Most mineral rights purchase and sale agreements follow a basic pattern. They will start with introductory front-matter (who the parties are, recitals as to why the parties are entering into the agreement, dates, etc.), then set out what is being conveyed, describe the diligence and closing process, and close with contractual boilerplate provisions.
The exact order of the provisions isn’t important, and not every mineral rights purchase and sale agreement will have every provision. But once you know what the component parts are, it’s easier to see how your mineral rights purchase and sale agreement is either run-of-the-mill or else contains unusual or buyer-friendly provisions.
Front Matter & Recitals
Mineral rights purchase and sale agreements start with basic introductory material like who the parties are, usually “Buyer” or “Grantee” (the party acquiring the interests) and “Seller” or “Grantor” (the party selling the interest); the date of the contract, and (in some cases) “recitals,” which are usually a list of clauses that each start with “whereas,” followed by a “now therefore” (or something like that). These clauses explain the general purpose of the purchase and sale agreement, and are usually used only for context.
The Conveyance
The first provision in mineral rights purchase and sale agreements is usually the conveyance. It usually says something like:
For an in consideration of such-and-such purchase price, Buyer agrees to purchase from Seller all of Seller’s right, title and interest in and to the oil, gas and other minerals, royalties, non-participating royalties, net profits interests, and any other royalty interest in and under, and that may be produced from, such-and-such lands.
Purchase Price
The purchase price is the amount for which the Seller is agreeing to sell the mineral or royalty interest. It will usually be stated in one of two ways:
- As a total. If the Buyer has a good idea of exactly how much the Seller owns, the purchase and sale agreement will usually state an exact dollar amount (e.g., $100,000). “For and in consideration of $100,000, Buyer agrees to purchase from Seller…”
- As a price per acre. If the Buyer doesn’t have a good idea of exactly how much the Seller owns, the purchase and sale agreement will usually state a price per net mineral acre (e.g., $5,000 per net mineral acre). “For and in consideration of $5000 per net mineral acre, Buyer agrees to buy from Seller…”
Property Description
The property description is the legal description of the property to be conveyed. It is not unusual to reference an exhibit with the formal property description. So the agreement might say, “…in the Lands, as defined in Exhibit A.” And then Exhibit A will include either a legal description (describing a specific tract of land and often referencing a particular deed) or one or more unit descriptions.
This description defines what Seller is legally obligated to sell. So read it very carefully to make sure it is correct.
Mother Hubbard Clause
Many purchase and sale agreements will include in the property description what’s called a “Mother Hubbard Clause,” which is included after the property description, and says something like:
The Lands include all property adjoining, contiguous, or adjacent to the Lands and owned by Buyer.
Basically, this clause is saying that you’re conveying not just the lands described in the legal description, but also any adjacent lands.
The point of the Mother Hubbard Clause is to act as a cover-all/catch-all clause for minor drafting mistakes. So if there’s a minor survey inconsistency or a small strip of land contiguous to the main property being conveyed, that property is also conveyed. But these Mother Hubbard Clauses can result in strange results, so if you have an adjacent tract (or even a nearby tract) that you do not intend to convey, you should consult a qualified attorney before signing anything.
Catch-All Clause
Some purchase and sale agreements will include a much broader version of the Mother Hubbard Clause, which might be better characterized as a Catch-All Clause. These clauses usually say something like:
The Lands include all minerals rights owned by Buyer in such-and-such county.
The result is the Seller will convey not just the mineral rights specified in the purchase and sale agreement, but all the mineral rights the Seller owns in that county.
These Catch-All Clauses are not necessarily unusual, but they can obviously create problems for sellers. Unless a seller wants to convey everything he or she owns in the county (e.g., to ensure they don’t have any more tax bills), a safer approach is usually to ask the Buyer to specify exactly what they want conveyed and skip the Catch-All Clause entirely.
