CHAPTER 3 AGREEMENT PROVISIONS: BUILDING A CHECKLIST OF WHAT IS IMPORTANT AND WHY
| Jurisdiction | United States |
(Jan 1994)
AGREEMENT PROVISIONS: BUILDING A CHECKLIST OF WHAT IS IMPORTANT AND WHY
Howard R. Hertzberg
Jones & Keller, P.C.
Denver, Colorado
I. INTRODUCTION
It is important to develop a series of checklists or forms that can be used to draft agreements for specific transactions. These are needed whether the agreements are development agreements, leases, or letters to be used in many day-to-day operations.
There are various types of agreements used in the minerals industry to acquire rights to explore and develop properties, or to develop jointly owned or pooled tracts of properties. In the hardrock minerals industry, the most commonly used forms for acquiring rights in properties are leases, joint venture agreements, assignments, and deeds. The most commonly used form for developing a jointly owned mining property is a joint venture agreement. In the oil and gas industry, the most commonly used forms for acquiring rights in properties are leases, farmout agreements, and assignments. The most commonly used forms for developing a jointly owned or pooled tract of oil and gas property are joint operating agreements, communitization agreements, and unit agreements.
As discussed in Part IV of this paper, the mining and oil and gas industries have developed standardized forms for joint venture agreements and joint operating agreements. Those forms typically serve as the starting point for the negotiation of such agreements, and most of the negotiating focuses on the financial and business terms that are unique to the deal. These negotiated terms often have little impact on the other provisions of the form.
Oil and gas leases have a high degree of standardization, and one can purchase off-the-shelf forms. There is no such thing as a standard mining lease accepted by the industry. This paper will focus on the important provisions of mining leases because that gives a helpful overview of the subject. This paper will also compare key mining lease provisions with their counterparts in oil and gas leases.
Following the discussion of the key provisions of leases, this paper contains a conceptual comparison of mining joint venture agreements and oil and gas farmout agreements. Joint venture and farmout agreements used in the mining and oil and gas industries allow a party to acquire an interest in properties and then jointly develop the properties.
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The best sources of reference materials for mining and oil and gas agreements are the indices to the annual institutes and special institutes of the Rocky Mountain Mineral Law Foundation (the "Foundation"). Throughout the course of this paper are references to various articles appearing in the last twenty-five years or so that deal with mining and oil and gas agreements.
II. THE BASIC NATURE OF MINING AND OIL AND GAS OPERATIONS
A. Basic Characteristics of Developing Mining Properties
It helps to understand the basic attributes of a mining project and compare it to an oil and gas project. This allows one to understand mining leases and other mining exploration or development-related agreements, and appreciate their key provisions. This also helps to explain why mining agreements differ from oil and gas agreements.
First of all, the time frames from exploration to commercial production of a mining project are, for the most part, relatively long and the costs are high when compared to most oil and gas projects. This is due to many factors, such as: (1) It generally takes an extensive exploration drilling program to determine whether or not there is a commercial ore body. (2) If the drilling results are promising, then often the next step is the preparation of a detailed feasibility study to analyze the economics of the mineral deposit. (3) If the feasibility study is favorable, then the development phase, which includes designing the mining facility and opening the mine, begins; this often requires an environmental impact statement.
The very nature of a mine also distinguishes mining projects from oil and gas projects. Mines may be underground, open pit, or strip mines. Open pit and strip mines entail a level of surface disturbance that generally is far more extensive than oil and gas operations. These processes inherently tend to involve greater costs and take more time than drilling most oil and gas wells.
B. Basic Characteristics of Developing Oil and Gas Properties
The time frames from exploration to commercial production of an oil and gas project are relatively short and low cost, compared to exploring and developing mining properties. When the geology of an oil and gas project has been studied and the drill sites and target formations have been identified, an oil or gas well usually can be drilled with a minimal amount of delay. Depending on the objective depth, and barring unforeseen downhole conditions, the time between drilling a well and determining whether a commercial discovery is made is fairly predictable; it usually takes no more than a few weeks or months. Detailed feasibility studies are not required.
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Barring extreme market volatility, at the time the well is drilled the operator has a general idea of the price it will receive for production. Another feature of oil and gas is that one well can drain and produce hydrocarbons from a fairly expansive area of land.
Oil and gas surface facilities are often only a "Christmas Tree" or a pumpjack and tank. There is no capital intensive open pit or underground mine and related mill facility. Moreover, the extent of surface disturbances, and the time involved for permitting the drilling operations, are typically far less than those involved with mining operations.
III. HARDROCK MINING LEASES AND OIL AND GAS LEASES
A. In General
As noted above, oil and gas leases are fairly standardized and available in preprinted forms, but there is no such creature as a standard mining lease. There is substantial similarity among the various types of leases used in the mining industry, but mining leases are usually customized for specific properties or minerals.
B. Reference and Source Materials
1. Mining Leases. Two good sources of forms for mining leases, both of which are published by the Foundation and come with computer software, are: (i) Reeves, Mining Lease Handbook, and (2) the Mining Agreement Document Assembly System. Those two publications provide an excellent source for mining lease forms.
There are many articles generally dealing with mining leases or with topics not covered below. See 27 Rocky Mountain Mineral Law Institute 887 (1982) (hereinafter, "RMMLI"), "Assignment Provisions in Mining Agreements," by Sager and Henderson; 24 RMMLI 309 (1978), "Mining Leases and Oil & Gas Leases — Different Breeds," by Fletcher; 24 RMMLI 811 (1978), "Economic Considerations for the Layman/Landman in Negotiating Mining Leases," by Clark; and 21 RMMLI 535 (1976), "Minimum Work Clauses in Mining Leases," by Mark Adams.
2. Oil and Gas Leases. There are numerous and readily available preprinted forms of oil and gas leases.
For general articles dealing with oil and gas leases, see 30 RMMLI Paper 4 (1984), "How to Modify a Lease Without Screwing it Up," by Houck; and 14 RMMLI 383 (1968), "The More Important Oil and Gas Lease Clauses," by Sperling.
3. Mining Leases and Oil and Gas Leases. The Landman's Legal Handbook, which is published by the Foundation, is a good reference book for both mining leases and oil and gas leases.
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C. Basic Terms of Leases
Now, let's look at a preliminary checklist and explanation of the most important provisions of mining leases and oil and gas leases.
1. Title of Document. Most documents are given a name, and virtually everyone would label a lease as a "Mining Lease" or "Oil and Gas Lease," or call it an "Agreement," as appropriate. There is one instance, however, where the name of the instrument has substantive effect. When a lease contains an option to purchase, the title of the lease should state something like "Lease With Option to Purchase." This would be of vital importance in a state like Colorado, where a mining or oil and gas lease containing a purchase option must clearly state in its title that it includes such an option. Otherwise, the option is voidable by the lessor. See Colorado Revised Statutes Section 38-42-102.
2. Parties to the Lease. The lease must identify the parties. When one of the entities is a corporation, limited or general partnership, or limited liability company, the state in which the entity was established should be specified in the lease. It is good practice to identify the state under which a legal entity is organized, because this avoids confusion with another entity that has the same name or a similar name—but organized under the laws of a different state.
When leasing from an individual, it is important to determine the marital status of that person. If he or she is married, then as a safeguard...
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