Title Examination Series: Proportionate Reduction Provisions

The purpose of a proportionate reduction clause is to allow the lessee to reduce the benefits/amounts paid to a lessor based upon less than 100% ownership of the minerals by the lessor.

“ If lessor owns an interest in the oil, gas, or other hydrocarbons in or under said land less than the entire fee simple estates, then the royalties, bonuses and rentals to be paid Lessor shall be reduced proportionately.”

Generally, every lease should have a proportionate reduction provision. If you do not have a proportionate reduction provision, you should obtain an amendment of the lease, unless you have confirmed for certainty that the Lessor owns 100% of the minerals in the lands covered by the lease. If not, a Lessee may have to pay disproportionate royalty. For example, Lessee owns Lease A and Lease B both covering Blackacre. Lessor A and Lessor B each own 1/2 of the minerals under Blackacre. Both Lease A and Lease B provide for 25% royalties, but Lease A does not include a proportionate reduction provision. Lessor A would be entitled to royalty of 25% since they are not subject to proportionate reduction, Lessor B would be entitled to royalty of 12.5% (1/2 of 25%), and the Lessee would have their net revenue interest reduced to 62.5% instead of 75%.