You can negotiate all the terms of your lease.
YOU DON'T NEED TO ACCEPT THE FIRST LEASE
Therefore, you must consider and be prepared to negotiate many issues, some of which are listed here:
THE GAS COMPANY OFFERS.
Up-front bonus payments for signing the lease
A bonus payment is money paid "up front" by the gas company to the landowner within 60-90 days after the lease is signed. The payment is typically a certain number of dollars per acre, paid in one lump sum regardless of whether drilling operations occur. The bonus will normally also be treated as the first year's rental under the lease.
Delay rental payments
This is money paid to the landowner for the period of time after you've signed the lease but before the gas company begins drilling. This is a per-acre amount that is much small than the up-front bonus (can be as low as five dollars per acre). Unless your lease includes delay rental payments, you may not receive payments unless the gas company is actually drilling on your land. In a "paid-up" lease, delay rentals are paid at the same time as the up-front bonus.
Royalty payments are a fee that the landowner receives based on actual production from a well on your property (or from a production pool that includes your property). Pennsylvania law has established a minimum royalty payment of 12.5%, but you can negotiate for a higher percentage, and you should consult with an attorney to make sure you understand your rights. Also, you need to be careful about provisions in form leases prepared by the gas companies that permit royalty payments to be reduced based on post-production costs including treating, processing and transporting the gas taken from your property.
Landowners must also consider whether to negotiate the right to have a third party confirm the gas company's actual production figures for each well. At the very least, the landowner should have the right to access and audit the gas company's records related to production and operations under a particular lease.
"Most Favored Nation" clause
Over the past year, and particularly over the past several months, there have been significant increases in bonuses and royalties to be paid under gas leases in Pennsylvania. Many people have neighbors who signed for several hundred dollars per acre as an up-front bonus, only to see that amount jump to over $1,000 - sometimes in less than a month. A most favored nation clause is a hedge that provides for your compensation to be increased as the amounts paid by the same gas company to other landowners increase. Gas companies are not fond of these provisions, and when they can be negotiated, they are typically limited to a short time (often 30 days) and are restricted to specified geographic areas.
Payments for pipelines placed over or under your property
You need to be aware of your rights with respect to the placement of pipelines over or under your property. Also, if the gas company requests the right to place pipelines on your property but does not produce gas from your property, you should request additional compensation for the privilege of placing the pipelines on your property. Typically, this is not provided under a gas company's form lease.
Length of your lease
You must carefully negotiate the length of your lease. You should consider whether you want a long term lease, or a shorter term. You should discuss the pros and cons of each with a licensed attorney.
Renewals of your lease, and rates for renewal
You must also consider how and under what terms the lease can renew. The time to negotiate these terms is before you sign a lease. You can negotiate additional payments or different payment terms altogether for a renewed lease.
The length of time that an oil and gas lease remains in effect is very important to the landowner, and can have a significant impact on the landowner's ability to negotiate to receive market rate compensation over time. Typically, oil and gas leases provide for a primary term and a secondary term. The primary term is the initial fixed term (usually five or ten years). This is the period of time during which the lessee has the opportunity to explore and take steps leading to productions, although sometimes they will do nothing. During the primary term, landowners can expect to receive an up-front bonus, that will also serve as the first year's rental. During the balance of the primary term, the lessee will pay delay rental (sometimes called drilling-delay rental). The delay rental compensates the landowner during the period of time that the lessee delays in drilling. This amount is often much less that the up-front bonus. When the bonus and the delay rental are paid up-front, the lease is called a paid-up lease. The secondary term is the period of time, which can be unlimited, during which the company is actually in production. There are a variety of ways for a lessee to extend or renew the primary term, whether automatically or through an option. These provisions in the lease must be read and negotiated carefully. An experienced lawyer can help protect the landowner. Once production starts, the lease will normally extend so long as gas is being produced in paying quantities. There are, however, various protections that can be afforded to a landowner if production slows or is stopped.
Restoration of your property after the drilling is completed
You must negotiate what will happen to your property after the drilling is finished. There will be clean-up costs and costs to restore your property to the condition it was in before the drilling began. You also need to negotiate what happens to any wells or other structures on your property after the drilling is complete
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