The Defect Dilemma of Unpaid Oil and Gas Leases

Empty Envelope from Oil and Gas Company because of Voided Lease

The Defect Dilemma of Unpaid Oil and Gas Leases

The ink is dry on the oil and gas lease you signed. All that you have to do is sit back and wait those 120 days until the oil and gas company sends you your bonus check. You dream of the new Kubota tractor you’re going to buy or that vacation to Aruba you and your wife had always wanted to take. Finally, you receive that envelope in the mail. However, when you open that envelope you don’t find a check. Instead, you find a letter that tells you that you don’t own your acreage or that it is subject to an ancient oil and gas lease and payment will not be made. Poof! There goes that Kubota and there goes Aruba. How can this happen? Is this proper? The answer, as always, is that it depends…

Title Defect – The Lease You Signed is Void

Unfortunately, the situation described above happens all too often. Just because you sign an oil and gas lease does not necessarily mean that you will be paid for it. After signing, the oil and gas company performs a title examination of your oil and gas minerals and makes a determination as to what you own and whether it is available for lease. That is the reason for the 120-day pay period. If they claim to discover an issue (commonly called a “title defect”), they will issue a letter stating as such and that the lease you signed is void.

“Ancient” Leases – Void the Lease You Signed

Most commonly, the oil and gas company claims they found a prior reservation of some or all the oil and gas minerals in your land’s chain of title. In simple terms, a previous owner of your land “kept” the oil and gas minerals when he or she sold the property to the next owner. Other times, the oil and gas company claims to have found a prior oil and gas lease (what I call “ancient” leases) that is still in effect. These and others are legitimate reasons for oil and gas companies to void the lease you signed—or pay a lesser amount if you still own some oil and gas minerals but not all.

Not The End – Is the Defect Appropriate?

BUT, that should not be the end of the inquiry. Sometimes deed reservation language is not clear.

  • Did the prior owner reserve all of the oil and gas minerals or some lesser interest?
  • Did the prior owner reserve a royalty-only interest which would entitle you to receive the bonus?
  • Is the prior lease still in effect?
  • Does it contain a pooling clause?

Just because you receive a defect letter, it does not that you’ve reached the end of the road. If you receive a defect letter, make sure the oil and gas company provides a reason for the actual defect and a reference to the deed containing the reservation and/or the oil and gas lease they claim is still in effect. That way, you can make an independent assessment of whether their defect is appropriate.

Professional Help – Oil and Gas Lease Due Diligence

That being said, oftentimes a lawyer is needed to make a legal determination as to the effect of a deed reservation or ancient oil and gas lease. The answers aren’t always clear, to say the least. Here at GKT, when I negotiate a lease for a client who later receives a defect letter, I do my own due diligence to ensure that the defect is appropriate. And, if the oil and gas company and I cannot agree, I have and will continue to successfully pursue my client’s claims in court.

If you have received a defect letter or less payment for an oil and gas lease bonus or extension payment and have questions, contact my office to set up a no-cost, no-obligation consultation. GKT offers a wide range of legal services to oil and gas land and mineral owners in Ohio, West Virginia, and Pennsylvania.

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