Have you received an offer to lease your mineral rights? If so, you may be wondering if the offer is fair and if you should accept it. Evaluating lease offers can be a difficult task because there is not a lot of information available online. In addition, there are usually no local resources that can help you evaluate lease offers and determine if the offer is fair. We’ll help you better understand a lease offer and also tell you where to get help.
Evaluating Lease Offer Terms
Not all lease offers are the same. There are a number of terms within the lease offer and some of them are very important. Read each of these terms carefully so that you’ll know what to watch out for when evaluating lease offers.
Lease Bonus: The most common term you hear about related to evaluating lease offers is the lease bonus. This is the amount you are paid up front for the right to lease your property. The lease bonus is important because this is the guaranteed money you will receive when signing the lease. No matter what happens after the lease is signed, this is your money to keep. You want to negotiate the highest possible lease bonus!
Lease Term: Every lease is for a specific period of time. The lease term is the amount of time that an operator has to start drilling on your property. The lease bonus you receive in the beginning covers the entire lease term. You want to negotiate the shortest possible lease term. If you can negotiate a shorter lease, this mean you will either have drilling on your property (royalty income) or you will have the opportunity to lease your property again.
Optional Extension: In almost every lease, there is an optional extension. The optional extension allows the entity who leased your property to extend the lease term by a specified amount of time. This is typically double the original lease term, so if you had a 3 year lease term you would likely have a 3 year optional extension. If an optional extension is exercised, the entity must pay you another lease bonus for the extension.
Royalty Percentge: The royalty percentage is commonly overlooked by mineral owners. Due to the fact that it doesn’t make a difference today, many mineral owners will not carefully consider the royalty percentage when evaluating lease offers. This is a big mistake! The royalty percentage you receive could be a very substantial amount of money in the future. You should negotiate the best possible royalty percentage you can. Always aim for more than 15%, and try to get as close to 20% as possible.
How to Negotiate a Lease Offer
Negotiating a lease can be challenging for many mineral owners. Even after you have evaluated the lease offer, it can be difficult to know what terms are fair in your area and what things you should negotiate on. If you have received an offer to lease your mineral rights, we highly recommend that you fill out the form below. We can help you evaluate lease offers and also help you with the negotiations if you would prefer.