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SURFACE RIGHTS AND MINERAL RIGHTS

Minerals, such as coal, oil, natural gas, metals, and others, are often a valuable resource or asset to their owner if they can be developed.  But even when they are in their natural state (usually underground), our legal system treats them as being owned by someone.  These mineral rights may be owned by the same person who owns the surface of the land (the surface owner), or they may be owned by another person, in which case the mineral rights are considered severed from the surface rights. 

This page offers thoughts on

• severing the ownership of mineral rights and surface rights,
• fragmenting ownership of mineral rights among several mineral right owners,
• documenting ownership of mineral rights as part of the public record,
• mineral rights dominating over surface rights,
• North Dakota statutory law that addresses the transfer of mineral rights,
• North Dakota statutory law that describes the abandonment of mineral rights, and
• some introductory comments on mineral leasing.

Severed Mineral Rights

As the United States acquired ownership of land in the early 19th century (e.g., Louisiana Purchase), it was presumed that the surface rights and mineral rights were owned by the federal government.  Much of the land was subsequently transferred to private ownership, setting in motion the process we still follow today of owning, using, and transferring property.

Over the course of these transactions, mineral rights may have been severed from the surface rights.  For example, the surface owner may have transferred the mineral rights to another person but retained the surface rights, or a previous owner transferred the surface rights to another person but retained the mineral rights.  Thereafter, ownership of the surface rights and mineral rights would transfer to buyers, donees, or heirs as separate and distinct property interests.

Mineral rights, like surface rights are described according to the government survey method; for example, the mineral rights for a particular 160-acre tract is owned by person A, or co-owned by persons B and C.  However, the surface rights could be owned differently, such as Person E owns the west half of the 160-tract and Person F owns the east half of the tract.  There is no correlation between the ownership of the surface rights and the underlying mineral rights. Overtime, the surface owner and mineral owner may have no direct connection to one another, except they still hold property rights in the same tract of land. 

However, there is land where the mineral rights and surface rights have not been severed and are owned by the same person or group of persons. Throughout this discussion, be mindful that in some situations, the mineral owner and surface owner may be different individuals or groups of individuals, and in other situations, the mineral and surface owner may be the same person or group of persons.

Sharing Ownership of the Mineral Rights

It is not uncommon for surface and mineral ownership interests to be further divided or fragmented among members of a group, such as, siblings co-owning either the surface or mineral interests after inheriting the rights from a parent.  This discussion focuses on the co-ownership of mineral rights.

Sometimes, only part of the mineral rights are sold with the surface rights.  For example, person A sells the surface and half of the mineral rights to person B.  This person (B) then does the same thing by selling the surface and half of the remaining mineral rights to person C.  At this point, person C owns the surface and 25% of minerals, B owns 25% of minerals and A owns 50% of minerals.  If A then bequeaths his or her property to three children as heirs, the surface and 25% of minerals will be owned by C, B owns 25% of the mineral rights, and persons A1, A2, and A3 each own 16.7% of the mineral rights.  It is easy to see how ownership of mineral rights can become fragmented.

Mineral interests could be co-owned as tenants in common, joint tenants, life estate with a life tenant and remainder interests, or a trust.  On occasion, there may be a guardian for a mineral owner.  Each of these situations deserves a brief comment.

• If the mineral rights have been divided by will, deed, or inheritance, each owner becomes a tenant-in-common of an individual interest in the minerals. Each tenant-in-common has to consent to lease their mineral interests by signing a mineral lease.  While it may be advantageous for all co-owners to lease to the same company, there is no need for them to do so.  Each co-owner is free to bargain for as large a cash bonus or other benefits as can be obtained

• Mineral interests held by individuals as joint tenants with the right of survivorship can be handled in the same way. The joint tenants are free to bargain separately or collectively. If three siblings owned the mineral rights as joint tenants, each may have a different lease pertaining to their one-third share of the minerals; however, in doing so they may inadvertently “sever” the joint tenancy into a tenancy in common, which may not be what they intended. Thus, best practice would be for all joint tenants to sign the same lease.