DOI Warranty
Sometimes a purchase and sale agreement with include a net revenue interest (or division of interest, i.e., DOI) warranty. The language would read something like:
Seller intends to convey and assign unto Buyer no less than the net revenue decimal(s) in the Wells/Leases as described on Exhibit A. The net revenue decimals described on Exhibit A (“Wells/Leases”) shall be for warranty purposes only and shall not be construed as a limitation upon the grant of interest set forth in this Purchase Agreement.
Exhibit A will then list one or more wells or units, with a division of interest (DOI) in that well. The point of this language is to require the seller to convey at least the net revenue interest specified. So, for instance, if a seller owns a net revenue interest of 0.02 in a well, and they are selling 50% of that interest, the buyer might require them to warrant that they are selling at least 0.01 (50% of 0.02). That way, if it is later discovered that the seller only has a net revenue interest of 0.0175, the buyer is still made whole.
As the sample language indicates, these DOI warranties are obligations imposed on the seller. The DOI warranty establishes a floor (you must convey at least this much), not a ceiling.
The Effective Date
The effective date is the date from which the mineral rights purchase and sale agreement is effective. It is usually a date in the past, sometimes several months in the past. These sort of retroactive effective dates are common, but you should still be aware of what’s happening and why.
The logic is simple: mineral owners usually receive payments on wells 2-4 months after the wells actually produce (because the operator needs to gather and sell the product). So the effective date is set back a few months to allow the buyer to get the royalty checks after closing or going forward, because the valuation usually assumes that the buyer will be paid on that production after closing.
Diligence
Mineral rights purchase and sale agreements almost always include some sort of “diligence” provision stating that the Buyer has a “diligence period” (usually 2-4 weeks) to diligence the property (e.g., title, verification… perhaps even arrange financing).
These diligence provisions will usually contain at least three elements: restrictions on conveyances, title, and when/how the purchase price can be revised.
Restrictions on Conveyance
Sellers are usually restricted from conveying, leasing, or otherwise encumbering the mineral interest during the diligence period. So, for instance:
Seller agrees to not execute any instrument affecting the Mineral Interests without prior written consent from Buyer, including but not limited to Mineral Deeds, Royalty Deeds, Oil and Gas Leases, Extensions of Oil and Gas Leases, Division Orders, and Liens or Encumbrances of any kind.
Basically, the buyer requires the seller not to do anything new to the property while the buyer finishes its diligence process. This type of provision is obviously needed to run clean title, but it can create a problem for sellers: the seller is restricted from selling the property to someone else for the duration of the diligence period.
As a practical matter, this means that the seller should solicit multiple offers before he or she signs a purchase and sale agreement, because once the purchase and sale agreement is signed, the seller is usually locked up for the entire diligence period.
Title
The main purpose of a diligence provision is to allow the buyer to run title. So implicitly or explicitly, the purchase and sale agreement will address what happens if there’s a title problem. In most cases, the prospective buyer will have the right to walk away from the transaction. This can take one of two forms. Either:
- The buyer has the right to walk away for any reason during the diligence period.
- The buyer has the right to walk away for only the reasons specified in the agreement (e.g., title problems).
In theory, these seem like two very different provisions. In practice, however, they operate similarly because it’s hard to define a “title defect.” So even if the purchase and sale agreement says the buyer can only walk away for specified reasons, you’re better off assuming that they’ll be able to walk away regardless.
Revised Purchase Price
Often, purchase and sale agreements will contain a provision stating that if the buyer discovers a problem, the buyer can revise the offer. So, for instance, if the offer was for 20 net mineral acres for $200,000, but it’s discovered that the seller only owns 15 net mineral acres, the buyer would be able to revise the offer down to $150,000. These provisions will often be very broad and offer the buyer a lot of flexibility. Example:
In the event that, as part of the due diligence review of the Mineral Interests, Buyer is for any reason not satisfied, in Buyer’s sole discretion, then Buyer shall so inform Seller and (a) propose a revised Purchase Price with appropriate adjustments, or (b) terminate this Purchase Agreement by providing notice to Seller prior to the Closing Date.
