CHECKLIST FOR NEGOTIATING AN OIL AND GAS LEASE
Prepared by John B. McFarland
Graves, Dougherty, Hearon & Moody
401 Congress Ave., Suite 2200, Austin, Texas 78703
for the Texas Land & Mineral Owners Association
Annual Meeting, October 5, 2006
Check out the lessee.
Some leases are acquired in the name of landmen or agents for the true
lessee. Insist on knowing the identity of the company acquiring the lease,
and that the ultimate lessee be the named lessee in the lease. Inquire
about the experience of the company in the area. Learn to use the Texas
Railroad Commission website to investigate operator history. Ask other
landowners who have dealt with the company. If the company is small
and/or owned by one person, consider asking the principal for a guaranty
of the lease.
Agree on Deal Terms First.
The "deal terms" of a lease are typically:
delay rental (if any)
Reach agreement on these terms before negotiating the form of lease.
Additional "deal" terms may include:
an option to extend the lease primary term,
a commitment to drill a well during the primary term, or pay an
agreed amount as liquidated damages.
a promise to pool lands into a unit for a well to be drilled,
an increased royalty after "payout" of a well,
a minimum annual royalty.
The Lease Form.
Once "deal terms" are agreed, decide whose lease form to start with in
negotiations. If possible, use your attorney's form or the TLMA form as
the beginning of negotiations. The TLMA form addresses many of the
issues described in this checklist.
Remember: all lease terms are negotiable. The landman acquiring the
lease may not have authority to negotiate those terms, but someone does.
Don't be timid.
Your bargaining power in negotiating lease terms depends on
-- The size of your tract and what minerals you own in the tract;
-- the proxi