• A life estate involves 1) a life tenant who is entitled to use the property for the remainder of his or her life, and 2) remainder persons who will receive the property upon the death of the life tenant. The life tenant is entitled to use any income from the land (such as rent) that is generated during the life estate.  The life tenant, however, is prohibited from taking action that causes "waste" or permanently diminishes the value of the land that will be received by the remainder persons.  It is argued that producing minerals permanently reduces in the value of the land, and thus the life tenant may be prohibited from developing the mineral rights. One solution is for the life tenant and all the remainder persons to sign the mineral lease.

• Should the mineral owner establish a trust, the trustee controls the property for the benefit of the beneficiaries.  But it is not always clear what is the full range of the trustee's authority.  Therefore if a trust is being established and mineral rights will be included as part of the trust property, the person creating the trust may want to explicitly address how the trustee should manage the mineral interests and the income derived from leasing those rights.

• A court may appoint a guardian for an individual who is incapable of managing his or her affairs; this often imposes on the guardian the obligation of managing the individual's property.  It will be the guardian who will need to decide if the minerals should be leased, but a more fundamental legal issue is whether or not the guardian has the authority to lease the mineral rights.  It may be helpful to have the court explicitly address this question at the time the guardian is appointed if the individual has mineral interests.

These several examples illustrate how ownership of mineral rights can become complicated; the next topic addresses how our legal system tries to track ownership of mineral rights through the same set of county-level public records as is used to track ownership of land.

Determining Ownership of the Mineral Interest

On occasion, an individual may not know they own property rights, especially severed mineral rights.  For example, grandparents may have overlooked telling their children that they retained the mineral rights when the sold their land.  Upon their death, the personal representative of the grandparent's estate may not have known this and merely administered or probated the wills without addressing the need to document that the mineral rights transferred to the children. Upon the death of these individuals years later, their wills may have again transferred all their property rights to members of the third generation without explicitly mentioning the mineral rights.  At this point, there could be siblings and first cousins sharing ownership of the mineral rights.  Even though the transfers have not been properly documented during the estate settlements, in this example, the grandchildren own the mineral rights.  Reconstructing the record of ownership years later can be challenging, but it does not mean the grandchildren are not the mineral owners. 

Bottom line -- be aware of what you own and inform others of these property rights even if that communication is as simple as including a list of property interests among your documents that will be used by your heirs when your estate is settled.

A family member may tell you who they believe owns the mineral rights, but the ultimate answer lies in the legal system.  In North Dakota, ownership is determined according to the public records maintained by the county register for deeds.  It may be prudent to hire an attorney to provide a title opinion as to ownership of the mineral rights.  If ownership is not clear after that step, it may be necessary to commence a "quiet title" lawsuit in which the court will review evidence to determine mineral ownership.

The 2010 North Dakota court case of Melchior v. Lystad (2010 ND 140) illustrates a situation where fragmented ownership of mineral rights led to a "quiet title" action.

Persons thinking they own mineral rights may find that they need to take steps to bring the public record up-to-date, such as having the personal representative of an estate file an appropriate deed indicating that the mineral rights transferred from a deceased owner to the heir who is now the owner of the mineral rights.  Consult an attorney!!

Recommendation -- Know What Mineral Rights Are Owned

Do not assume the surface owner owns the mineral rights.  That may be the situation, but it also may not be the situation.  Surface owners may not own all or any of the mineral rights in their land. Because of possible prior severance of mineral rights from surface rights, surface owners should develop a list of tracts owned, including the percentage of mineral rights remaining with each tract. This provides a starting point for decision-making.

Compiling a list may not be easy. Where mineral rights have been severed, most landowners will require advice from a knowledgeable attorney to interpret the legal wording pertaining to each tract. Moreover, many landowners may not realize that they own less than all of the mineral rights beneath their property.

The same advice can be relevant to an individual who owns severed mineral rights; check the public record (or hire an attorney to check the record and provide a legal opinion as to the ownership of the mineral interests) to determine what mineral rights the mineral owner owns; it may not be all the mineral rights.

