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Top Leasing

The phrase “top lease” is used in the oil and gas business to refer to the circumstance in which a lease is executed covering land upon which a current lease already exists. As commonly spoken, the phrase is often used as a verb, as in “we’re top leasing in that area”. It’s meant to illustrate that a lease is taken on “top” of another preexisting lease, with the top lease becoming effective only after the termination of the first lease. Top leases and top leasing usually occur in areas of significant competition among oil and gas companies. As a mineral owner, consider it a vote of confidence if someone wants to top lease your property.

Why Companies Want to Top Lease

In a word – flexibility. Obviously, any company approaching you about a top lease has a hunch that there may be hydrocarbons underneath the tract of land, no company can be absolutely sure. Only the drill bit knows for sure, goes the old saying. Top leasing attempts to secure drilling rights for a time in the future by paying for those rights today. Some top leases turn out to be worthless to the party taking the lease. Some turn out to be good deals for all parties. Some turn out to be disproportionately better for one of the parties. Neither party, the mineral rights owner or the oil company can predict with certainty whether or not they’ve made the best trade. Only time will tell.

First Right of Refusal Provision in Top Leasing

In order to avoid the possibility of being top leased, some oil companies will include a First Right of Refusal provision in their original leases. This provision states that they have the right to top lease before any third party does. (This in effect is an option – the option to review and preempt a transaction by another party). And, with any option, there should be some sort of consideration for it. Only the two parties having the discussion can determine what type of consideration – it does not necessarily have to be financial, it could simply be a favorable nod on another lease provision.

Should I Sign a Top Lease?

Remember, any request for top leasing reveals that the requesting party is willing to risk capital to position themselves to find oil or gas. Review the offering terms carefully. Circumstances you should consider include:

  • How much time is left on the original lease?
  • How much lease bonus and royalty percentage is being offered? Usually, a top lease bonus is more than the bonus paid for the original lease.
  • What’s the likelihood of drilling by the original leaseholder
    (operator)?
  • Is the top lease being offered by a reputable party?

The bottom line is – does it
maximize your benefits both financially and with respect to other of your
circumstances?

Additional Resources