LEASING VS. SELLING MINERAL RIGHTSby Will Brackett
If you own minerals in an area where there is oil and gas activity, you have probably received (or will receive at some point) a letter in the mail, or perhaps even a phone call, from a company making you an offer to buy your mineral rights. You may be wondering how such an offer is different from one to lease your minerals.
Since there is a very big difference between leasing and selling your mineral rights, it is very important to understand the difference before you give any consideration to such offers.
Both leasing and selling do result in the transfer of an ownership interest in minerals from one party to another. However, the big difference is how much of the ownership interest is transferred (conveyed) and for how long.
When you lease your minerals to an oil and gas company (or their agent), you are transferring some of your ownership interest since you (the lessor) are conveying to the oil and gas company (the lessee) the right to explore and produce your minerals and receive the majority of the proceeds from any production. While the lease is in effect, you may not lease your minerals to anyone else.
In return, you retain a royalty interest that gives you the right to receive bonus payments, delay rental payments, and of course royalty payments for your share of the production.
With an oil and gas lease, the transfer of ownership interest from one party (the lessor) to another (the lessee) lasts only as long as the lease is in effect. When an oil and gas lease expires – either because the lessor did not fulfill their obligations during the primary lease term to keep the lease in effect or because there are no more active wells on the property – total ownership of the minerals reverts to the mineral owner.
When a lease expires the mineral owner regains the right to lease the property or alternatively to explore and produce the minerals on their own if he or she chooses to do so.
Selling your minerals is an entirely different matter from leasing. If you accept an offer to purchase your minerals, you are transferring your entire ownership interest in your minerals to another party.
You will receive a lump sum and in return convey all of your mineral rights to another party. This means you are giving up your right to lease and receive bonus and royalty payments – forever.
Unlike a lease, selling your minerals means you do not retain any ownership interest. Once you sell your minerals, they’re gone.
If you do consider selling your mineral ownership, please note that you do not have to sell everything at once. You can sell a portion of your mineral interest in a certain property to another party, while retaining a portion for yourself.
This can be better illustrated with an example. Let’s say you own the mineral rights for ten acres. You receive an offer from a company interested in purchasing all or a portion of your mineral interest in the ten acres.
You decide to sell only half of your mineral interest in the ten acres. You would receive a lump sum payment for the sale of half of your mineral interest. Your ownership would now be five mineral acres, for which you can still lease and receive future income.
Mineral owners will ask “Why would I ever want to sell my mineral rights?” Indeed, there is an old adage to never sell your mineral rights. However, there are many mineral owners who end up selling all or a portion of their minerals.
The most common reason for selling is financial, where people find themselves in need of cash now rather than later. There can be circumstances in life where selling may make sense, usually due to a large and unforeseen financial need, such as unexpected medical bills.
Another reason why people will sell is they find the ownership of mineral rights to be a hassle that they would rather not deal with anymore. Mineral rights are an asset that must be managed and some people would rather not do so. This situation is more common when the mineral owner does not own the surface.
Lastly, owning minerals, especially those that are being produced, means you are in the oil and gas business – whether you like it or not. If not, perhaps it is better to sell.
Without question, retaining a mineral ownership so you can lease and receive future income is the way to go for most people. However, circumstances can make selling a mineral interest a legitimate option, particularly if you find yourself in immediate need of cash.
The decision of whether to sell your minerals or not is entirely up to you and your family.