How Do I Know If I Am Getting a Fair Lease Offer?

David Smith, Louisiana Manager, Argent Mineral Management

With oil and natural gas prices at such high levels, the market may be ripe to lease mineral rights. When presented with a lease offer, I and my colleagues at Argent Mineral Management recommend a two-step negotiation process.

The first part involves negotiating the primary term of the lease, bonus per acre, and royalty rate. Generally, the first offer is not the best, and other potential parties may also be interested in leasing the same tract.

It is also helpful to research the area around your minerals to determine if any companies (and which companies) are actively operating in that area to consider if competing offers can be generated. If possible, another tool to maximize your leverage is to determine if you can act in concert with other mineral owners in the area. These other owners can help to increase the size of the fractionalized interests while also offering insight into the terms they have been presented. Mineral managers or legal professionals who actively negotiate in the area also should be consulted for their opinion of market conditions.

While negotiating the primary term, it is in your best interest to keep it as short as possible. Terms of three years or less are preferred, and I strongly discourage an option period (also known as a “kicker”) for extending the term. Negotiating a high bonus per acre is a priority, but do not let the promise of a higher bonus sacrifice your royalty rate (percentage paid on production). Leases typically last for as long as oil and gas are produced in paying quantities.

To maximize the long-term value of your payments, a higher royalty rate is the leading consideration when negotiating terms.

Once terms have been agreed to, the second step is to negotiate the governing document surrounding the lease. Lease documents, as presented, almost always favor the operator. This contract determines how you are paid and the amount of activity on your minerals. Some important clauses to consider adding include:

  • Royalty valuation should be free of costs and valued at the higher of “market value” or “proceeds” at the point of sale or use (“no deduction clause”)
  • Right to inspection, records, information, and audit
  • Limiting the lease to certain depths (“depth clause”)
  • Limiting the amount of acreage an operator can maintain with one well (“pugh clause”)
  • Limiting the amount of acreage that can be pooled with other owners in the area
  • Do not warrant title

A properly negotiated lease can help secure the wealth-generating power of mineral assets to benefit owners and their future generations, as well as ensure that you are getting a fair lease offer.