North Dakota Mineral Rights Bonus Payments

North Dakota Mineral Rights Bonus Payments

North Dakota Mineral Rights
Bonus Payments

The North Dakota Mineral Rights Bonus Payments legal consideration received by the lessor in exchange for the leasing of the mineral rights to a lessee usually consists of:

  • a cash bonus – paid when the lease is entered into, or shortly thereafter;
  • delay rental payments during the primary term of the lease, if the lease allows, and if wells are not drilled within a specified period of time;
    and
  • royalties on the income received from the resources – if mineral production is actually achieved.

North Dakota Mineral Rights Bonus Payments

When the lease is signed, the lessor will usually receive from the lessee one or more initial lump sum cash bonus as the North Dakota Mineral Rights Bonus Payments, usually related to the number of mineral acres being leased.

The amount of cash North Dakota Mineral Rights Bonus Payments offered to the lessor is often determined by:

  • the availability of the mineral resources in a given area,
    and by
  • the competition among lessees for such resources in that area.

The actual amount of the initial lump sum cash bonus to be paid to the lessor is generally not identified in the lease – but in a related offering letter.

Usually, the lease only identifies a nominal consideration such as “ten dollars and other valuable consideration.”

The amount of the initial lump sum cash North Dakota Mineral Rights Bonus Payments offered to the lessor are typically based upon an assumption that the mineral owner owns the full mineral interest.

For example, if

  • the proposed lessee offers $2,000 per acre North Dakota Mineral Rights Bonus Payments for a 160-acre tract of land,
  • but the mineral owner owns only 25% of the mineral rights,

the actual bonus paid will be $80,000, not $320,000.

Failure of Lessee to Make the Bonus Payments to Lessor

In 2012, the North Dakota Supreme Court held, in Irish Oil and Gas, Inc., vs. Gerald C. Riemer, that the failure of a lessee to pay the agreed upon North Dakota Mineral Rights Bonus Payments would not as a matter of law allow the lessor to cancel the lease by reason of a failure of consideration:

Here the district court concluded that

“[r]easoning minds would not differ”

and that Irish Oil’s failure to timely make the bonus payment was a total failure of consideration, as a matter of law.

[¶24] We recognize a bonus payment generally is an important part of the consideration supporting leasing of the premises.

However, we cannot conclude as a matter of law that Irish Oil’s failure to timely pay the bonus leaves the leases with a total failure of consideration that excuses the Riemers’ performance.

To do so would require a conclusion that the remaining consideration is, as a matter of law, insubstantial and unimportant to the contract.

[¶25] We cannot conclude as a matter of law that the possibility of future production and future royalties is so speculative as to provide no consideration supporting the existence of a fact issue on the question of failure of consideration.

We note that, in the context of breach of an obligation to pay royalties, the legislature has provided:

“The obligation arising under an oil and gas lease to pay oil or gas royalties to the mineral owner . . . is of the essence in the lease contract, and breach of the obligation may constitute grounds for the cancellation of the lease in cases where it is determined by the court that the equities of the case require cancellation.”

N.D.C.C. § 47-16-39.1.

This public policy statement suggests that the possibility of future royalties is, or at least might be in a given case, an important component of the oil and gas lease.

The relative importance of the royalty clause to the Riemers cannot be ascertained from the written document.

A fact issue therefore exists, requiring remand for further proceedings in the district court.

[¶26] Finally, the uncertainty of the Riemers ever receiving a one-sixth production royalty does not, as a matter of law, prevent that royalty from being enough consideration to avoid a total failure of consideration.

The legislature has distinguished between currently paid consideration and consideration paid in the future.

A consideration may be executed or executory in whole or in part.”

N.D.C.C. § 9-05-05.

“When a consideration is executory, it is not indispensable that the contract should specify its amount or the means of ascertaining it.

It may be left to the decision of a third person or regulated by any specified standard.”

N.D.C.C. § 9-05-06.

Here, the bonus payment is “executed consideration.”

The production royalty appears to be “executory consideration.”

Both forms of consideration can support the contract.

N.D.C.C. §§ 9-05-01, 9-05-05.

Because both executed and executory consideration can support a contract, the district court erred by concluding that the production royalty failed as a matter of law to support the leases in this case.

Therefore, the failure of a lessee to pay the agreed upon North Dakota Mineral Rights Bonus Payments would not automatically, as a matter of law, allow the lessor to cancel the lease by reason of a failure of consideration.

Bonus Payments – Good Consideration

North Dakota Century Code Section 9-05-01 defines sufficient “good” consideration in the traditional manner – as follows:

9-05-01. Good consideration defined.

