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Energy Industry (Oil & Gas)/Renewal of Oil and Gas Lease; Top Lease

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Question
Dear Mr. Scott:

I have an oil and gas lease entered into on March 24, 2009 that is due to expire March 24, 2014. The lease is for land in West Virginia in the Marcellus field.  It appears to be a standard lease form.  It contains an "Extension of Primary Term" clause giving the Lessee the option to extend the primary term of the Lease for one additional term of five (5) years under the same terms and conditions of the original lease.

There is a Right of First Refusal clause which states that "If at any time within the primary term of this lease or any continuation thereof, Lessor receies any bona fide offer, acceptable to Lessor, to grant an additional lease ("Top Lease") covering all or part of the Leasehold, Lessee shall have the continuing option by meeting any such offer to acquire a Top Lease on equivalent terms and conditions."

I am aware the value of leases in this area have increased considerably since this lease was entered into in March 2009.

My question/confusion lies in whether the clause stating the lease can be extended for a five year period on the same terms takes priority over the Top Lease clause; i.e., can I approach another company about acquiring the rights?  I understand any offer received will have to be submitted to the current Lessor.

Thank you.

Answer
Neither of those paragraphs are good for you, especially the five-year extension (unless they had agreed to pay DOUBLE if extended or something.) As you've noted, lease prices have increased significantly since 2009, but you will be "locked in" at the rate that was current five years ago for another five years if they choose to exercise their option to extend. You can hope that they do not.

You can of course approach another company to lease at any time, but you won't be able to lease to them until your current lease, or any extensions thereto that are exercised, expire, and as you mentioned, any offer you receive while your lease is still in effect will have to be run by your current lessee to give them a chance to match it. Sounds good maybe, but it's really not a good clause to have. See below.

The reason the ROFR clause is bad for you is because when other companies see that you have one they are going to be less likely to even bother making you an offer before your lease expires since they know they will have to run it by your current lessee first to see if they want to match it. If anyone's interested, they'll likely just wait until your lease expires to even contact you.

Hope this helps you out.
Frederick M. "Mick" Scott CMM, RPL
www.mineralhub.com
The Mineral Hub  

Energy Industry (Oil & Gas)

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Frederick M. Scott

Expertise

Oil and gas leasing, lease negotiations, how to best deal with the oil and gas companies or their representatives, buying/selling mineral rights, forced-pooling, correlative rights, deeds and conveyances, and "post-production" costs. I am most experienced with Oklahoma properties and laws, but am able to answer questions concerning other oil and gas producing states in many cases.

Experience

I am a Certified Professional Mineral Manager (CMM) certified by the National Association of Royalty Owners (NARO) in Tulsa, OK. I am also a Registered Professional Landman (RPL) with the American Association of Professional Landmen (AAPL). I have managed my family's oil and gas properties in Oklahoma for over 10 years and have dealt with many landmen, title analysts, attorneys and other oil and gas professionals in the process. I have written articles of interest to mineral rights owners which have appeared in various industry magazines and newsletters. I have negotiated and drafted leases, prepared deeds, affidavits, and other legal instruments relating to my own minerals, as well as performed title, legal research, and curative work for same. I have acquired a good deal of knowledge on the subjects of oil and gas law, mineral appraisal, and land and title work over the past ten years, and have also worked as a professional landman. I've seen the business from "both sides" and therefore feel confident I can help out most of the folks who ask questions in this forum.

Publications
National Association of Royalty Owners "Action Report" (ROAR); NADOA Magazine, The Mineral Hub, Landman Magazine, and several royalty owner association group's newsletters.

Education/Credentials
Certified Mineral Manager (CMM), Registered Professional Landman (RPL)

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