Implications of Severed Mineral Rights

A mineral estate (i.e., mineral rights) is dominant over the surface estate (i.e., surface rights), that is, the mineral owner has the right to use the surface of the land to explore for and produce minerals without securing the permission of the surface owner, but this is not an unlimited right -- as described by the North Dakota Supreme Court in Hunt Oil Co. v. Kerbaugh, 283 N.W.2d 131 (N.D. 1979).  In its decision, the court explains:

1) that the mineral estate is dominant; it carries with it inherent rights to use the surface to find and develop the minerals, but

2) the rights of the owner of the mineral estate are limited to so much of the surface as are reasonably necessary to explore, develop, and transport the minerals, which means

3) if there is an existing surface use that would be interfered with, and there are alternatives available by which to recover the minerals, the rules of reasonable use of the surface by the mineral owner may require the mineral owner to adopt an alternative recovery method to accommodate the existing surface use.

4) If there is no alternative means of recovering the minerals, the mineral owner may pursue the only means possible to find and develop the minerals despite the adverse impact on existing surface activities.

In summary, the surface cannot stop the mineral owner from doing what is reasonably necessary to recover the minerals.  However, the mineral owner cannot negligently or unreasonably use the surface, and the mineral owner must reasonably accommodate an existing use of the surface. Restated from the surface owner's perspective:  "the surface owner is entitled to not have the surface negligently used and to have existing uses reasonably accommodated".

In addition, the North Dakota legislature expanded the surface owner's rights by requiring that an oil company compensate the surface owner for surface damages; this statute is discussed as part of Considerations for Surface Owners.

Transfer of Mineral Rights (N.D.C.C. §47-10-24)

The discussion on this page has focuses on the ownership of mineral rights, so it is appropriate to briefly review the law on transferring ownership of mineral rights in North Dakota.

The North Dakota general rule when transferring mineral interests states:  All conveyances of mineral rights, except leases, convey all minerals of any nature, except 1) those minerals specifically excluded by name in the conveyance (and their compounds and by-products) and 2) gravel, clay, or scoria (unless specifically included by name in the conveyance).

The exception is when the transfer of mineral interests is a lease:  A lease of mineral rights transfers only those minerals specifically identified or named in the lease.

• In the case of an oil and gas lease, all associated hydrocarbons produced in a liquid or gaseous form shall be deemed to be included.
• The use of the words "all other minerals" or similar words of an all-inclusive nature in any lease shall NOT be construed as leasing any minerals except those minerals specifically named in the lease and their compounds and by-products.

Clearly, North Dakota law treats mineral leases differently than other transfers of mineral interests (such as sales, bequeaths, gifts).  As stated throughout this web site: seek knowledgeable legal counsel.

Abandonment of Mineral Rights

North Dakota also has addressed the issue of severed mineral rights, especially in those situations where it appears the mineral owner may not even know they have an ownership interest. 

"Any mineral interest ..., if unused for a period of twenty years immediately preceding the first publication of the notice required by section 38-18.1-06, [is] deemed to be abandoned, unless a statement of claim is recorded in accordance with section 38-18.1-04. Title to the abandoned mineral interest vests in the owner or owners of the surface estate in the land in or under which the mineral interest is located on the date of abandonment."

"A mineral interest is deemed to be used when:

a. There are any minerals produced under that interest.
...
d. The mineral interest on any tract is subject to a lease...
g. A proper statement of claim is recorded... (N.D.C.C. §38-18.1-03).

Recommendation:  An owner of severed mineral rights in North Dakota should review the statute to assure the necessary steps are taken to prevent the mineral rights from being considered "abandoned."

Leasing Mineral Rights as a step to Producing Minerals

Most minerals are not developed by the individuals who own the mineral rights.  Few mineral owners have the know-how, technology and financial resources to drill and operate an oil well or dig a coal mine.  The more common practice is for a mineral developer to acquire the right to develop the minerals from the owner of the mineral rights.  This acquisition could be a purchase (the mineral developer purchases the mineral rights from the previous owner) or a mineral lease (the mineral developer leases the right to develop the minerals from the mineral owner).  The focus of this discussion is on 1) oil and gas and 2) leasing mineral rights. 

