Pay me!

Four and a half years ago, in August of 2011, you signed a five-year, paid-up oil and gas lease with Developer Co. covering your 100-acre farm. Late in 2015, you sold off the south half of your farm to two different people, Ann and Brian, in equal portions. Just last week, you received word from Developer Co. that a 25-acre portion of your farm will be included in Developer Co.’s oil and gas unit. You quickly run and grab a piece of paper to sketch out the land covered by the lease in an attempt to figure out how much of your land is included in the unit and how much money you can expect to receive from Developer Co.

The portion of your land in the unit (orange on your sketch) lies entirely within the boundary of the 50-acre portion of the farm that you retained. This means you will receive all of the royalty payments for the 25 acres included within the Developer Co.’s unit, right?

The answer depends on where your farm is located.

If your land is located in Ohio or West Virginia, you would be entitled to all of the royalty payments coming due from the production of Developer Co.’s unit since none of the property you sold was included in the unit. Absent a specific clause in a lease (such as an entireties or apportionment clause), the vast majority of states, including Ohio and West Virginia, allocate royalties to the owner of the parcel located in the pooled unit. This type of parcel-basis royalty allocation is called non-apportionment.

However, if your land was located in Pennsylvania, the result just might surprise you! In apportionment states like Pennsylvania, royalty is divided among all of the owners of land subject to the lease. Each owner of the several parcels subject to the lease is entitled to a share of royalty paid upon the production from a well based on the percentage of their acreage for the entire lease. In apportionment states, like Pennsylvania, California and Mississippi, the royalty interest is calculated on a lease-basis.

Using the example of your farm, if your farm was located in Pennsylvania, absent any clause in the lease specifying otherwise, you would be entitled to 1/2 of the royalties paid to the 25 acres in the unit and Ann and Brian would each be entitled to 1/4 of the royalties. That is, if Developer Co. determined $100 worth of royalty was due under the 25 acres, you would get a check for $50 and Ann and Brian would each get a check for $25. The logic in forming this theory was that both of Ann’s and Brian’s tracts were burdened by the lease; therefore, they are also entitled to the benefit of the lease, even if their property is not included in the drilling unit. But, again, if your farm was in Ohio or West Virginia, you would receive all of the royalties from the 25 acres included in Developer Co.’s unit ($100), while Ann and Brian would receive nothing.

The apportionment vs. non-apportionment payment allocation in Pennsylvania, Ohio and West Virginia comes from judicial precedent decided 100 years ago – well before the Utica and Marcellus shale plays!

It is important to remember, however, that the specific language of the lease will dictate over the default rules of your state. If you are purchasing or selling land that is already subject to a lease, make sure you know your state’s rules and request a copy of the lease. Additionally, if you own more than one parcel of land, think about executing one lease per parcel, especially in Pennsylvania.