Oil Patch Press
Importance of the Assignment Clause in a Lease
In many companies in the industry today, the Division Order Analyst is not charged with analyzing oil and gas leases. That usually is done by the Lease Analyst, with extracted data entered into the land records database. But, for the Division Order Analyst to do their job properly, there are times when it is necessary for the Division Order Analyst to review personally a specific clause in the lease. One such clause is the Assignment Clause. Here is a typical example of such a clause:
“No change or division in ownership of the land, or royalties, however accomplished, shall operate to enlarge the obligations or diminish the rights of Lessee; and no change or division in such ownership shall be binding on Lessee until thirty (30) days after Lessee shall have been furnished by U.S. Mail at Lessee’s principal place of business, a certified copy of recorded instrument or instruments evidencing same.”
For the Division Order Analyst, this clause indicates what effective date the Analyst can use for a database transfer of ownership under this lease. Company policy will state if the Analyst is to use the date stated in the recorded document or calculate the effective date based on the language in the Assignment Clause. For royalty owners that can’t be matched with the lease from which they are derived, the Company should set a standard procedure. Why is this important?
Suppose you have an owner who is currently in Pay in the division of interest (DOI) and has been receiving @$100 a month to current. You receive a copy of a recorded deed conveying 100% of this owner’s interest to a new owner, but the deed was signed three months ago and it states no effective date. The lease from which this royalty is derived can’t be identified readily because it is many years old, mineral rights have changed ownership many times, and this well was obtained in an acquisition. The Seller in the acquisition provided inadequate data, including the link between this owner and his lease.
What date do you use for the transfer process in the database? Normally, the transfer date must be the first of any given month. So, should the effective date be the first of this month, or the first of next month, or the first day of the month following the date the deed was signed?
Fist apply Company policy to the data available. No reverse & rebook (R/R) is needed for this transfer. However, bear in mind the functionality of the database the Company uses. Future updates to the division of interest (DOI) not related to this owner might need reversal and rebooking—that R/R might pay the new owner for months of production already paid to the old owner. That will throw the old owner’s account into a negative balance instead of the $0 balance it should have. There could be no way to recoup the negative balance from the old owner unless he is still active in other properties in the database. The Company eventually must “eat” the negative balance, a loss of company funds.
Granted, some databases have built-in preventions for this all-too-common scenario, but the others do not. Preventing Company loss is a manual process in those companies, and is the responsibility of the Division Order Analyst.
The Division Order Analyst must know how to apply Company policy and must know the internal functionality of the database they are using. In a perfect world, the Analyst also would always be able to identify the lease from which the oil royalty owner’s interest is derived and read the Assignment Clause in it for direction.
But, alas, we live in a Division Order World filled with acquisition properties using imported DOI’s lacking lease references for owners and sketchy title documentation.