A top lease oil and gas implies a contract signed at the time of another pre-existing lease (bottom lease) but comes into effect once the first lease expires.
Natural minerals like petroleum and gas comprise a significant part of the GDP of many countries including the US. Under American law, landowners can own, sell and extract the subsurface mineral reserves. Hence, the general public and oil/gas companies sign mineral leases.
However, buying exclusive mineral rights is expensive, and thus, companies are more inclined toward leasing mineral acres for a specific period to explore the area. Unfortunately, the disproportionate ratio between mineral reserves and independent oil producers has led to saturation in the industry, due to which companies tend to top lease.
This article elaborates on top lease in oil and gas and walks you through its legal process according to the Texas laws.
What is Top Lease?
The term ‘top lease’ is defined as a lease signed and paid for before the termination of a pre-existing lease.
Except for geophysical tests and drilling, there is no way to identify if the land has underlying mineral reserves. Therefore, instead of purchasing mineral acres for a lifetime, petroleum companies lease land to carry out mineral exploration.
There is a high competition between oil and gas producers in the areas known to have significant amounts of minerals. Therefore, companies often approach mineral owners to top lease the area and buy the drilling rights.
What is the Right of First Refusal (ROFR) Provision?
The first right of refusal provision gives its holder the right to transact with the owner before third parties.
Companies can add the ROFR in the lease contract to top-lease. This contractual right implies that the mineral owners must first offer their proposal to existing lessees.
It is essential to mention that ROFR does not give absolute ownership to bottom lessees. Instead, having a ROFR offers them the opportunity to lease the mineral rights based on the offer of the third parties. This mechanism allows the lessees to invest in the long-term production of minerals and hence, favors their business.
What are the Types of Oil and Gas Top Leases?
In Texas, top leasing oil and gas mineral acres is legally valid, and the practice has become common in the past 50 years.
There are two primary types of top leases:
Two-Party Top Lease
The top two-party lease refers to a deal between the bottom lessee and the mineral owner, in which the lessee acquires a top lease before the termination of their existing contract. This usually takes place due to ROFR.
Three-Party Top Lease
Three party top lease implies a situation in which a third party secures the top lease, and it comes into effect after the expiration of the bottom lease.
What are the Common Lessor and Lessee Conflicts?
Before we proceed to clauses that you must discuss in the top lease contract, let’s see some common lessor-lessee conflicts that arise when top leasing mineral rights:
- Nature of Exploration: Several things factor in during mineral exploration, such as geology, reservoir mechanics, economic conditions, etc. Unfortunately, the basic lease form used in the industry is not elaborate. Therefore, if the methods regarding mineral exploration and the compensation of any consequent damage are not discussed beforehand, it often leads to conflict.
- Separate Mineral and Surface Rights: In Texas, property owners can lease or sell their mineral rights without selling the land. Understandably, exclusive mineral and surface rights lead to a problem when the contract is not adequately discussed between all three parties.
- Lessor’s Interference: Unwarranted intervention by the lessor or denial of physical access to the premises needed for exploration is another cause of disagreement.
- Adjacent Tracts of Mineral Acres: Neighboring mineral acres can be leased to different companies. Any issues during drilling or mineral production between the two parties working on adjacent lands can also create a problem. This issue is also significant because oil and gas can seep through the area. Therefore, properly discussing terms and conditions with neighboring landowners is critical when signing a lease.
How Should You Go About Top Leasing Mineral Rights?
The crucial points to consider when top leasing mineral acres are as follows:
Keep a Record of Previous Lease Paperwork
To mitigate potential conflicts and legal issues, it is important to keep a record of your previous lease paperwork when signing a top lease. Additionally, distribution of mineral rights in the will, royalty conveyances, maps, and other essential aspects should also be discussed.
Check for the Surface and Mineral Authorization Before Signing the Lease
When signing a top lease, a company should confirm the authorization of mineral and surface rights. This is particularly crucial as any conflicts concerning the issue can interrupt /halt mineral production in the future.
Unfortunately, we do not have any absolute elaborate criteria for top leasing mineral rights in Texas. Any ambiguity in the contract can lead to a disagreement between the lessor and lessor. Therefore, it is essential to negotiate important points such as:
- Discuss the complete mechanism of exploration techniques and geophysical surveys.
- Make it a point to discuss compensation amounts in case of property damage during drilling/exploration.
- Take written consent from property owners prior to drilling.
Get a Contract Leasing Agent
To keep from issues during top leasing mineral rights, it is helpful to get a contract leasing agent for consultation and representation during the process. They are experts on the law concerning oil and gas leasing and can get you the best deal out of it.
This article explains top leasing mineral rights in Texas and how to go about it. Understanding mineral rights and laws regarding leasing them is essential for both lessors and lessees.
Therefore, it is paramount to always ensure an unambiguous and thorough contract that discusses all the important aspects regarding mineral exploration and production. Additionally, it is also essential to involve the land owner during the process. For adequate guidance through the procedure, you can also hire contract leasing agents.