Requiring an Oil Producer to Negotiate a Surface Use Agreement with Surface Owner

Surface Owner Issues
1

I am selling the mineral interest that I own in my Texas property to an adjoining landowner. I plan to create a mineral title and include numerous deed restrictions to provide some level of protection to myself as a Surface Owner and to my heirs and/or anyone who might purchase the property from me in the future. I’ve been told that one deed restriction that I cannot include would be a requirement to have any prospective oil producer negotiate a surface use agreement with me, as this would be contrary to Texas law.

I understand that, but I would like to know if I could have (as part of the sale contract of my mineral interest rather than a deed restriction) a stipulation that would require any oil producer he leases with to at least make a good faith attempt to negotiate a surface use agreement with me. I realize that this would only be good as long as the current purchaser of the minerals owns them and would be lost if he ever sold them, but this would be better than nothing at all.

I would very much appreciate the thoughts and input of anyone who has experience with this type of issue.

2

Keep the executive rights. That would give you control over the lease. What did your attorney recommend?

3

Scott, Thanks for your reply. My lawyer recommended assigning just the royalties and me keeping the minerals. That would have been my preference, too, but it was not acceptable to my neighbor. He wants the executive right so that he can negotiate the lease. I have no problem with that, I would just like to keep as much control over what happens on the surface of my land as possible.

One thing that I discovered is that if I assigned the royalties to him, I would have to retain at least a small percentage for myself. Otherwise there would be no incentive for me to lease the minerals, and that would contradict my fiduciary right as the executor of the mineral estate.

Scott Madison said:

Keep the executive rights. That would give you control over the lease. What did your attorney recommend?

4

My understanding is that if you sell the mineral rights and give up all executive rights you, as the surface owner, would have no input into any lease. You would not need any incentive to lease the minerals since that right would lie with the mineral and executive owner, your neighbor. You might not be assured the surface protections that are customary for your area. Your neighbor would have no incentive, other than kindness to protect your surface.

I would think you need to keep enough executive rights to ensure that you have input into the surface agreements in the lease. Your neighbor could include specific mention of fiduciary responsibilities to ensure that you would sign a lease that would benefit the mineral owner. I am not an attorney, obviously.

As for the royalty scenario, it would seem that your fiduciary responsibility to the royalty owner would be the same whether you owned some royalties or not. It would be hard to enforce either way.

If a deed for the sale of the minerals does not allow for you to have input into the surface agreement in any future lease; then holding some executive rights might serve to protect you. That would give you fiduciary responsibilities to the mineral owner and would give you the incentive to sign a lease with reasonable surface protections. Not leasing over the failure to agree to reasonable surface protections would expose you to a lawsuit. You should resolve yourself to be agreeable to accept the kind of surface agreements that are customary for your area. That is the best you could hope for. If you are not comfortable with that then don’t sell your minerals.

I think you will be spending a lot of time with your lawyer. You only need to get it right once. This is that time.

Benny Butler said:

Scott, Thanks for your reply. My lawyer recommended assigning just the royalties and me keeping the minerals. That would have been my preference, too, but it was not acceptable to my neighbor. He wants the executive right so that he can negotiate the lease. I have no problem with that, I would just like to keep as much control over what happens on the surface of my land as possible. One thing that I discovered is that if I assigned the royalties to him, I would have to retain at least a small percentage for myself. Otherwise there would be no incentive for me to lease the minerals, and that would contradict my fiduciary right as the executor of the mineral estate.

Scott Madison said:

Keep the executive rights. That would give you control over the lease. What did your attorney recommend?

5

You can convey the mineral rights without the rights of ingress/egress and further stipulate that development may only be accomplished by horizontal/directional drilling or pooling.

This inherently reduces the value of the minerals, so a purchaser may not be willing to pay the same amount of consideration.

I am assuming the property is in Texas, however these restrictions are used elsewhere.

6

Remember in Texas the mineral estate is dominant. The lessor agrees to a surface use agreement only because the benefits outweigh what they are giving up. They have the right to use as much of the surface as is reasonably necessary to explore and produce their minerals. This doctrine is construed broadly in favor of the mineral estate. So, Scott is right keep as much of the executive rights as you can so you have input into the lease. I have put many surface use restrictions and remediation clauses in leases I have drafted. And no, not all end up in the final lease.

The ingress/egress rights are not part of the bundle of rights in a mineral estate. If you lock them out, you open yourself up to liability for unreasonable interference.

