Overpayments Clause in the Oil and Gas Lease
More than a few Lessors have experienced a demand by a Lessee to return signing bonus or royalties paid, when the Lessee discovers the Lessor owns less than expected, or owns no mineral rights at all.
There are other situations, however, when overpayments are made to royalty owners due to no fault of their own. Take for instance the common practice of using an estimated revenue deck to distribute revenues from first sales, usually to meet the statutory (or lease terms) deadline for distributing first sales from a well or pay a penalty. Routinely, one or more royalty owners later are found to have been overpaid by the estimated deck. A revised, final division of interest is loaded into the database to replace the estimated deck. All revenues paid through the estimated deck are then reversed and rebooked to the final initial deck. But wait—what about the leases contributing to the well that have an overpayments clause?
Aside from estimated deck setups, demands for repayment of overpaid royalties can sometimes occur months, or even years, after the payment was made, and the Lessor has paid the taxes on it and spent the money. Generally, an overpayments clause restricts the basis a Lessee can use for a demand for repayment from the Lessor of overpaid signing bonus, rentals, or royalty funds. Sometimes it also will limit, or prohibit, enforceability of a judgment obtained by the Lessee against the Lessor for failure to reimburse. Without this type of clause, the Lessee might have recourse to file suit and get a judgment forcing repayment of the funds. And with this clause, it is the Lessor who might have recourse to file suit and get a judgment against the Lessee for forcing repayment out of future royalties.
Example of Overpayments Clause
“In the event Lessee makes an overpayment of royalties for reason other than a failure of title, Lessee may only recoup such overpayment from future royalties payable on lands covered by this lease only. Lessor shall have no obligation to return royalties paid and received, and Lessee may not recoup overpayment of royalty under this lease from any other lease in which Lessor may own an interest of any kind.”
Simplified. “In the event Lessee makes an overpayment of royalties for reason other than a failure of title, Lessee may only recoup such overpayment from future royalties payable on lands covered by this lease only. Lessor shall have no obligation to return royalties paid and received, and Lessee may not recoup overpayment of royalty under this lease from any other lease in which Lessor may own an interest of any kind.”
This example allows demand for repayment of overpayments only if Lessor’s title fails and the Lessor was not entitled to the funds. Overpayments made for any other reason can only be made out of future royalties otherwise payable under this lease. If overpayment of royalties due under this lease does occur, the overpayment can be recouped only out of royalties paid from this lease only. If this Lessor has signed other leases owned by this Lessee, the Lessee is not allowed to recoup overpaid royalties remitted for this lease, from the production obtained from the well(s) producing from other leases.
One effective way to make the presence of this clause known to management is for the lease analyst to enter it into the Lease Data Record as a special provision. Likewise, the division of interest record should be noted in a way disallowing a routine reversal and rebooking of revenues during any maintenance transfer of interest due to any reason other than title failure.
The division order analyst should be aware of this clause before creating an estimated revenue distribution deck (division of interest) for booking initial revenues. If such a deck is used waiting for final title review to create a final deck, if the estimated deck results in overpayment of royalty to this Lessor, only royalties from that particular well, as to the portion of this Lessor’s royalty attributable to this lease only, can be recouped. This means that if the well for which overpayment was made should suddenly stop producing, the overpayment cannot be recouped from the production revenues of any other well unless production from that well is coming, at least in part, from this well.
More examples of an overpayment clause can be found in the reference book, “Principles of Oil and Gas Leases: Uncommon Clauses,” sold in the Oil Patch Press bookstore.