A mineral lease generally means the mineral developer pays the mineral owner for the right to explore for and begin developing or producing the oil and gas.  The lease grants this right to the mineral developer for an agreed upon period of time, maybe three years.  These leases also state that if production begins during the period of the lease, the mineral developer has the right to produce the minerals for as long as production occurs; this may be for decades.  If no production is initiated by the end of the lease, the lease simply expires and the mineral owner is free to seek another mineral developer to lease the mineral rights. 

Should production be initiated and the agreement is now binding for as long as production occurs, the mineral owner is paid a royalty, often based on the amount of oil and gas being produced.  Thus a mineral lease for three years may be an agreement that defines a relationship with the mineral developer for several decades or longer.  For this reason, it is critical that mineral owners carefully enter into a lease agreement.

In the case of severed mineral rights, the surface owner may be disappointed that he or she is not sharing in the wealth generated by the minerals being produced from beneath the land they own.  They may be further frustrated when the oil and gas exploration and production processes interfere with or damage their use of the surface. 

But the law is clear -- a mineral owner (or the mineral lessee) has the right to enter onto the surface of the land (even if owned by another person) for the purpose of exploring for and developing minerals. 

The law also is clear that surface owner is entitled to be compensated for damages that occur during the exploration and production of minerals.  Due to the uncertainties that can arise during mineral development, the state legislature has enacted laws directing how the relationships among the mineral owner, mineral developer, and surface owner are maintained.  In North Dakota, the Industrial Commission is responsible for overseeing mineral development.

The North Dakota legislature also has offered some protection for surface owners by statutorily requiring oil exploration companies to secure a permit from the Industrial Commission prior to beginning exploration.  See N.D.C.C. §38-08.1-04; and N.D.A.C. chapter 43-02-12. In addition, the North Dakota legislature enacted statutory law to assure surface owners are compensated during production of oil and gas; see N.D.C.C. §38-11.1-04.  Note that this statute imposes the obligation to compensate the surface owner on the mineral developer, not on the mineral owner.

 

Furthermore, the North Dakota legislature offers protection for the water resources of the surface owner AND adjacent landowners. See N.D.C.C. §38-11.1-06.  This protection encompasses both oil and gas exploration and production activities.

Leasing co-owned mineral interests

When the mineral rights are owned by several persons, difficulties can arise in getting all of them to execute a lease. This could happen if one person has disappeared, is a minor, refuses to execute the lease, or for some reason cannot execute the lease. North Dakota law permits the owners of one-half or more of the oil and gas, or the owners of leases covering one-half or more of the minerals under contract, I do not see this limitation; that is, the statute says any interest holder can initiate this court proceeding, not just majority interests  to ask the court for an order allowing them to develop the oil and gas. This is done to protect the interests of the majority owners (N.D.C.C. chap 38-13.1).

When this is done, all owners, both known and unknown, are made parties to the action. If the petition is approved by the court, nonsigning owners are guaranteed their proportionate benefits from the lease.

See N.D.C.C. chap 38-13.1 Trusts for Unlocatable Mineral Owners

Joint Tenants

For example, if two of three individuals who co-own mineral rights as joint tenants agree to the same lease, the company may approach the third joint tenant and ask that joint tenant to ratify the mineral lease agreed to by the other two joint tenants. By signing a “Ratification” form, the third joint tenant agrees that, if he or she inherits the mineral interest of one of the other two joint tenants before the lease expires, the third joint tenant will accept the provisions of the mineral lease.

Life Estate

Leasing is more complicated when land is subject to a life estate and remainder interests. Life tenants and remaindermen usually must join in executing or ratifying an oil and gas lease. They may agree to divide the proceeds in the lease or in a separate agreement. In the absence of such an agreement, the law provides a formula for computing the share of each one. If a life estate is burdened by remaindermen interests that are unknown or indeterminable, it is possible to secure a lease of such remaindermen interests by petitioning a court.

Guardianship Or Trustee

Leasing complications also arise when mineral rights are controlled by a guardian or trustee. Generally, a court order is needed to allow the guardian or trustee to execute an oil and gas lease.

Next Page

One more topic should be addressed before discussing considerations for the mineral and surface owners, that is, the regulatory responsibility of the North Dakota Industrial Commisison.

Last Updated August 29, 2010

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