Any benefit conferred or agreed to be conferred upon the promisor
by any other person to which the promisor is not entitled lawfully,
or
any prejudice suffered or agreed to be suffered by such person,
other than such as that person, at the time of consent, is lawfully bound to suffer as an inducement to the promisor,
is a good consideration for a promise.

Contrary to the majority decision of the North Dakota Supreme Court, Chief Justice VandeWalle offered the following warning statement regarding a possible result of the majority decision with respect to North Dakota Mineral Rights Bonus Payments:

I have grave concern that the majority opinion will allow speculators

  • to secure a lease with a promise to pay a bonus,
  • attempt to sell the lease to an operator
    and,
  • if that doesn’t succeed, perhaps because development on surrounding property has devalued the speculative worth of the minerals, simply refuse to pay within the prescribed time contending that the real consideration is the oil royalty promised in the lease if a well on the lease is productive.

Justice VandeWalle offered the following reasoning for his concern:

I respectfully dissent to Part II B, concluding there was no failure of consideration as a matter of law, and to Part II C, . . .

I would affirm the judgment of the trial court dismissing Irish Oil and Gas, Inc.’s action against the Riemers and Johnson.

I.

[¶55] I conclude Irish’s failure to make a timely bonus payment was a total failure of consideration.

Failure of consideration arises when a valid contract has been formed, but the performance bargained for has not been rendered.”

Check Control, Inc. v. Shepherd, 462 N.W.2d 644, 646 (N.D. 1990) (citing First Nat’l Bank of Belfield v. Burich, 367 N.W.2d 148, 152 (N.D. 1985)).

We explained further in Shepherd:

A failure of consideration may be either partial or total.

Burich, 367 N.W.2d at 152;

Schaff v. Kennelly, 61 N.W.2d 538, 544 (N.D. 1953).

A total failure of consideration will occur where a party has failed to perform a substantial part of its obligation, so as to defeat the very object of the agreement.

Burich, 367 N.W.2d at 153;

Lawrence v. Lawrence, 217 N.W.2d 792, 796 (N.D. 1974);

Schaff, 61 N.W.2d at 544.

The remedy for a total failure of consideration is to excuse the non-breaching party from performance of its obligations under the agreement.

Burich, 367 N.W.2d at 153.

A partial failure of consideration occurs when there has been an insubstantial breach that leaves sufficient consideration for sustaining the contract.

Id. (citing Empire Gas Corp. v. Small’s LP Gas Co., 637 S.W.2d 239 (Mo. App. 1982)).

Where a partial failure of consideration has occurred the proper remedy is to grant appropriate damages to the non-breaching party.

Id. (citing Ralston Purina Co. v. Jungers, 86 S.D. 583, 199 N.W.2d 600 (1972)).

Id. at 647.

. . .  [¶56]  Irish argues sufficient consideration supported the lease, even without the bonus payment.

In particular, Irish argues the primary consideration was the promise of “a 1/6th royalty in the event of production.”

In addition, each lessor received a ten dollar payment as consideration. . . .

The Court of Appeals of Texas has described a bonus as

the amount the lessees were willing to pay for the lease, in the way of a lump sum, over and above the usual nominal amount where the land is not in proximity to a proven field.”

Andrews v. Brown, 283 S.W. 288, 292 (Tex. Ct. App. 1926).

[¶58] In Andrews, the court considered whether the bonus belonged to

  • the owner of a life estate in the mineral interest,
    or
  • the owners of the remainder.

Id. at 293.

The court held:

We are unable to resist the conclusion that the bonus constituted a part, and a very substantial part, of the consideration for the entire title to the minerals conveyed by the lease; that it constituted a part of the proceeds of the corpus of the estate; and that its ownership was in the life tenant and remaindermen in the same respective interests as their ownership in the minerals before the lease was executed.

Id. at 293.

The California Court of Appeal’s opinion in Elsinore Oil Co. v. Signal Oil & Gas Co. shows the importance of the bonus to the lessor,

“It was the evident intention of the parties that the real inducement to respondent to permit appellant to have the property under the lease was not the nominal sum of ten dollars recited as consideration in the lease, but the other more substantial ‘bonus‘ for which judgment was recovered.”

Elsinore, 40 P.2d 523, 523-24 (Cal. Ct. App. 1935); but see Stockton v. Weeks, 125 P.2d 110, 112 (Cal. Ct. App. 1942) (explaining a similar intention that the bonus was the real inducement was not evident in the lease).

[¶59] Here, the $160 per acre bonus and the $10 payment were the only consideration the Riemers were guaranteed to receive under the leases.

The 1/6th royalty, cited by Irish as the primary consideration for the leases, was speculative.

