When it comes to subsurface mineral rights, as well as related surface entry rights, much consideration is required for any analysis of the feasibility of a large solar energy project. Often times, land considered for these projects includes areas in which oil, gas and mineral deposits exist, and in some cases, where exploration has or is occurring. As opposed to other alternative energy projects, solar projects are somewhat unique because they involve extensive coverage of the surface of the ground with photo-voltaic panels or other array technology and, given the huge cost of that equipment, it is critical that developers secure the ability to use the maximum amount of the surface area without interference, which requires the limitation, restriction and/or removal of third-party surface rights to make sure that the technology placed on the surface can operate unimpeded. This article will provide a brief guide of mechanisms available for that purpose and an analysis of the various approaches from a title insurance perspective.
Nature of Mineral Rights
When evaluating prospective project areas for solar development, it may be crucial to keep in mind what types of minerals exist on the site. It will also be important to know what type of minerals have or have not been severed from the surface rights.
Typically, the proprietor of the land owns all things below the surface of the land including the minerals. When the property is being conveyed, all of those “things” beneath the surface, including mineral rights, are also conveyed if there is no specific mention in the deed. However, real property can be divided horizontally, just as it can be divided vertically. This means it is possible to sever the ownership of the subsurface rights from the ownership of the surface rights. Once there has been a severance, conveyance of the surface doesn’t necessarily transfer title to the subsurface, but rather, each must be transferred separately.
Surface Entry Rights Appurtenant to Mineral Rights
The ability to access the surface of the property to extract the minerals may be included in ownership of a subsurface mineral interest. The instrument creating the rights will determine the extent of a mineral holder’s surface rights — typically, the reservation in a deed conveying the property, or the separate grant of those rights. Generally, the language of the instrument creating the mineral rights (or absence of language regarding surface rights) determines the nature and extent of the surface rights created. The type of documentation necessary to extinguish or waive the right will be determined by the nature and extent of the rights, and subsequently to obtain the desired title insurance.
Silence Equals Reasonable Access
The reservation or grant of mineral rights may first be silent on the mineral holder’s surface rights. If this is the case, the law typically implies a reasonable right to use the surface to extract the minerals. That is, the mineral rights holder may use the surface of the property in such a manner as is reasonably required for the enjoyment and exercise of the mineral interests, even if they have no express right to use the surface. In practice, this typically means the mineral rights holder has the right to enter the surface of land and to extract the minerals. However, the use cannot unreasonably interfere with the surface owner’s use of the surface. The extent of surface use allowed will depend on the specific situation. For instance: What is the surface currently used for; what is built on the surface; how practical and feasible is access to the minerals from areas of the surface which are not developed or used; is there access to the minerals from any other property; and, what types of mining activity is customary in the area.
Instrument Expressly Describes Surface Rights
Next, the reservation or grant may expressly reference the extent of surface rights conveyed to the mineral rights holder. This may include a specific location on the surface from which the holder may access the minerals or the depth to which the right holder may drill or mine. Conversely, the access may be broad and include access to any part of the surface of the property or any part of the surface on which no permanent structures exist.
Instrument Expressly Excludes Surface Rights
Lastly, mineral rights may be reserved or granted, but the reservation or grant expressly excludes any rights to access the surface to extract the minerals. If this is the case, the intent may be that the minerals be accessed only by “horizontal” or “slant” drilling from adjoining property or some other mechanism which does not disturb or intrude on the surface of the property. Often times, such as grant will include a specification that the mineral rights granted are a specific number of feet (generally 500 feet or more) below the surface of the property.
Identifying Mineral Rights
In any mineral rights analysis, the first step is to perform a title review to identify any documentation creating or reserving mineral rights, particularly as pertains to surface rights access. At the onset of the transaction or development project, a Preliminary Report should be obtained from a title insurance company reflecting the conditions on which the title insurance company is willing to issue title insurance and particularly, the exceptions to coverage identified by the title insurance company relative to the specific property. Generally, if there is a severance of the mineral rights, the severance would be reflected in this report.
If a severance is exists, developers can obtain a separate report specific to those mineral rights disclosing the exact nature and detailed ownership interests relating to those rights. This type of report will likely be required by title companies from a reliable third party company before they will underwite insurance based on documentation indicating a waiver or relinquish of any surface rights. They will want assurance that all of the interests and owners have been identified, as well as all of the owners having agreed to the documentation limiting or extinguishing their rights.
Mechanisms for Limitation or Removal of Surface Rights
If a solar project developer discovers that a potential project site has a mineral severance, assurance will be wanted that any existing mineral rights will not be exercised in a manner that would damage the existing improvements or any future improvements that the surface owner wants to construct. There are a few mechanisms to limit or remove surface access rights which can be used to protect a proposed solar energy project from interference.
The first mechanism is an old fashioned one: negotiation. Negotiation with the holder of rights to limit or eliminate any surface access. One of the most significant obstacles with respect to the negotiation option is locating the holder of the mineral rights. It may be that there a number of holders of the rights because the interests have been fractionalized. The original owners sometimes have died so it is necessary to locate the heirs of those original owners. And, often times, the heirs are unaware that they own a mineral interest. If a mineral rights holder becomes aware that his or her ownership may impede a project, he or she may try to use that leverage to obtain a negotiation advantage. If the mineral rights holder is willing to negotiate, the cheapest and most expedient action for a developer is usually to purchase the surface entry rights. If the surface entry rights are acquired, the developer can typically proceed, even if subsurface mineral rights remain, with appropriate title insurance coverage.
