone (we won’t mention who) had gotten those terms in their lease.  Everyone would have then asked for and probably gotten those terms and better.  In just a few months lease prices would have gone from $1,500 per acre to $5,000 per acre or more.

Instead of filing the lease, the company will have you sign both a lease and a memorandum of lease.  The memorandum of lease will include a description of the property, the length of the primary term and any extensions thereof, whether there is a right of first refusal, and a couple of other terms that vary from company to company.  It won’t include the bonus amount, the royalty amount, or any other unusual or different terms that you acquired.  It’s just enough information to show a subsequent landman that there is a lease on your property and how long that lease will probably last.  The company will file the memorandum of lease at the courthouse instead of the actual lease.

You want the lease to be on file, however.  The lease is the only actual record of what you and the company agreed to.  The landman will get fired, leave for a different job, get reassigned to a different project, or retire.  Companies lose leases more often than anyone cares to admit.  You could lose your lease in a move, a fire, a flood, or just because people lose things.  Your attorney (you did hire an attorney, right?) will retire and destroy files when the statutory time comes up.  The only somewhat reliable method for keeping a record of the lease is to have it filed at the courthouse.

You and the company have competing interests.  It’s not an easy thing to work around.  However, one solution is to get the company to agree that you can place a copy of the lease on file at the courthouse once there is production from the property.  Before that, it doesn’t matter too much whether the lease gets filed because it could simply expire at the end of the primary term.  Once there is production, however, the lease could be in effect for decades and the risk of losing all copies of it goes up.

As a practical matter, it’s been awfully difficult to get companies to agree to a clause like that.  If you’re in a strong negotiating position, however, I highly recommend you push for it.

Good luck, and get in touch if you want help with your lease.

West Virginia Oil and Gas Lease Basics

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DocumentIMPORTANT!:  The following article includes good advice about how to improve a “standard” oil and gas lease.  However, it is no substitute for hiring a lawyer to read the exact document you have and give you advice about the exact language of that document.  Even if you decide not to hire me, go find a lawyer that knows oil and gas leases.

With the price of oil and natural gas rising and, more importantly, with production numbers dropping and new pipelines getting ready to be built, leasing activity in West Virginia is going to see another uptick.  People who have never seen an oil and gas lease will be needing some advice.  The following is some good basic advice that everyone can benefit from.  Rising tides and all……

THE MONEY – The Only Thing You Think Matters

The first thing anyone thinks of, and the first thing any landman will discuss after establishing that you own the oil and gas, is money.  The landman will offer you a signing bonus.  The signing bonus is in exchange for the rights to develop the oil and gas for a certain number of years.

You can always get more than their first offer.  You don’t wear your best pair of shoes to get to the dance.  As a rule of thumb, you can usually expect to get double what their first offer is, unless it’s over about $2,000/acre or below $500/acre.  (Note: If the company you’re dealing with is trying to get a delay rental lease, the bonus is paid out in equal yearly amounts.  It’s a little harder to understand, but the landman should be able to explain to you the difference between what they’re doing and a “paid up” lease, including the possibility of having to pay some of it back to the company.  Yes, that’s often in delay rental leases.)  Don’t be shy when negotiating the bonus, because the bonus can be the only money that you ever get.  If the company never drills on the land there will never be any production and there will never be anything to pay royalties on.

That segues nicely into the next thing that everyone thinks about–the royalty.  The statutory minimum royalty in West Virginia is 1/8, or 12.5%.  Don’t settle for 1/8, though.  You can get almost always get 15%, and the huge majority of leases we have negotiated over the years have ended up at 18%.  If the company does drill and produce, getting a little more money for that production can be a nice thing.

Along the same line of thought, you’re going to want to get what’s called a gross proceeds lease.  The company is going to want to deduct some of the costs of transporting the gas from the well to wherever it gets sold, and as many other costs as it can.  In West Virginia, the company is responsible for those costs up until it sells the gas.  Don’t let them stick you with those costs.  Not only will you end up with more royalty money, you will also find it a lot easier to read and understand the data on the check stub.

LIABILITY – You Should End Up With None

The company is going to ask you to warrant the title to the oil and gas.  In other words, they want you to promise that you own the oil and gas.  If it turns out later that you don’t own the oil and gas, or that you own a smaller portion of it, then they will ask you to return money to them.  Even worse, they could ask you to fix the problems with the title.  That’s expensive.  Thousands of dollars worth of expensive.

You probably didn’t have any clue you owned oil and gas in West Virginia before the company told you so.  You are acting in reliance on the company’s research.  It doesn’t make sense for the company to turn around and ask you to warrant that the company’s work was done right.  Tell them you won’t warrant title.

Also, make sure that there isn’t anything in the lease about old wells or old leases.  It’s a pretty safe bet that there is an old well somewhere on that property, and there’s also a chance that there’s an old lease that could be affecting the property.

Finally, go ahead and ask them for an indemnification clause.  It’s not terribly likely that you’ll be liable for bad things that happen while the company is drilling.  They have deep pockets, you don’t.  They’re easy to find, you’re not.  They’re doing things on the property, you probably had to look up West Virginia on Google.  But it’s pretty easy to get and nice insurance to have, so ask.

LIMITED SCOPE – Oil and Gas Production Only

An oil and gas lease should be limited to just producing oil and gas.  Most of them aren’t.  Most of them include things like the right to convert it to gas storage, or the right to use the property for a disposal well.  Many of them also include the right to produce coal bed methane.

The main problem with most of these is that they don’t pay well.  At all.  They pay a few hundred dollars a year most of the time.  Even worse, they keep that lease alive longer than it should be.  In other words, you won’t be able to re-negotiate the terms of the lease or get a new signing bonus.

