By: Clif Little, Extension Educator, Guernsey & Noble Counties
The provisions of an oil and gas lease and right-of-way grant, outlines payment details and can be a complex element of a lease or grant. Understanding these provisions is integral when considering the financial aspects of an oil and gas lease or right-of-way grant. In modern oil and gas transactions landowners are often offered a signing bonus in consideration for granting a lease or right-of-way grant. It is a common practice for companies to offer this payment in the form of a bank draft once the agreement is signed and notarized. For many landowners who are accustomed to exchanging paper notes or personal checks for things they purchase, a bank draft can be a new financial experience. Understanding the elements of a bank draft can assist a landowner who may come across one when entering into oil and gas related agreements.
A bank draft in simple terms is a “conditional” form of payment to be honored within a described time period. The draft itself may appear similar to a personal check. One key element that typically appears in a bank draft are a list of conditions for payment. The conditions of payment are important for a landowner to review prior to signing any agreement. A number of companies involved in shale development and the leasing of land utilize bank drafts. A landowner may be informed that this is the standard form of payment. However, it is important to know that the landowner may have the option to control the form of payment. Ultimately, the landowner determines the standards of payment. The wording contained within the bank draft can have serious effects in terms of when a landowner may expect payment. Terminology and conditions written into the bank draft can cause a substantial delay or cancellation of payment, even in cases where landowners have clear title and ownership.
How Bank Drafts Work
A transaction involving a bank draft may occur between a landman (a landman typically refers to an agent who serves to secure mineral rights to a private property through negotiations with a landowner) and a landowner. A landman may offer a bank draft in exchange for a signed and notarized agreement. The landowner may be instructed to take the draft to the bank. Some banks are not familiar with the type of bank drafts oil and gas companies use for payment and may not know how to process the draft.
If a landowner should choose to utilize this form of payment, it is important to have the leasing company’s bank contact information. Next, the landowner’s bank or the landowner sends the bank draft to the leasing company’s bank. There is potentially a cost associated with this transaction, either in the form of a bank charge or a priority mail charge. After which, the company’s bank confirms and notifies the sending party that the bank draft has been received. Bank drafts typically contain language which details time parameters for paying the landowner. The conditions may stipulate a specific length of time a company has before they must honor the draft. After the party which sent the draft is notified that it has been received, the time limit included in the draft for payment to the landowner begins.
During this time period the landman or company often records a memorandum of the lease or grant, creating a cloud on the landowner’s title that the landowner must have removed from the title if payment is not received in due time.
What are the Conditions of the Bank Draft?
Although each respective company has their own preferences and conditions in terms of bank drafts, there are a number of key features that a landowner should be aware of. The following are key terms and conditions that surface within a typical bank draft presented to a landowner:
Payment within a specified period of time. There is not a standard for this time period; it can range from 15 days to 180 days or more. Landowners should keep in mind that these are not calendar days but are typically business days. Weekend and holidays do not usually count in this time period. There are a number of reasons for this payment within a specified period of time. A company may find it desirable to include this stipulation to delay payment in order to check title thoroughly, investigate production potential of the area being leased, secure more areas of interest, secure a purchaser of the lease, or grant, etc. A landowner has the right to negotiate this period of time included in a bank draft before signing.
Payable on approval and/or approval of title. This term can be vague and confusing. What exactly does payment on approval mean? Landowners should request a clear explanation of what constitutes clear title and what does not. This should be put clearly in writing in the bank draft and the lease or grant. Likewise, define what constitutes company non-approval of payment and secure it in writing.
Nether party shall be liable for payment. This is the most significant feature of a bank draft. Can a company back out of the deal if they are short on funds? What if the company could not tie-up enough acreage in your area? It may be that neither the landowner nor the company is bound to honor the lease. Prior to signing, it is advisable to consult an attorney in considering the “no liability” aspect of a bank draft.
Alternatives to the Bank Draft
It is possible to work with companies and have them conduct thorough research, prior to signing an agreement and exchange the lease or grant for an unconditional, nonrefundable, certified check. Another method is to keep the signed notarized original lease or grant in your attorney’s office and exchange it for payment after the company has had time to research the title. It also may be possible for your bank to hold the lease or grant in escrow and then exchange it for payment.
The conditions of payment described in bank drafts are a critical component of an oil and gas lease and right-of-way grant for landowners and their attorneys to consider. Have your attorney look at the entire document including the payment terms and bank draft prior to signing. If you choose to accept a bank draft, define what is considered clear title, limit the “no liability” clause and keep the days to payment as short as can be negotiated. In addition, it is advisable that the lease or grant memorandum not be officially recorded on your property until you have been paid in full.