The subject of a confidentiality clause in an oil and gas lease has come up a few times in the last couple of months, so it seems like a good time to write about it here.

A confidentiality clause says you can’t talk about the terms of your lease with anybody.

While a confidentiality clause technically means that you can’t talk about the lease terms with your family, friends, and neighbors, or even your spouse, the company doesn’t really expect that to happen.  It’s pretty unlikely to enforce that aspect of the clause except in very egregious circumstances.  For example, if you were to negotiate a totally awesome lease and then go start a landowner’s group using your lease as the base lease, then they might take you to court to enforce the confidentiality clause.

The real reason for the confidentiality clause is that the company wants to keep the lease from being recorded at the courthouse.

The company doesn’t want to file the actual lease for a couple of reasons, the most important being that they don’t want to start bidding wars.  If all the terms of all of their leases were on file at the Doddridge County courthouse, for example, nobody in Doddridge County would have settled for less than $2,500 per acre for the bonus or less than 18% for the royalty.  Everyone would have gone to the courthouse, looked up recent leases, and seen that someone (we won’t mention who) had gotten those terms in their lease.  Everyone would have then asked for and probably gotten those terms and better.  In just a few months lease prices would have gone from $1,500 per acre to $5,000 per acre or more.

Instead of filing the lease, the company will have you sign both a lease and a memorandum of lease.  The memorandum of lease will include a description of the property, the length of the primary term and any extensions thereof, whether there is a right of first refusal, and a couple of other terms that vary from company to company.  It won’t include the bonus amount, the royalty amount, or any other unusual or different terms that you acquired.  It’s just enough information to show a subsequent landman that there is a lease on your property and how long that lease will probably last.  The company will file the memorandum of lease at the courthouse instead of the actual lease.

You want the lease to be on file, however.  The lease is the only actual record of what you and the company agreed to.  The landman will get fired, leave for a different job, get reassigned to a different project, or retire.  Companies lose leases more often than anyone cares to admit.  You could lose your lease in a move, a fire, a flood, or just because people lose things.  Your attorney (you did hire an attorney, right?) will retire and destroy files when the statutory time comes up.  The only somewhat reliable method for keeping a record of the lease is to have it filed at the courthouse.

You and the company have competing interests.  It’s not an easy thing to work around.  However, one solution is to get the company to agree that you can place a copy of the lease on file at the courthouse once there is production from the property.  Before that, it doesn’t matter too much whether the lease gets filed because it could simply expire at the end of the primary term.  Once there is production, however, the lease could be in effect for decades and the risk of losing all copies of it goes up.

As a practical matter, it’s been awfully difficult to get companies to agree to a clause like that.  If you’re in a strong negotiating position, however, I highly recommend you push for it.

Good luck, and get in touch if you want help with your lease.