7

Dear Mr. Bennet,

You may absolutely do exactly that. You may accomplish that in the conveyance or in the oil and gas lease itself. For this to survive you and become a covenant running with the land, it must be done in the conveyance and so stated that this is a covenant running with the land.

One of my landowners does it in the oil and gas lease, but they are a large foundation (and never die, or that is the theory).

Also, concerning the executive issue you raised, you were misinformed. For years in Texas, the executive right was a power (to act) coupled with an interest (in the minerals). Now, since the right to lease is a separate and distinct right in the attributes of the mineral estate, it is capable of being reserved, conveyed, etc. without ownership in the balance of the mineral interest. The fiduciary (or utmost good faith and dealing) kicks in only when the lease is entered into, not before (so not leasing does not breach the duty). All of this is clearly dependent on the language in the conveyance or reservation, but that is the red-line law.

If your attorney cannot help you with this, there are many that can.

8

Hello Buddy. Thanks for your response. So there would be a way to include such a stipulation in the conveyance? How would that work? I was wondering if I should consult another attorney, but I’ve not found any others in my area who deal with this sort of issue. Most are used to working for the interests of either the mineral owner or the oil producer – not the surface owner. My attorney told me that I’m the only person he’s ever dealt with who wanted to include such a requirement.

I also did not know that the executive right could be split up as Mr. Symms suggested. I thought it was an all or none type right. How can it be divided?

Buddy Cotten said:

Dear Mr. Bennet

You may absolutely do exactly that. You may accomplish that in the conveyance or in the oil and gas lease itself. For this to survive you and become a covenant running with the land, it must be done in the conveyance and so stated that this is covenant running with the land.

One of my landowners does it in the oil and gas lease, but they are a large foundation (and never die, or that is the theory).

Also, concerning the executive issue you raised, you were misinformed. For years in Texas, the executive right was a power (to act) coupled with an interest (in the minerals). Now, since the right to lease is a separate and distinct right in the attributes of the mineral estate, it is capable of being reserved, conveyed, etc. without ownership in the balance of the mineral interest. The fiduciary (or utmost good faith and dealing) kicks in only when the lease is entered into, not before (so not leasing does not breach the duty). All of this is clearly dependent on the language in the conveyance or reservation, but that is the red-line law.

If your attorney cannot help you with this, there are many that can.

Best, Buddy Cotten Mineral Manager

9

Sounds like Mark Symms and/or Buddy Cotton are attorneys skilled in the expertise you need; friend them and ask for their services.

10

Mark, thanks for your input. I certainly appreciate your help and that of everyone else who has responded. I’m not going to try to keep anyone from drilling. My neighbor is also a friend and I hope this transaction benefits us both. However, I know that once he leases the minerals to an oil producer, neither he nor I will have control of anything unless it’s stated in either his lease agreement, or in my mineral deed conveyance, or in a separate surface use agreement between me and the oil producer. I know that in Texas, an oil producer is not required by law to negotiate and sign a surface use agreement with a surface owner who doesn’t own any of the minerals. Some do and some don’t – that is why I hope to be able to include a stipulation requiring them to do so with me.

I do plan to maintain control over the points of ingress and egress and the path of any new road. That language will be in the conveyance. I was not aware that the executive right could be split up. How does that work?

Thanks again.

Mark Symms said:

Remember in Texas the mineral estate is dominant. The lessor agrees to a surface use agreement only because the benefits outweigh what they are giving up. They have the right to use as much of the surface as is reasonably necessary to explore and produce their minerals. This doctrine is construed broadly in favor of the mineral estate. So, Scott is right keep as much of the executive rights as you can so you have input into the lease. I have put many surface use restrictions and remediation clauses in leases I have drafted. And no, not all end up in the final lease.

The ingress/egress rights are not part of the bundle of rights in a mineral estate. If you lock them out, you open yourself up to liability for unreasonable interference.

11

Hi Scott,

Thanks for your response. I know that it may not be possible for me to accomplish my objective to have an oil producer negotiate a surface use agreement with me, but I want to explore all of my options before transferring the deed. You are so right when you say that I only need to get it right once – that’s why I’m here asking questions.

When you say that I should keep enough of the executive rights to ensure that I have input into any oil lease, how would I do that? I wasn’t aware that the executive right could be split.

Thanks for your help.

Scott Madison said:

My understanding is that if you sell the mineral rights and give up all executive rights you, as the surface owner, would have no input into any lease. You would not need any incentive to lease the minerals since that right would lie with the mineral and executive owner, your neighbor. You might not be assured the surface protections that are customary for your area. Your neighbor would have no incentive, other than kindness to protect your surface.