Generally, the more fractionalized mineral rights are, the less valuable they are for any particular holder because an aggregation of those rights is required to make any exploration worthwhile. An aggregation is often required not only of the rights on one parcel, but of mineral rights on several parcels, to make extraction feasible.
It is helpful to obtain an appraisal of the mineral rights to determine their fair market value to properly prepare for negotiations with a mineral rights holder. A mineral rights appraiser will usually compare the cost of extraction of the minerals with the market value of the minerals to determine their value. As mentioned, interests will frequently need to be aggregated to make extraction economically feasible. The significant drawback to the negotiation strategy is the cost and time involved in such negotiation, although the alternative also have cost and time components associated with them.
Termination of Dormant Interests
The next approach to limit surface rights is to determine if the mineral interest is dormant and subject to termination, pursuant to statute. Some states provide a mechanism for the termination of dormant mineral rights. The purpose of the statue is to prevent a situation where old mineral rights cloud title and avoid a productive use of the property.
If all of the following conditions are satisfied for a period of twenty years preceding commencement of the action to terminate the mineral right, it is considered dormant:
- There is no production, mining or other development of the mineral rights.
- No separate property tax assessment is made of the mineral right or, if an assessment is made, no taxes are paid on the assessment.
- No instrument creating, reserving, transferring or otherwise evidence the mineral right is recorded.
Satisfaction of the first condition, relating to no production or mining of the mineral, may be verified by an inspection of the real property and review of historical records. A mining consultant is often hired to inspect the property and mining records and, if needed, to testify that no production or exploration has occurred in the last twenty years.
Satisfaction of the second condition may be verified through a review of the property tax records in the county in which the property is located.
Satisfaction of the final condition may be verified through a review of the public record maintained by the County Recorder and can be more difficult. Often times, the instrument “creating, reserving, transferring” the mineral right is more than twenty years old, but within the last twenty years a property description — which may be attached to a deed or a deed of trust — has been recorded which itself reflects the reserved mineral rights. Therefore, even though there has been no separate conveyance of the rights, if an instrument has been recorded referencing the rights by, for instance, using the original language of reservation, an argument can be made that that instrument “evidences” the mineral rights, and — if the instrument was recorded within the last twenty years — the twenty-year period requirement is not met.
A complaint can be filed in the Superior Cort of the county in which the property is located if the conditions of the statute are satisfied to obtain a determination that the mineral rights have in fact been abandoned. If the current mineral rights holders can’t be located or are unknown, they can be served by publication in a local newspaper. It is not unlikely for known holders of the mineral rights, upon being served with a complaint, to simply disclaim any interest or to not oppose the request for termination. If there is no response to the summons and complaint, request for entry of default can be filed and a default judgment entered.
Termination of Right of Surfaces Entry in Oil/Gas Leases
Another mechanism that is also statutory, and applies only to oil and gas leases on “lands within a city in any county with a population exceeding 4,000,000, or with a population of more than 700,000 and less than 710,000 as determined by the 1960 Federal Decennial Census.”
Again, the purpose of the statute is to allow for a productive use of property — especially in urban areas — where an old oil and gas lease exists. If a lease exists for the production of oil, gas or other hydrocarbons, together with a right of entry or occupation of the surface, the fee owner may obtain a judgment terminating or limiting the right of entry of the surface under the following conditions:
- The document creating the leasehold interest was executed more than 20 years prior not including any amendments.
- There is no oil or gas well or well bore on the land.
- Termination of the right of entry or occupation of the surface that is requested by the plaintiff, or as may be conditioned by the court, “will not significantly interfere with the right of the lessee, under the lease, to continue to conduct operations for the continued production of oil…” This means that some provision must be made to allow the lessee to continue to access any oil reserves which may exist below the surface.
The most common form of insurance is, typically, against loss from the exercise of any right to use the surface of the land for the extraction or development of the minerals.
This type of particular coverage can be provided in the title policy itself, as with the American Land Title Association (“ALTA”) or on commercial transactions, through endorsements such as the ALTA 9 series of endorsements.
Solar developers will generally be working with the endorsements. Prior to 2012, the ALTA 9 series of endorsements provide a whole host of coverages in addition to surface damage protection, including violations of covenants, conditions and restrictions, encroachments and violations of setback lines. ALTA approved a new series of endorsements called the ALTA 35 series in May of 2012. This series provides varying levels of coverage against damage to improvements resulting from the exercise of rights to use the surface of the land for the extraction or development of minerals or any other subsurface substances.
Our energy climate is continually changing. As more resources become available and are allocated to alternative energy projects, developers of these projects are going to explore many opportunities for development in more difficult areas. A severance of mineral rights can present a challenge, but the right tools can enable a solar project developer to address this challenge and move forward with the assurance it needs.
MAS Field Services is a field service company within the energy industry eager to be a part of the ever expanding goal of American energy independence. Whether it’s title for minerals on an oil and gas or solar project, leasing large acreage for a wind farm, or obtaining right of ways for long haul transmission and pipelines, MAS can get the right people in the right place. We are excited to tap the local oil and gas reserves needed to keep our way of life moving forward, capture the overwhelming wind and solar resources on local soil needed to help power America, and tackle the challenge of bringing those resources from production to consumption. Contact us with the link below for more information!