What is the Purpose of a ND Lease Agreement?
ND lease agreements are agreements signed by a tenant and landowner that give the tenant an interest to explore and extract mineral resources from the land of the landowner. Under the North Dakota Century Code (NDCC), the legal description for oil and gas formations is found at NDCC 38-11-301. The NDCC describes oil and gas as following: "Oil and gas" means all of the substances named in this section, except those gas substances in commercial quantities (other than hydrogen sulfide gas) which are embraced within and produce from a geological formation or stratum, whether producing through the use of enhanced recovery methods or other means or natural production , if the geological formation or stratum is located below the base of the Treatable Quality Ground Water in the state, except, however, those substances defined in sections 38-11-206 through 38-11-302, which are produced on the surface or from the surface of the land, and any water produced in conjunction with the substances, for the purpose of being treated for the removal of minerals or contaminants; In North Dakota, these ND lease agreements are most commonly used in the western part of the state. With the onslaught of Bakken shale revolution, there has been a boom of oil production in the counties of Burke, Bottineau, Mountrail, Dunn, McKenzie, Ward, Williams, and Stark.
Elements of an ND Lease Agreement
To begin, there must be three parties involved, which will include (a) a grantor/lessor; (b) a lessee/burden owner; and (c) the mineral interest parent tract owner. All three components must be named and described within the lease, including how the working interest is divided. The lease must also include the leasehold term. The leasehold term is the time period in which the oil and gas company has an obligation to conduct operations for production (i.e. drilling a well); if the oil and gas company fails to meet this obligation, then the ND lease is set to expire. Generally, the oil and gas company will achieve this obligation after one well is drilled on your property. The payment of a one-time bonus must be named along with the date when the payment will be disbursed. The ND lease will also contain a price per ton that the oil and gas company is required to pay your landowner family for its gravel mined. These are the minimum provisions that should be included in an ND lease.
Other clauses you want to be aware of include the following:
- Change of royalty clause – this clause sets forth the process that must be followed for increasing or decreasing the royalty rate. If this clause is absent, then all changes to the royalty rate must be in writing and signed by all three parties.
- Authorization Clause – this clause authorizes the burdenth owner to enter into leases with the oil and gas company on behalf of the parent tract owner.
- Pooling Clause – this clause allows ND leases to be pooled with other ND leases in a defined area. All owners of mineral interests in the pooled areas will receive a designated portion of the royalties in the pooled tract. For example, if you own 1% of the minerals in a 640 acre area (one section), and that area is pooled with another 640 acres to make a 1280 acre unit, then you will receive a pro-rata share of the production in the pooled areas (in this instance, 1%).
Advantages of an ND Lease Agreement
ND Lease Agreements benefit both the lessor and lessee (landowner and oil company):
• Flexibility – ND Lease Agreements are inherently flexible. The lessor can negotiate with the lessee for a favorable lease or negotiate for an ongoing royalty interest in any wells on the property. The lessee can at the very least get certain specified rights to the property, but it doesn’t have to pay anything until it starts drilling.
• Cost-Effectiveness – ND Lease Agreements are cost-effective. The landowner may not have to spend money on surveying and appraising the land to sell it. The oil company gets drilling rights without paying anything unless it drills.
• Security – ND Lease Agreements make the leasing process more secure for both parties. The landowner’s interests are protected until the lease is exercised or the option period expires. The oil company can’t enter the land without permission, which is protected through a written contract.
Typical Clauses in a ND Lease Agreement
Most ND lease agreements will contain standard clauses that outline confidentiality requirements, maintenance obligations, and termination conditions, among other items. In this section, we describe some of the more common clauses that may appear in ND lease agreements and their implications.
Confidentiality Agreements. It is not uncommon to see a clause in ND lease agreements requiring that a party keep confidential information, proprietary information, and/or trade secrets confidential and not publicly disclose such information. Such confidentiality provisions are generally mutual, meaning that both parties are subject to confidentiality obligations. Confidential information is usually defined broadly to include any proprietary, technical, or business information, including existence and terms of the ND lease agreement, but that definition may be subject to several exceptions. Exceptions usually include: (1) disclosure required by applicable law or the order of a court of competent jurisdiction; or (2) disclosure of the existence of the ND lease and/or lease terms to employees and agents of the parties and their lenders, equity holders, partners, and affiliates.
The confidentiality obligations survive termination of the ND lease as long as the confidential information remains confidential, which could be substantially through the primary term of the lease and any extensions (if applicable).
Maintenance. Modern ND lease agreements often have a provision allocating surface maintenance obligations between a lessor (the landowner) with the purpose of prioritizing the maintenance obligation and avoiding potential disputes over which party should be responsible for which maintenance.
