Consent to Assign — A Scourge Upon Your Lease

romeo-and-juliet-death-scene-jpgAs landmen in the field, an often mentioned request by mineral owners is that the lease not be assignable without consent of the lessor.  On the surface this is a perfectly reasonable request, because Mr. Johnny just wants to make sure that he knows who holds his lease and that they are good folks.  Unfortunately this clause can cause all sorts of heart burn later down the road.

Most legal departments draft this clause with a caveat, “such consent will not be unreasonably withheld.”  Unfortunately most leases don’t define the word ‘unreasonable’, and there are a multitude of perfectly reasonable-reasons that Mr. Johnny might not want to give his consent for the lease to be assigned to Jimmy Dolittle Oil Company:

  • He knows that Jimmy Dolittle Oil Company treated his Daddy’s farm badly and didn’t want to pay damages years ago.
  • Mr. Johnny did his homework, and JDOC has a terrible Dunn & Bradstreet rating.  He doesn’t feel that they can live up to their obligations under the lease.
  • Perhaps Mr. Johnny feels the original Lessee (you) owe him a release of depths, or that you bump up his royalty to match his neighbors that you leased after him.

Depending on the way Mr. Johnny structures his argument, you might have a hard time finding a leg to stand on in the exchange.  Even if you can win, do you really have time to take him to court to complete your deal?  Of course, maybe you are sure you are in the right so you go ahead and assign it anyway — hopefully Mr. Johnny can’t prove in court that you acted in bad faith.

Unfortunately, what happens in many cases is that the lease gets assigned without Mr. Johnny’s consent.  Why does this happen?

  • As mentioned above, the Lessee feels that they can prove the landowner is “unreasonably” withholding consent.
  • A proper due diligence wasn’t performed and perhaps no one realized that consent was necessary until after the transaction had taken place.

I have seen the second option happen numerous times.  This is one of the best reasons to try to avoid these types of clauses.  Once you find out ‘after the fact’ that you have assigned without consent, then you have already breached the terms of the lease.  Of course, getting consent after you have already assigned the lease is going to be difficult.  You will be upfront and honest with the Lessor right?  Usually there is little recourse than the pay the Lessor a fee for your breach of the lease terms, and you’ve given up whatever negotiating power you had by your previous actions.

So how do you avoid including this clause in your lease when landowners request it?  The first line of defense is offering a clause which will provide notice of assignment within ‘xx’ number of days of the assignment.  This keeps the landowner informed as to who holds an interest in the lease.

In extreme cases I’ve seen clauses included in leases to the effect of “Lessee, and his assigns, hereby agree that this lease will never be assigned to XYZ Oil Company or any subsidiary thereof.”  I’d say this is a last resort type maneuver, as it could really cause problems down the road depending on the size of ‘XYZ’.  There is also some implicit vagary, can the lease be assigned to the resulting company who merged with or acquired ‘XYZ’?  It’s a slippery slope.

Many sophisticated lessors will not allow you to get away with not including a ‘consent to assign’ clause, but when possible it is advised that you do everything possible to avoid its inclusion in your lease.

Randy Young

Randy Young

Randy is a land consultant with experience in field and in-house land work, land administration, and software consulting with systems used in the land management business. He is an active member of the AAPL, HAPL, and NHAPL and is a regular attendee of industry functions. Randy's latest projects have included land data systems integrations, with a focus on Quorum Land System.

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Landman - May 15, 2013 Reply

You’re over thinking it.

First, a lessor will typically agree to an assignment, and if they don’t, it doesn’t really matter. If you have the “shall not be unreasonably withheld language” then they have to give you a legit reason of which “I want more money” is not a legit reason.

Second, is the history of lawsuits, a lessor has never sued to rescind title from the assignee back to the assignor. There is a simple reason for this, or rather, several ($ and $$). The first reason is that the seller will no longer operate the lease and the landowner presumably would like to earn royalties on production and doesn’t want to shut down operations. Secondly, the acceptance of royalty money from the new company is implied approval of the assignment. Thirdly, lawyers cost money and even if the lessor succeeds in blocking the assignment, the title doesn’t revert to lessor in any consent to assign clause I’ve ever seen. If the lessor succeeds in legally blocking the assignment, the “win” for the lessor is that an oil company that doesn’t want to operate or develop the lease now has ownership of it. It would be a Pyrrhic victory and a colossal waste of time for the landowner.

When analyzing leases and contracts, it’s good to look at the real world implications and not just rights that are held on paper.

    Randy Young
    Randy Young - May 15, 2013 Reply

    I generally don’t approve comments from people who wish to post ‘anonymously’, and I’ll refrain from doing so in future comments on this thread:

    As I mentioned, there are a multitude of reasons to ‘reasonably’ contest an assignment, such as the ability of the assignee to maintain the obligations required in the lease. This isn’t some theoretical possibility, I derived the examples I’ve used from situations I’ve encountered.