One way sellers can protect themselves is by including a clause that requires mutual agreement of the parties to any revised priced. That way, the seller is not obligated to sell at the new price, though they can of course still choose to do so. This clause helps protect against buyers that try to lock-in a purchase and sale contract with an eye-popping price, only to walk it back later.
At the same time, a lot of this comes to down the buyer’s reputation. The buyer is investing significant time, money, and energy in evaluating the property and researching ownership, so it’s not unreasonable for them to want the seller to be obligated to sell at the end of the diligence period.
Closing
The last major section of any mineral rights purchase and sale agreement is “closing.” The closing provisions usually specify the manner of closing, who bears closing costs, post-closing obligations, and what happens if the contract doesn’t close.
Closing Type
Just as with any other real estate transaction, buyers and sellers have to figure out how to make sure that the purchase money and the deed change hands in a way that ensures everyone is protected.
There are three ways in which this is usually handled: a “standard” closing, an in-person closing, or an escrow closing. Each of those closing types handle the risk of trading a deed for money a little differently. And most reputable companies will allow sellers to pick whichever type of closing makes them most comfortable.
Standard Closing
The most common closing type, what we would call a “standard closing,” is that the seller sends in an executed mineral deed with the purchase agreement, and the buyer holds onto it and files it if and only if the transaction closes. So for instance, a standard closing might read:
Contemporaneously with the execution of this Purchase Agreement by Seller, Seller shall also execute and return to Buyer the Mineral & Royalty Deed (“Mineral Deed”) that accompanies this Purchase Agreement. The execution of the Mineral Deed by Seller does not complete the transaction. Upon receipt of the executed Purchase Agreement and Mineral Deed, Buyer shall begin its due diligence review of the Mineral Interests.
The standard closing says, essentially, the buyer is a reputable institution with plenty of money and a strong track record, so they can be trusted to hold the deed. If the transaction doesn’t complete, they’ll either destroy the deed or send it back.
Most buyers are okay with this arrangement, because it is simple. But if a seller is not sure about a buyer’s reputation, this might not be the best approach… because it relies upon the honesty of the buyer. Yes, the seller would be able to sue the buyer if they try to file the deed without closing the transaction, but no one wants to get into a legal battle that can be avoided.
In-Person Closing
An in-person closing is exactly what it sounds like. The buyer and seller show up to the same place, and trade a signed deed for a check or wire. The main downside with this approach is that the buyer and seller need to be in the same place, which isn’t always feasible.
Escrow Closing
The “safest” type of closing is an escrow closing. Escrow closings use an “escrow agent,” which is a third-party fiduciary (such as an attorney) that will hold the executed deed “in escrow” until payment is made. Once payment is made, the escrow agent will release the deed to the buyer and the transaction will be finished. It sounds complicated, but it’s pretty standard for real estate closings (including most home sales, with the title company usually acting as the escrow agent), though it does tend to include extra fees.
Closing Costs
A purchase and sale agreement should specify who bears any costs associated with the closing. It is standard for the buyer to bear any closing costs except Seller’s attorney fees. Some agreements will also require the seller to bear the costs of their own escrow fees, if they choose an escrow closing.
So for instance, a standard provision might read:
All costs and expenses arising out of this transaction, including recording fees, but not including the fees of Sellers’ counsel or Seller’s escrow fees, shall be paid by Buyer.
Taxes
The purchase and sale agreement will usually specify who is responsible for taxes before and after closing. The typical breakdown is that the seller is responsible for any taxes accrued on or before the effective date or closing date, while the buyer is responsible for any taxes accrued afterwards.
Routine Assistance
There’s usually a lot of post-closing paperwork that needs to happen, such as updating tax records, getting the operator to transfer the account to the new owner, correcting any errors, and otherwise dotting all the i’s and crossing all the t’s. So most agreements will include a provision obligating the seller to render basic post-closing assistance on those matters.