The lessor is generally responsible for maintaining surface structures, such as fences, roads, pipelines, storage tanks, well cellars and pits, and well sites. Furthermore, much of the provision details the appearance and the operational use of pre-existing surface structures by the lessee to address potential effects to the surface land warranted by the lessee’s operations. Seasonal requirements may also be included. Maintenance requirements usually survive the expiration or termination of the lease. These provisions are important to protect both parties in the event of the wear and tear on the surface structures.
Termination. An ND lease agreement commonly provides for termination in the event of a failure to produce in paying quantities, with continuous development obligations, under certain circumstances. In the event of a failure to produce, the landowner has the right to receive 12 months notice of the failure. As long as the lessee is making a good faith effort to bring the production back into the money before the 12 months are up, the lease would not terminate, otherwise it would terminate. In this way, the lessor has an expectation that the lessee will make efforts to restore production. However, a downtime clause is not a requirement of a mineral lease by any means, as most leases do not contained such a clause. Tenants and landlords have an incentive act in good faith and properly operate and maintain wells and facilities.
Another area of ND leases that requires close attention to detail is the payment of production royalty.
Legal Compliance and Regulations
Before entering into a lease agreement, parties must first determine if the contract is in compliance with statutory, regulatory, and case law requirements. The same compliance requirements are essential when renewing or amending a prior executed lease agreement. Specific legal considerations of ND lease agreements include.
Compliance with State Law: Subject to certain exceptions, ND law requires a lessor to be the following before leasing land in the state: Document all leases with the ND Secretary of State’s office: On January 1, 2011, a new ND law took effect requiring most land leases to be documented with the ND Secretary of State’s office. In accordance with this law, and unless the lease is exempted, any lease executed or renewed on or after January 1, 2011 and containing a term of longer than 6 months must be recorded in the Secretary of State’s Deed and Abstracts Division .
Disclosure of Contingent Fees and Lease Restrictions: ND law requires lessors and lessees to disclose to the ND Secretary of State other agreements which may restrict the future use or access of the property. For example, a lease agreement may be contingent upon the land being drilled by a certain date after the signing of the lease agreement. Accordingly, the parties may be required to disclose the existence of an agreement for the drilling of a well to others.
Financial Statements: ND law requires the disclosure of financial statements and other relevant documents when their absence would create an uncertainty in the enforceability of the lease. Most lessors are able to provide the necessary documentation, the issuance of the lease commitment is on hold until the documentation is provided.
Best Practices in Preparing an ND Lease Agreement
Drafting an effective non-disclosure lease agreement requires careful consideration of the terms to be agreed upon. For a non-disclosure lease agreement to be enforceable throughout the duration of the tenancy, there are several steps that you must follow to draft a robust and suitable agreement.
First of all, both parties need to agree on what exactly the tenant should not disclose. This step will involve coming to a mutual agreement on what specific information, including trade secrets, classified documents, private accounts, and pricing models, will be shared during the term of the tenancy, and what should be kept strictly confidential.
Secondly, clear language should be used in the ND lease agreement to ensure that other parties do not misinterpret the meaning of the provisions within the agreement. A legal professional will be able to choose the most suitable wording for your ND lease agreement so that you are left with an effective document.
Thirdly, an appropriate duration period should be added to the ND lease agreement. This should relate to how long the lease agreement will be in effect. There may also be clauses that specify when information can be disclosed once the ND lease agreement ends.
Finally, enforceability will depend on the clause outlining what will happen if a tenant violates a non-disclosure clause in the ND lease agreement. Misdemeanours such as how information was disclosed, the severity of the disclosure, and whether reasonable precautions were taken to prevent the information from being disclosed without consent will all come into play here.
Frequently Asked Questions on ND Lease Agreements
The following will provide detail on a few of the more common questions I have heard about ND lease agreements:
Q: How long is the Lease Term typically for in ND?
A: The lease term granted by the landowner to the operator typically runs for 3 years followed by three options to extend for periods of 2 years each. Each of these charges has its own consideration amount. The first term can vary from 3 to 5 years. Because of the continued low prices for oil and gas, the lease term amount will likely remain much shorter, i.e., shorter than 3 years.
Q: What does it mean that a well has been Spud?
A: Spudding of a well is when the drilling rig is on location and begins setting up to drill. This date is important because the overriding royalty interest (After Royalty) , if any, runs from the 1st day of the month following Spudding.
Q: What is an "attorney-in-fact" in this lease?
A: An attorney-in-fact is someone who is designated to have authority to act in the interest of another, in this case, in the interest of the Landowner in negotiating and agreeing to bonus consideration to be paid by the operator.
Q: Can I get together with all the other Landowners who hold minerals under this lease and vote as a group whether or not to renew the lease?
A: No. Every Landowner holds a mineral interest under his or her own individual non-participating lease. They will all receive in their certificates, the royalties allocated to them under the lease.