Oil and gas companies cannot start drilling and extracting mineral oil from your property in California until you sign a lease or sell the property. You may have your mind on what you plan to do with the money once it starts rolling in, but you need to stay focused on the lease agreement. Before you sign your name on anything, make sure you understand what the lease requires so you do not make any mistakes that go against your interests.
Here is a brief overview on common oil and gas lease mistakes to avoid.
Rushing to sign
You are under no obligation to sign a lease with the first company that approaches you. Take some time to examine your options and proposals from other oil and gas companies. Read over all contracts carefully. Hire an attorney to go over everything to ensure you understand your rights and all expectations in the leases. An attorney can help you to protect your interests and choose a lease that is most beneficial to your situation.
Not negotiating a better deal
You should take some time to research other local oil and gas companies, so you can generate more interest in your property and increase the profitability of the situation for yourself. Research the values of local mines and wells so you can get a better idea of how much you can ask for in your lease agreement. You may be able to negotiate a better lease deal when you have the interest of multiple energy producers instead of one.
Not thinking about taxes
According to the Journal of Accountancy, income from oil and gas agreements can have an impact on your tax situation. The designation of payments you receive determines how they are taxed. Make sure any payments you are to receive are properly classified as rents or royalties to prevent tax complications. You should consider working with a tax professional to avoid issues with the IRS and reduce your tax liability.
Thoroughly read over the terms of your oil and gas lease agreements. Get every promise in writing. If there are things you want to be included in your oil and gas lease, do not be afraid to negotiate them into the deal. Take some time to think things over so you do not rush to protect your rights.