As 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.