It would only materialize

  • if Irish chose to drill, which it was not required to do according to the lease,
    and then
  • only if the wells produced.

Paragraph 2 of each of the leases states:

This is a PAID-UP LEASE.

In consideration of the cash payment, (which payment is accepted by Lessor as good and sufficient consideration for the rights granted to Lessee in this Lease), Lessor agrees that Lessee shall not be obligated, except as otherwise provided, to commence or continue any operations during the Primary Term.

Lessee may at any time or times during or after the Primary Term surrender this Lease as to all or any portion of the land and as to any strata or stratum by delivering to Lessor or by filing for record a release or releases, and be relieved of all obligation accruing as to the acreage surrendered.

[¶60] It cannot be said that the failure to timely make the bonus payment was an insubstantial breach when the royalty was merely speculative.

The bonus was part of the “other valuable consideration” described in the lease and was also “a very substantial part” of the consideration for the leases.

Andrews, 283 S.W. at 293.

When Irish failed to timely make the bonus payments it failed to perform a substantial part of its obligation, defeating the very purpose of the agreements.

The district court was correct when it asserted reasoning minds would not differ.

Thus, the district court did not err when it held that, as a matter of law, there was a total failure of consideration. . . .

[¶61] I have grave concern that the majority opinion will allow speculators

  • to secure a lease with a promise to pay a bonus,
  • attempt to sell the lease to an operator
    and,
  • if that doesn’t succeed, perhaps because development on surrounding property has devalued the speculative worth of the minerals, simply refuse to pay within the prescribed time contending that the real consideration is the oil royalty promised in the lease if a well on the lease is productive.

Of course, the lessor

  • may pursue the procedure in N.D.C.C. § 47-16-36 to have the lease terminated or forfeited, or
  • hire an attorney to file suit to determine whether or not the failure to pay the bonus at the onset as required by the lease constitutes a total failure of consideration, or
  • pursue the remedies in N.D.C.C. § 47-16-37, including the munificent sum of $100 in damages and “any additional damages that the evidence in the case will warrant.”

It remains to be determined whether the latter provision will allow the recovery of the destruction of the value of the mineral estate proven worthless while the lessee holds a lease for which the lessee has not paid the agreed-upon bonus.

[¶62] I am concerned the majority opinion could even open the door to allow a lessee to actually drill a well without paying the bonus and,

  • if a producing well is drilled,
  • pay the bonus
  • or, in the case of a dry hole, refuse to pay the bonus, leaving the lessor to pursue the statutory remedies while holding a property proven worthless for production and thus no speculative value to market.

[¶63] Perhaps it is recent success of oil exploration in North Dakota that has dimmed the memory of those years when the number of dry holes drilled significantly outpaced the number of successful wells.

Nevertheless, I doubt that all wells drilled today are successful and result in oil royalties paid to the lessor.

The majority opinion is a disservice to those lessors who may have their mineral estate found worthless and receive no bonus.

[¶64] But, in light of N.D.C.C. § 47-16-39.1 – Obligation to pay royalties – Breach – the majority may be justified in its position that the failure to pay the substantial bonus is not a total failure of consideration.

Section 47-16-39.1 makes the obligation in a lease to pay oil and gas royalties to the mineral owner “the essence in the lease contract.”

I have found no such statutory provision regarding the payment of the bonus, perhaps because it is the bonus which is the lure, the consideration for the lessor to enter into the lease, and the Legislature assumed that would necessarily be paid or the lease would be ineffective.

If so, the majority opinion clearly negates that assumption.

North Dakota Mineral Rights Bonus Payments

Topics of Interest – North Dakota Ancillary Probate

Topics of Interest – North Dakota Transfer on Death Deeds

Topics of Interest – North Dakota Affidavits of Heirship

Topics of Interest – North Dakota Intestate Succession.

Topics of Interest – North Dakota Informal Probate

 Conclusion – North Dakota Mineral Rights Bonus Payments

The primary lesson to be learned from this decision is that the lessor should get all of his or her bonus check up front, at the time that the lease is signed by all parties.

Copyright 2019 – All Rights Reserved

 Gary C. Dahle – Attorney at Law
2704 Mounds View Blvd., Mounds View, MN 55112

Phone:  763-780-8390   Fax:     763-780-1735      gary@dahlelaw.com

Gary C. Dahle has represented clients from the countries of Canada, Norway, and Sweden, and the states of Alabama, Arizona, California, Colorado, Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington, and Wisconsin in the United States, with respect to North Dakota mineral rights and probate issues in various North Dakota Counties.

http://www.legis.nd.gov/general-information/north-dakota-century-code

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