How does the order for payment for an oil and gas lease work?
The order for payment can stir excitement in a mineral owner because it appears to be a determination that a lease bonus will be paid and a deadline is set for the payment receipt. Just as with an oil and gas lease, the order should be scrutinized.
As a Michigan State University Extension farm educator, I have talked with several mineral owners who have discovered the language in the order of payment that had created disappointment and frustration. In one case, it had been more than six months since the lease was signed and the bonus had not been received.
The order of payment provides the lessee with a time period, in this case 45 days to finalize its review of title to insure that when it makes payment, it is to the correct owner of the mineral rights and that such rights are not otherwise encumbered. Unfortunately for the owner, the language used to structure the order of payment can allow the lessee much more time to make payment than it appears.
Many order of payments state that payment will be made within 45 days of Lessee’s (Company) receipt of the order of payment, along with the executed oil and gas lease. It appears that a 45 day deadline clock begins running. However, in the first paragraph of the order of payment it may state that “No default shall be declared for failure to make payment until 10 days after written notice from payee of intention to declare such default.” The layman’s interpretation of this is that the company can wait to make payment until you notify them in writing that they are in default. The owner has the responsibility to watch the clock. The order of payment provides no penalty for payment after the 45 days, nor does it provide the owner the right to cancel the lease for non-payment if payment is not received within the 45-day period. In this case, the fine print of the order of payment also states that the order of payment will expire one year from the date it is issued, or sooner if terminated by Company. It provides the Owner no opportunity to cancel the order of payment.
In addition to verifying title, other things might be going on that the Owner may not be aware of during the 45 day or longer delay period. The Company may be shopping the lease in hopes it can assign it for a greater bonus than the one owed the Owner. The landman may record the lease and then attempt to assign it. If there is an assignment, the order of payment is paid and the Owner is none the wiser.
To counter this, the Owner has several alternatives:
- The lease can be amended to require that the lease will not be recorded until such time as actual payment is made to the Owner.
- The Owner can insist upon retaining the original lease and then providing it to the Company when the bonus payment is received.
- Amend the lease to require a deadline for payment of the bonus and if that deadline is not met, the Owner has the option to declare the lease void.
- The order of payment should be executed (signed) by both Owner and Company. If a signature line for Company is missing, insist upon its inclusion.
- Typically, orders of payment do not provide an objective standard by which the legitimacy of Company’s disapproval of title is gauged. Shorten the 90, 60 or 45 day timeframe for title verification to 30 days. State that marketable title is title that is curable. For example, title defects will not include:
- A mortgage encumbering Owner’s lands
- The lease was not properly styled
- The lease was outside the approved leasing area
- The lease was taken after the project ended
- The lease was not on the approved lease form.
If Company finds a defect, require that they advise Owner of this defect and allow Owner 60 days to attempt to cure the defect. During this period Company is not obligated to make payment.
- Many orders of payment provide “The right to receive this payment shall not be assigned, whether as collateral or otherwise” or some variant thereof. If the lease permits the Company and Owner to assign it, the Owner should also be permitted to assign his or her bonus payment and this provision should be struck.
- Make sure that the order of payment is consistent with the lease as to the names, legal description, acreage and bonus amount.