I would think you need to keep enough executive rights to insure that you have input into the surface agreements in the lease. Your neighbor could include specific mention of fiduciary responsibilities to insure that you would sign a lease that would benefit the mineral owner. I am not an attorney, obviously.

As for the royalty scenario, it would seem that your fiduciary responsibility to the royalty owner would be the same whether you owned some royalties or not. It would be hard to enforce either way.

If a deed for the sale of the minerals does not allow for you to have input into the surface agreement in any future lease; then holding some executive rights might serve to protect you. That would give you a fiduciary responsibilities to the mineral owner and would give you the incentive to sign a lease with reasonable surface protections. Not leasing over the failure to agree to reasonable surface protections would expose you to a lawsuit. You should resolve yourself to be agreeable to accept the kind of surface agreements that are customary for your area. That is the best you could hope for. If you are not comfortable with that then don’t sell your minerals.

I think you will be spending a lot of time with your lawyer. You only need to get it right once. This is that time.

Benny Butler said:

Scott, Thanks for your reply. My lawyer recommended assigning just the royalties and me keeping the minerals. That would have been my preference, too, but it was not acceptable to my neighbor. He wants the executive right so that he can negotiate the lease. I have no problem with that, I would just like to keep as much control over what happens on the surface of my land as possible. One thing that I discovered is that if I assigned the royalties to him, I would have to retain at least a small percentage for myself. Otherwise there would be no incentive for me to lease the minerals, and that would contradict my fiduciary right as the executor of the mineral estate.

Scott Madison said:

Keep the executive rights. That would give you control over the lease. What did your attorney recommend?

12

Dear Mr. Butler,

Just because your attorney has never heard of something does not mean that it does not exist. Restrictions are placed in deeds ALL of the time. This is just another type of restriction. I have plenty of language that I have seen, copied and refined to accomplish just that in an oil and gas lease. It would be a simple matter to use that as a base for a deed restriction.

I cannot share the language because I am not an attorney. If you think the unions are strong, they are intimidated by the American Trial Lawyers Association. Heck, the ATLA can intimidate the president. They are great at guarding their turf, so I am extra careful to not step out of my field into theirs.

Benny Butler said:

Hello Buddy. Thanks for your response. So there would be a way to include such a stipulation in the conveyance? How would that work? I was wondering if I should consult another attorney, but I’ve not found any others in my area who deal with this sort of issue. Most are used to working for the interests of either the mineral owner or the oil producer – not the surface owner. My attorney told me that I’m the only person he’s ever dealt with who wanted to include such a requirement.

I also did not know that the executive right could be split up as Mr. Symms suggested. I thought it was an all or none type right. How can it be divided?

Buddy Cotten said:

Dear Mr. Bennet

You may absolutely do exactly that. You may accomplish that in the conveyance or in the oil and gas lease itself. For this to survive you and become a covenant running with the land, it must be done in the conveyance and so stated that this is covenant running with the land.

One of my landowners does it in the oil and gas lease, but they are a large foundation (and never die, or that is the theory).

Also, concerning the executive issue you raised, you were misinformed. For years in Texas, the executive right was a power (to act) coupled with an interest (in the minerals). Now, since the right to lease is a separate and distinct right in the attributes of the mineral estate, it is capable of being reserved, conveyed, etc. without ownership in the balance of the mineral interest. The fiduciary (or utmost good faith and dealing) kicks in only when the lease is entered into, not before (so not leasing does not breach the duty). All of this is clearly dependent on the language in the conveyance or reservation, but that is the red-line law.

If your attorney cannot help you with this, there are many that can.

Best, Buddy Cotten Mineral Manager

13

Mr. Butler, First I wanted to correct something I said incorrectly earlier; ingress/egress (the right to develop) IS part of the bundle of rights conveyed.

When you convey the mineral interest you may reserve a portion of the executive interest say 50%. Then you have a say and can insist on certain surface provisions in the lease. If you reserve a smaller interest, 20% perhaps, you have less of an input and run the risk of a partition. Example, let’s say you own Blackacre which is a 500-acre tract. You sell the minerals under Blackacre, reserving 20% of the executive rights; assuming this is all negotiated with the buyer. Big Oil comes to lease. You ask for several surface provisions to be included, i.e. pad remediation, ingress/egress at certain spots, roads of a certain quality. Impasse. They won’t budge, you refuse to sign. If the lease is still viable without you, you may find yourself in a partition suit where they carve out your 100 mineral acres and proceed without you. This is not the norm.

