The Warranty Clause

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The Warranty Clause

 

 The standard industry lease form contains a title warranty clause similar to that set out below:

Lessor hereby warrants and agrees to defend title to said land against the claims of all persons whomsoever.  Lessor’s rights and interests hereunder shall be charged primarily with any mortgages, taxes or other liens, or interest and other charges on said land, but lessor agrees that lessee shall have  the right at any time to pay or reduce same for lessor, either before or after maturity, and be subrogated to the rights of the holder thereof and to deduct amounts so paid from royalties or other payments payable or which may become payable to lessor and/or assigns under this lease.  Lessee is hereby given the right to acquire for its own benefit, deeds, leases, or assignments covering any interest or claim in said land which lessee or any other party contends is outstanding and not covered hereby and even though such outstanding interest or claim be invalid or adverse to lessor.  If this lease covers a less interest in the oil, gas, sulphur, or other minerals in all or any part of said land than the entire and undivided fee simple estate (whether lessor’s interest is herein specified or not), or no interest therein, then the royalties, and other moneys accruing from any part as to which this lease covers less than such full interest, shall be interest covered by this lease (whether or not owned by lessor) shall be paid out of the royalty herein provided.  This lease shall be binding upon each party who executes it without regard to whether it is executed by all those named herein as lessor.

 

The standard warranty clause presents special issues to you or your client. Normally the oil company does its own title research and comes to you with a leasing proposal. You or your client probably will not and cannot know the exact status of the mineral ownership the land.  After you distribute bonus and royalty revenues from the lease, you or your client will have parted with those revenues, which will probably be spent.  If the oil company made a mistake of title, reimbursing lease revenues that you have already distributed, spent, and paid to the IRS, will be difficult if not impossible.

 Because of these special problems, many oil companies will agree to the following title warranty language if you firmly request it:

 No Warranty of Title.  Lessor hereby disclaims warranties of title, express or implied, in relation to the Leased Premises, all minerals produced under this Agreement and any other matters regarding this Agreement.  Depiction of ownership of the Leased Premises herein and on exhibits hereto are advisory only and shall not constitute any warranty of title.  Lessee hereby acknowledges that no representations are being made to Lessee by or on behalf of Lessor with respect to such title.  For purpose of ascertaining title hereunder, Lessee may review upon request, at reasonable times and at no expense to Lessor, specific conveyance documents.  Lessee shall provide to Lessor copies of all title opinions, deeds, abstracts and other pertinent records relating to the Leased Premises.  If Lessor owns an interest in any part or all of the Leased Premises that is less than the entire mineral estate, royalties, other than bonus payments made pursuant to Section 3.1, due hereunder with respect to all minerals produced hereunder from the Leased Premises shall be reduced proportionately, but Lessor may retain and shall not be obligated to return any monies paid to Lessor prior to such determination.

 

If an oil company agrees in the leasing negotiations to delete the warranty clause from the lease, it is fair for the oil company to ask for an after-acquired title clause. An example of an after acquired title clause is:

 

This lease includes any right, title, or interest in and to the Property that Lessor hereafter acquires from any source, except by, through, or under Lessee. Lessor, Lessor's heirs and assigns, hereby covenant and agree to execute and deliver to Lessee, Lessee’s successors or assigns, any additional leases necessary to cause any such after-acquired title to be covered by this lease.

Copyright 2011 by Edward G, Hawkins. All rights reserved.