In the case of coal bed methane, the company you are dealing with doesn’t drill coal bed methane wells.  How do I know?  Because I’ve asked them.  The best case scenario for coal bed methane is that another company will approach the company that owns your lease and work out a signing bonus with them.  Once they drill and start producing they will send you royalties, but nothing more.

You should make sure the lease is only for the purpose of producing oil and gas and other products that might come out of the well with the oil and gas.

FINAL WORDS – It’s Complicated

There are a lot of other things that we help people with when it comes to oil and gas leases, including making sure they’re getting the most amount of money they can for the area their property is in.  What’s in this article is the basic stuff that can help you improve the standard boilerplate that the company will present to you.  It can make your lease…..palatable.

If you own the surface it becomes even more important that you get a good lawyer on your side.

We highly recommend you hire us to help you with your lease, even if it’s just a quick initial consultation.  You’ll leave with a lot more knowledge, confidence, and peace of mind than you came in with.

Give us a call at 304-473-1403 to schedule an appointment.  I promise we don’t bite.

Understanding West Virginia Oil and Gas Law: Who Owns What?

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huh_450One thing that people often don’t understand about mineral ownership is how the oil and gas company can sign a lease with one family member and not have to sign a lease with another.  Isn’t the oil and gas owned by both/all of you?  When my siblings sign, does that mean the oil and gas company doesn’t have to sign with me?  Can I still negotiate with the company if my siblings have signed?

It’s confusing to a lot of people.  It took me a while to wrap my head around it, too.  But I understand it now, and so can you.  Here’s how it works.

Usually you will inherit the oil and gas underneath one tract of land here in the great state of West Virginia.  (Sometimes there are more, but let’s keep it simple for now.)

Let’s set up a simple scenario to work with.  Mom owned a 30 acre tract of oil and gas rights.  She had three children.  When she passed away the 30 acre tract passed down to the children.

Most people think that since there are three children who own an interest in the tract, then you can divide the tract into three equal parts of 10 acres each and give one part to each child.  The 10 acres that are at the top of the hill go to the first child, the 10 acres that are in the “holler” (this is West Virginia after all, the valley is a holler) go to the second child, and the 10 acres that are in between go to the third child.

That’s not how it works, though.

The children own the oil and gas that’s below the 30 acre tract together.  Each child has an interest in each molecule of gas.  Each molecule of gas has three owners.

So you can’t draw lines on the map to make 10 acre tracts and give each child one.  (There is a way of doing this, called a partition suit, but it’s not necessary to get into right now.)

Since each molecule of gas has three owners, no molecule of gas can be removed from the property or sold without the permission of every person that has some ownership of that molecule of gas.

Since there are three separate owners, the oil and gas company has to deal with each owner.  The company has to get a separate contract with each owner.

The example that seems to help most people understand all of this the best is that of an old-fashioned encyclopedia.  You can buy and sell the books separately.  You can pay different prices for each book.  You can buy one this month, another next month, and a third the month after that.

But you don’t have the entire encyclopedia until you’ve bought them all.  This is important in West Virginia, because under West Virginia law the oil and gas company can’t do anything with the oil and gas until it owns all the “books”.  The company can’t drill, produce, and sell the oil and gas until all the owners have agreed to do so.

Knowing that, here are the answers to the questions above.

Yes, the oil and gas is owned by all of you.  However, none of you own or control in any way your siblings’ interests.

Yes, the oil and gas company has to sign a lease with you even when your siblings have already signed agreements.  West Virginia law requires this.

Yes, you can still negotiate with the oil and gas company even though all your siblings have agreed to something different.  We regularly get more money and better royalties for the siblings who decide to negotiate with the oil and gas company.

If you own oil and gas in West Virginia and need help understanding things, give the office a call at 304-473-1403.

Pennsylvania Lessors Should Have Gotten Competent Counsel

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DocumentA Pennsylvania judge ruled against a couple guys who signed a lease without getting competent counsel.  If they’d gotten competent counsel, they would have ended up in an entirely different position than they are in right now and probably wouldn’t have even had to go to court.

Competent counsel would have helped them either:

  1. understand that the lease they signed did not do what they wanted it to, and so managed their expectations so that when the company did what it did they would have known that was something the company could do, or
  2. (and even better) get changes made to the lease so that the company could not do what it did.

Either way would have been better than filing a lawsuit after the fact, spending tens of thousands of dollars for lawyers fees, and losing in court.

You can read the article for yourself, but the long and short of it is this.  Camp Ne’er Too Late signed a lease and two separate pipeline right of way agreements with East Resources which then sold it’s rights in the lease to SWEPI (the drilling arm of Shell).  SWEPI drilled one well, capped it, and then put a pipeline across the property.

Original plans called for up to 11 wells, and the owners of Camp Ne’er Too Late figured they would be rolling in the dough.  When they realized that the rest of the property wasn’t going to be developed, they sued.  Unfortunately, the plans and maps that they were shown during negotiations were not part of the final lease.

Also unfortunately, the final lease didn’t say anything about continued development.

In fact, without even seeing the lease we’re willing to bet that there was a clause in there that said the company could either develop or not at it’s own pleasure.  That’s extremely common in oil and gas leases.  It also looks like harmless legalese, so the owners of Camp Ne’er Too Late probably just breezed right over it.

We can’t really blame them.  They didn’t know any better.

You can learn from their expensive experience.  Don’t make the same mistake they did.  Don’t just breeze over your lease thinking you know what it says and does.  It can come back to bite you in the butt.

Now you are forewarned.  Get an experienced and knowledgeable attorney to review your lease before you sign it.  It can save you a lot of heartache, and net you a lot more money in the long run.  Call the office at 304-473-1403 to get help.