Most times the benefits outweigh the requests of the surface owner and the oil company acquiesces. Strive for reserving a portion of the executive rights. A covenant, as Buddy speaks about is an option, but may make the land less attractive. Also, if the covenant is against or violates public policy it can be set aside by a Court. But like Buddy said and I spoke earlier, there are many clauses that may be added to a lease to keep folks happy. Hope this helps.

Disclaimer: Please acknowledge that no attorney-client relationship has been formed as a result of this conversation.

Benny Butler said:

Mark, thanks for your input. I certainly appreciate your help and that of everyone else who has responded. I’m not going to try to keep anyone from drilling. My neighbor is also a friend and I hope this transaction benefits us both. However, I know that once he leases the minerals to an oil producer, neither he nor I will have control of anything unless it’s stated in either his lease agreement, or in my mineral deed conveyance, or in a separate surface use agreement between me and the oil producer. I know that in Texas, an oil producer is not required by law to negotiate and sign a surface use agreement with a surface owner who doesn’t own any of the minerals. Some do and some don’t – that is why I hope to be able to include a stipulation requiring them to do so with me.

I do plan to maintain control over the points of ingress and egress and the path of any new road. That language will be in the conveyance. I was not aware that the executive right could be split up. How does that work?

Thanks again.

Mark Symms said:

Remember in Texas the mineral estate is dominant. The lessor agrees to a surface use agreement only because the benefits outweigh what they are giving up. They have the right to use as much of the surface as is reasonably necessary to explore and produce their minerals. This doctrine is construed broadly in favor of the mineral estate. So, Scott is right keep as much of the executive rights as you can so you have input into the lease. I have put many surface use restrictions and remediation clauses in leases I have drafted. And no, not all end up in the final lease.

The ingress/egress rights are not part of the bundle of rights in a mineral estate. If you lock them out, you open yourself up to liability for unreasonable interference.

14

Several years ago we sold the surface along with executive rights and what small part of the minerals we owned but kept the right to half the bonus. Company came in last year and leased the property, paid the surface owner his bonus but not us. It took a few months before we knew the property had been leased. Wish we had kept part of the executive rights just so we would have known there was a lease in the works. Still trying to get paid; company says it will but hasn’t yet. Any suggestions appreciated.

15

Tim, I am sorry that you are dealing with what appears to be an unscrupulous operator. Seems to be catching, no? The title run/opinion should have found your reserved bonus right, if they did one. A sternly worded demand letter sent CMRRR is the start. If you have already tried that, perhaps one from an attorney or straight to small claims court if the amount sought is under 10K.

16

Thanks Mark, we will keep working on it.

17

Tim, after leasing the surface owner could have a responsibility along with the executive rights to see that you received the bonus you were entitled to. The executive might be an easier nut to crack than the operator, and you can bet that if you filed a suit against him that he would be burning up the line to the operator that they must pay you. Is it nice? No. Is nice actually getting you anywhere? I think you may have to sue someone. I hope the amount they owe you is at least a few thousand dollars to make it worth the effort. If it’s only a few hundred dollars, I would save my breath and aggravation. The lessee doesn’t care how much you call, it costs them nothing to put you off. The lessee would be out $0 if you were still calling this time next year and showing a profit of whatever they owe you. You need to make them think that it’s more expensive to not pay you than to pay you. Most people I think just give up on it after awhile. If you can convince people that you will spend every bit of what you would have received if you had been paid on your legal fees to sue them, they will generally see things your way. I have no problem convincing them, because I mean it. They can pay me or I will seek my bloody strip off their hide in court. If you can convince them that you can sue, will sue and win, that they will have to pay their legal expenses above and beyond having to pay you anyway, I think they will see reason. If you have an attorney you can ask, see what he thinks. You might have him write the actual letter informing them of how serious you are. Right now you are just the guy they blow off or ignore that they owe money to. If they really think you will sue, the only way you can really effect them, you become their problem that will cost them if they don’t pay you. You don’t have to build a relationship with these people, you have business with them one time, right now, and then you’re done. Consider it, and good luck.

Tim Young said:

Several years ago we sold the surface along with executive rights and what small part of the minerals we owned but kept the right to 1/2 the bonus. Company came in last year and leased the property, paid the surface owner his bonus but not us. Took a few months before we knew the property had been leased. Wish we had kept part of the executive rights just so we would have known there was a lease in the works. Still trying to get paid, company says it will but hasn’t yet. Any suggestions appreciated.