When it comes to negotiating a mineral rights lease, there are a lot of industry terms and lingo that require a full understanding before any contract agreement should be signed. One of the most common phrases questioned during oil and gas lease negotiations is the term “paid-up.” In this article, we will define paid-up oil and gas lease, in addition to exploring why and how they are created.
What is a Paid-Up Oil and Gas Lease Agreement?
A paid-up oil and gas lease is an agreement between a mineral rights owner and an oil and gas company, in which one payment is made at the beginning of the contract. This is the only amount of money that the gas company will pay the mineral rights owner until drilling operations begin. From there, the mineral rights owner may receive oil and gas royalties from the sale of resources extracted from their land.
Why Do Oil and Gas Companies Use Paid Up Leases?
Oil and gas companies will typically enter paid-up oil and gas lease agreements as an incentive to entice landowners to enter into a contract. If you receive an unsolicited offer with an attractive upfront payment promised, it is important to be wary of deals that seem “too good to be true.”
However, paid-up leases are extremely popular as the upfront payment is seen as a sort of “signing bonus” for entering the agreement. Occasionally, oil and gas companies will sign lease agreements that expire before they even explore their acquired land. With a paid-up lease, mineral rights owners are guaranteed at least some money in exchange for their property’s value.
Ultimately, if you’re wondering whether or not to sign a paid-up lease agreement for your mineral rights, you must weigh your options. If the lease agreement looks good, you may be able to receive a small sum of cash and a future of plausible oil and gas royalty payments. However, if you are primarily interested in an upfront payment, you may want to consider selling your mineral rights outright. Compared to paid-up oil and gas leases, selling mineral rights is a much quicker way to generate larger capital gains.