    While I won’t argue that your points are valid, there are plenty of fee mineral owners who would just as soon have a property be un-leased or un-produced before they let an operator they don’t approve work the lease. Most of them are sophisticated mineral owners, ‘those’ private equity backed companies that own minerals and royalties, and other operators. Of course most of these people don’t really care if lawyers cost money.

    Regardless, the real world implications are that over the last three years I’ve worked to settle three such cases in arbitration. So, you are partially correct that we never did actually end up in court on the matter — although it did cost the offending party a fair amount of cash.

    Cory - May 22, 2013 Reply

    Couple of quick questions Anonymous Landman’s reply…

    In your opinion, do you think you could potentially be liable for damages if you assigned the interests to a less than adequate operator without the mineral owner’s consent?

    What if that operator was negligent in its operations and either substantially damaged the surface or reduced the value of the reserves?

    Cory - May 22, 2013 Reply

    Sorry Randy for blowing up your comment thread, but one more item to note…

    I’m not so certain about your “implied approval” argument. Can you cite the case law on that? I think that may be another issue that could end up getting decided by a jury.

    In any event, a lot of operators do not pay mineral owners directly, but rather have the gatherer pay them. The mineral owners may not be aware of the operator change if no other notice was given.

    Austin Brister - September 3, 2013 Reply

    I’m writing an article on this topic at the very moment. I can give Anonymous-Landman above references to numerous cases dealing with Lessors who have sued over an alleged breach of the “consent to Assign” clause.

    It’s not a waste of their time, either. As Randy said, it can actually give them some bargaining room just to be a pain in the ass. But more practically, and to the contrary of what you had said, there are real world reasons a Lessor wouldn’t want to accept an assignment. Often times, a lease will be owned by a well-funded and very active company, who then decides to sell the leases for whatever reason.. A Lessor who reasonably believes that the prospective lessee will not adequately produce the oil from his land (either because the transferee is a dead beat or just not rich enough), will have an excellent argument as to the reasonableness of his refusal to grant consent.

    Nice article, Randy.

      Randy Young
      Randy Young - September 3, 2013 Reply

      I agree Austin, most of the consent to assign issues I’ve seen have revolved concerns around the assignee is not fiscally able to cover the liabilities that could be created by improper actions pursuant to the lease.

      Since you are writing an article on the subject, I’d also suggest you incorporate another piece of the puzzle — consent to assign as it relates to farm-outs. I’ve seen some tangles formed by operators assigning out portions of their earned farm-outs and worrying about consent later on the grounds that “we aren’t going to let one set of leases hold up a $xxx hundred million deal”. Of course the affected owner of those leases doesn’t feel the same.

        Austin Brister - September 3, 2013 Reply

        I’m absolutely including a portion on farmouts, joa’s, ami’s, etc. There is an interesting ambiguity that no other articles that I can find discuss, and that is the fact that the consent-to-assign framework is widely varied depending on whether we are talking about a real property interest or a contract. Contractually, inalienability provisions are largely valid. When dealing with real property interests, however, courts strongly disvafor inalienability and termination provisions. This creates an interesting issue, because all of the sudden the oil and gas industry came along and created all these types of instruments that are part deed part contract. State by state, it appearas that you can come up with some sort of rough percentage, for example, Texas seems to treat oil and gas leases as… oh I dont’ know.. 90% deed. This would explain why the courts keep tip-toeing around the consent-to-assign issue, by finding things such as “oh, the provision actually wasn’t triggered.” In some other states, however, especially those that characterize the lease as creating a profit a prendre, oil and gas leases are more of a contractual or personal property issue, so an entirely different set of rules apply.

        So what are farmouts? The interests are property, but the rest contractual? Does this mean that in the case of nonconsent by a lessor, that the ORI’s and WI would transfer (if some court were to say the particular consent clause is invalid), but all the other contractual rights and obligations would assign? How in the world would that ever work? I suspect the courts will keep trying to dance around the issue, where possible…

Cory - May 22, 2013 Reply

Randy,

I completely agree with you. “Unreasonable” makes it a fact issue, and there are a lot of sophisticated mineral owners out there. The judge (or jury) gets to decide what unreasonable means. If you are already caught lying or in a breach of contract situation, it may not go well for you, especially since you work for an evil oil company.

The best case is to negotiate a consent clause down to a notification clause. If you can’t get them to come off of it and you just can’t live with it, the best negotiation tactic is to walk away from the table. Let them decide if that clause is more important than the bonus and potential royalties.

Its always easier to get consent prior to the sale and typically is a simple formality. Going to the mineral owner, hat in hand, after the fact only invites a conflict.

Anyways, don’t lie, and stick to the contract, judges are prickly about that sort of thing.

Cory

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