You are a landowner with a current oil & gas lease for your property. The current lessee sends a land man asking you to “ratify” your existing lease. Should you do it?
Probably not. Do you know what it means to “ratify” the lease? Do you know why your current lessee wants you to sign a “ratification”? Do you know what the market would pay in bonus and royalties for your land if you did not already have a lease? Do you know what other landowner protections are being written into new leases? Until you know the answers to these questions, you should not sign anything.
To “ratify” a lease means that the landowner and oil & gas producer, as current lessor and lessee of the land, agree (or re-agree) to the terms of the existing lease. It is basically saying, “Yes, this is our agreement, and it will be our agreement going forward.” It is as though you are starting anew with the same agreement—but you can add or change terms.
The real question is why? Why is the land man coming to you now? If you already have an existing lease, why would the lessee want you to sign something?
In all likelihood, the lessee (usually the current producer) believes that you have legitimate grounds to break the existing lease. A common reason is that there has been little or no production from your property. Your existing lease may not have unitization or pooling language in it, and the lessee now wants to add this as part of the “ratification.” (This is not grounds to void the lease, however). The current lease may contain terms regarding shallow and deep rights that make the property unmarketable to the “deep” producers.
Watch: Why Should You Read Your Existing Oil & Gas Lease?
The bottom line is that the lessee needs you to “re-agree” to the original lease (perhaps changing some terms here and there) so that the lessee can sell these gas rights to one of the dozen or so shale developers. Think before you sign.
If asked to ratify, the landowner probably has the better negotiation position. Yet, the landowner often has insufficient information to effectively negotiate.
- First, you should learn why the lessee wants to ratify. It is important to know the strength of your case if you attempt to break the existing lease.
- Second, you need to understand the market. Is the lessee offering bonus money and enhanced royalties as an enticement to ratify? How much could be reasonably obtained if your land were clear of the existing lease?
- Third, new leases often contain favorable terms for landowners. They often contain clauses for increased domestic use, land use restrictions, restrictions on pipeline placement, etc. Can you negotiate these terms into a “ratification”?
Only when you, the landowner, believe that you have negotiated a ratification based on the market conditions and with ample knowledge of your lease should you agree to a ratification. Of course, when in doubt, hire a lawyer.
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