Specific Performance
As part of the closing provisions (or elsewhere), a mineral rights purchase and sale agreement will usually state whether specific performance is a remedy. Specific performance is a remedy used almost exclusively in the context of real estate contracts. It says, in essence, that one party can force the other to go through with the contract (rather than just paying damages for a breach). Thus, if a contract states that specific performance is a remedy, the buyer can ask a court to force the seller perform on the contract by selling at the agreed upon purchase price.
Boilerplate
Mineral rights purchase and sale agreements usually close with “boilerplate” (standard provisions that don’t change from contract to contract or even from transaction type to transaction type). Each company will have its own boilerplate, but here are some of the most common provisions.
Counterparts
The “counterparts” provision states that the purchase and sale agreement can be executed in any number of “counterparts” (i.e., copies). So the seller can sign one copy, and the buyer can sign a different copy, and the agreement is still binding even though they didn’t sign the same copy.
Severance/Revision
A “severance” provision provides that if a court finds that any part of the purchase and sale agreement is invalid for any reason, then the court should sever that provision but otherwise enforce the agreement. Likewise, if the purchase and sale agreement provides for revision, the court should try to revise the agreement. In other words, if there’s something wrong with the agreement, the court should try to fix it rather than trashing the whole purchase and sale agreement.
Entire Agreement
The “entire agreement” provision states that the written agreement is the entire agreement. The main point of this provision is to ensure that the seller isn’t relying upon any prior verbal or written representations from the buyer or buyer’s agents.
What this means in practice is that buyers should be very wary of relying upon any representations made by the buyer or its agents if such representations are not written in the contract somewhere. It is not uncommon for rank-and-file employees to stretch the truth or even just misunderstand a contractual provision, so you’re usually on safer ground to insist that any representation upon which you are relying is codified in the contract. When in doubt, consult a qualified attorney.
Disputes
It is common for any contract, including a purchase and sale agreement, to specify specific provisions about how disputes are handled. Most contracts will include provisions:
- Consenting to the jurisdiction of a particular state (e.g., Texas);
- Providing for an exclusive legal venue for any actions to be brought (e.g., the federal courts in the Western District of Texas); and
- Specifying which state’s laws govern the agreement (e.g., Texas).
Many purchase and sale agreements will also include requiring any disputes to be arbitrated by a third-party arbitrator or tried before a judge.
Tips
Read the Conveyance Carefully
It is extremely common for mineral buyers to cut-and-paste language from old agreements, and they sometimes make mistakes. So don’t assume that just because they are reputable and professional and they’re above simple mistakes. Instead, proofread the agreement carefully, especially the conveyance. Make sure it says exactly what you think it should, and if it doesn’t, speak up.
Get an Attorney
Especially if it’s a large transaction, run the agreement by an attorney before you sign it. Too many people get into trouble by trying to be their own lawyers. There are a lot of little things that can trip up an otherwise solid agreement. So our advice is always to consult with a qualified attorney who can be your advocate in the deal.
Ask Questions
If you don’t understand why a provision is included, ask about it. If the explanation doesn’t seem to match the language of the provision, ask them to revise it. Form legal agreements have a way of accreting errors over the years, so don’t assume that they’re right just because they’re the professionals and this is the way they’ve always done it.
Get a Second Offer
Before you sign a purchase and sale agreement, try to get a second offer. Caddo can try to make you an offer on your minerals same day. Once you have two offers, you can compare terms and decide if the purchase and sale agreement in front of you is the one you ought to sign.
Be Wary of Brokers
Be wary of brokers. They might represent themselves as a well-financed institution, but in reality they’re just flipping deals, which means that whether they close the deal is not actually within their control. One yellow-flag that might indicate someone is flipping is that they have extremely long closing periods (30+ business days) in the purchase and sale agreement. When in doubt, you can just ask: “Do you fund these deals yourself, or through partners?” If the latter, consider finding another buyer.