• Marcellus and Utica Shale Exclusive Marketing/Listing/Leasing Agreements: Issues for Property Owners
  • January 19, 2012 | Authors: Aaron S. Evenchik; Joseph P. Koncelik; Mark L. Rodio; Adam J. Russ; Mark J. Stockman
  • Law Firm: Frantz Ward LLP - Cleveland Office
  • Several types of businesses are attempting to capitalize on the Marcellus and Utica Shale plays in ways that property owners might not understand. Besides entering into a standard leasing agreement with an energy company, there are several other contracts that companies are approaching property owners to execute:
    (1) Exclusive Marketing/Listing/Leasing Agreements, and
    (2) “Paid Up” Oil and Gas Leases.

    Exclusive Marketing/Listing/Leasing Agreements:
    Just as a property owner can enter into an exclusive or non-exclusive listing agreement with a real estate broker to sell or lease real property, property owners can enter into exclusive or non-exclusive agreements to sell or lease mineral rights. Like any contract, these marketing/listing/leasing agreements will be enforced according to their terms so it is important that property owners read and understand all provisions before signing such agreements. If necessary, the property owner should consult legal counsel to explain unknown terms. Equally important, property owners should not rely on verbal representations from the salesperson about what the agreement means or how it should be interpreted. The written agreement typically will control to the exclusion of all verbal representations.

    Terms and conditions for which property owners should be aware include:

    • whether the agreement binds the property owner to the other party on an exclusive or non-exclusive basis,
    • the time period of any exclusive agreement and any “automatic” renewals,
    • the amounts, calculation, and timing of compensation to be paid to the other party,
    • the amounts, calculation, and timing of compensation to be paid to the owner,
    • any out-of-pocket costs to be paid by the owner or reimbursed to the other party from any royalty or lease payments,
    • responsibility for taxes,
    • disclaimer of warranties and limitations on liability,
    • which state’s law controls,
    • choice of jurisdiction and venue for any legal action that may be required, and
    • indemnification.

    If the property owner enters into an exclusive agreement, he or she will be unable to engage similar services from any other provider as long as the first agreement remains in effect. Further, some of the agreements obligate the parties to resolve any legal disputes in foreign jurisdictions, which will be both inconvenient and expensive for property owners.

    “Paid Up” Oil and Gas Leases:
    Property owners are also being approached with “paid up” leases, whereby an energy company or its intermediary obtains the oil and gas rights from the property owner for a nominal cash payment (for example, $10). The lease then provides that the energy company does not have to do anything else for the initial term as long as five (5) years, and many include renewal options for equal periods of time. These leases may promise bonus, royalty or lease payments based on acreage or production, but do not obligate the energy company to begin production or to make payments within the initial term.

    Courts Continue to Enforce Leases as Written:
    In two opinions issued the week of January 9, 2012, courts in Michigan rejected claims by property owners that land brokers breached lease agreements by refusing to pay bonus and by refusing to approve leases until the mineral rights had been approved. In the first case, the bonus payments were contingent on the land brokers “approving” the title to the minerals, and the lease gave the broker “complete discretion” to approve or reject title. In the second case, the lease contained clear language that it would not be approved until title to the minerals had been approved during a specified period. The property owners failed to show the title had been approved during the specified period, thus no binding contract was formed.

    Property owners need to carefully review and understand all documents before signing them. Otherwise, the unintended consequences can last for decades.