Severed Mineral Rights – Common Real Estate Title Issues in Renewable Projects, Part 1

This is Part 1 of a series of posts that will provide a high-level overview of common real estate title issues encountered in the development of renewable  energy projects.

One title issue that we see on a very large number of projects is the existence of severed mineral rights. The general rule of real property is that the owner of a parcel owns both the surface estate and the mineral estate (also referred to as the subsurface estate). The surface estate is what most people think of when they think of the rights derived from real estate ownership – it provides the right to occupy and make use of the surface of the subject parcel. The mineral estate is the right to explore for and extract oil, gas, gold, and other natural resources underneath the surface of the subject parcel. The term severed mineral rights refers to a state of title to a given parcel of land in which the mineral estate is owned by a party other than the party that is the owner of the surface estate – in other words, the mineral estate has been severed from the surface estate. Severance can occur in a number of ways, including an express transfer or lease of the mineral estate separate from the surface estate, or a reservation of the mineral estate to the Seller in a deed for the conveyance of a property.

Where the mineral rights on a proposed project site have been severed, the developer is the owner or tenant of the surface estate, but a third party party holds the mineral estate. The rights that the holder of the mineral estate has to utilize the surface of the site for purposes of exercising his rights to the mineral estate depends on the terms of the instrument that created the severed rights (for example, the deed that conveyed or reserved the mineral estate, or the mineral estate lease), and applicable state law. Sometimes, the severance instrument will provide that the mineral estate holder has no rights to access the surface of the property – when this is the case, the severed mineral rights generally will not pose an issue for the project. However, when the severance instrument expressly grants surface access rights to the mineral estate holder, the developer will need to address and resolve the issue (the issue also usually requires resolution when the severance instrument is silent on the topic of surface access, which is quite common – while state law differs, the law in most states is that the holder of the mineral estate has an implied right to utilize the surface of the property for the development of the mineral estate). These implied surface rights are quite strong in some states, including California. The owner of the surface estate generally may not develop the property surface in a manner that will prevent or unreasonably hinder the mineral estate holder’s development of the mineral estate.

The concern posed by severed mineral rights is that the construction or operation of the project will be disturbed by the use of the surface of the site by the mineral rights holder. For example, for a solar project site which is almost entirely covered by panels, the solar developer does not want to face risk of the mineral estate holder showing up one day and demanding that he be allowed to drill a number of oil wells right in the middle of the panel layout. Finance parties usually find severed mineral rights very troubling, and often will refuse to finance the project unless the issue is resolved in a satisfactory manner.  We have seen a number of projects derailed or almost derailed due to the existence of severed mineral rights.

There are a number of methods available to resolve a severed mineral rights issue, including:

• Purchasing the mineral estate outright.
• Acquiring a waiver of surface rights from the holder of the mineral estate.
• Entering into a surface rights agreement or mutual accommodation agreement with the holder of the mineral estate. Such agreements can take a variety of forms, but generally provide that the renewable project developer will limit the project footprint to a certain portion of the site, and the mineral rights holder will have the right to use a certain portion of the surface outside of the renewable project footprint.
• Obtaining affirmative title insurance coverage, usually via endorsement to the title policy, insuring the renewable project developer and lender against damages caused by the mineral estate holder’s right to use the surface of the property.

Purchasing the mineral estate or acquiring a waiver of surface access rights, and (sometimes) entering into a surface rights agreement will usually require the payment of some amount of money to the mineral estate holder. It can also sometimes be difficult to locate the current mineral estate holder(s), which obviously is a prerequisite to any of the above methods other than obtaining title insurance. With respect to title insurance coverage, title companies are generally rather conservative in underwriting this type of coverage, so a developer should not assume that title insurance will be a viable option. On the bright side, a small number of title companies have developed innovative approaches to underwriting mineral rights coverage – these companies have really been a savior in a number of renewable deals we have worked on in California.

As with most project issues, as a general rule it is much better to learn of the existence of severed mineral rights early in the development process. Identifying the issue early will be of great assistance in being able to resolve the issue in a timely manner and at a reasonable cost (or in determining that the issue is not resolvable on acceptable terms). This is just one of many reasons why we counsel clients to always obtain a preliminary title report or title commitment as soon as a potential project site is identified. If the site has a severed mineral estate issue and the issue turns out to not be resolvable, it is obviously much better to know this at the beginning before the developer expends precious cash and human resources on the development of a project site that is not viable.

One final note – as noted above, state laws do vary on the extent of a mineral estate holder’s right to use the surface of the property, so it is always important to check with a real estate attorney with knowledge of the laws of the state in which your project is located.