Reconciliation: A Practical Guide to Surface, Leasing and Curing Mineral Title in North Dakota. Presented by Josh Cole, Co-Owner of Bakken Oil LLC, Lease.

Reconciliation: A Practical Guide to Surface, Leasing and Curing Mineral Title in North Dakota.

Presented by Josh Cole, Co-Owner of Bakken Oil LLC, Lease Brokers

What is a Mineral Right? Mineral rights are a real property owner’s right

to produce and save the minerals, namely the oil, gas and other substances in and under a tract of land. Minerals are also defined by statute.

When this right is severed from the surface through a mineral reservation or sale of those rights separate from the surface, a split estate is created. In the early days of patents, most estates were not split and it took an act of the surface owner to create the split estate. The notable exception being grants from the government where the minerals were reserved, creating a split estate.

Mineral rights are “real property” and are typically

created by a reservation where a landowner sells a parcel of land and reserves all of the oil, gas, coal and other minerals in and under the land. Being real property, mineral rights are subject to state law where the property is physically located.

Mineral rights by common law are considered the dominant estate. This was to insure mineral development as minerals are essentially worthless

without the right of access to harvest and collect through the surface estate.

Supreme Court of North Dakota

A mineral estate is dominant over the surface estate, the mineral owner has the right to use the surface of the land to explore for and produce minerals 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:

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

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,

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 prevent 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.

Do you have any questions as to the mineral owners right to produce minerals?

Oil and Gas LeaseHow does the right to produce minerals get from the mineral owner to the oil company? This is accomplished through an oil and gas lease. In a typical lease you will the following language:

 WITNESSETH, That the Lessor, for and in consideration of Ten and more ($10.00+) DOLLARS cash in hand paid, the receipt of which is hereby acknowledged, and the covenants and agreements hereinafter contained, has granted, demised, leased and let, and by these presents does grant, demise, lease and let exclusively unto the said Lessee, the land hereinafter described, with the exclusive right for the purpose of mining, exploring by geophysical and other methods, and operating for and producing therefrom oil and all gas of whatsoever nature or kind, with rights of way and easements for laying pipe lines, and erection of structures thereon to produce, save and take care of said products, all that certain tract of land situated in the County of Williams, State of North Dakota described as follows, to-wit:

In Feland v. Placid Oil Co. ... Chief Justice Teigen,

speaking for the Court, stated:

"Under a usual oil and gas lease, the lessee, in developing the leased premises, is entitled to use of the land reasonably necessary in producing the oil ... Whether the express uses are set out or not, the mere granting of the lease creates and vests in the lessee the dominant estate in the surface of the land for the purposes of the lease; by implication it grants the lessee the use of the surface to the extent necessary to a full enjoyment of the grant. Without such use, the mineral estate obtained under the lease would be worthless..."

Feland v. Placid Oil Company, 171 N.W.2d 829 (N.D. 1969)

If the mineral estate is dominant and we have the right to be there, why do we need to give notice or pay damages at all?

State legislation has created laws to account for the compensation for various losses of the landowner and although they have a subservient estate, they still have a right to use and enjoy the surface that a mineral owner may now be occupying.

N.D.C.C. 38-11.1-01. Legislative Findings.

The legislative assembly finds the following:1. It is necessary to exercise the police power of

the state to protect the public welfare of North Dakota which is largely dependent on agriculture and to protect the economic wellbeing of individuals engaged in agricultural production.

2. Exploration for and development of oil and gas reserves in this state interferes with the use, agricultural or otherwise, of the surface of certain land.

3. Owners of the surface estate and other persons should be justly compensated for injury to their persons or property and interference with the use of their property occasioned by oil and gas development.

THE LAW

N.D.C.C. 38-11.1-04. Damage and disruption payments. The mineral developer shall pay the surface owner a sum of money equal to the amount of damages sustained by the surface owner and the surface owner's tenant, if any, for lost land value, lost use of and access to the surface owner's land, and lost value of improvements caused by drilling operations. The amount of damages may be determined by any formula mutually agreeable between the surface owner and the mineral developer. When determining damage and disruption payments, consideration must be given to the period of time during which the loss occurs and the surface owner must be compensated for harm caused by exploration only by a single sum payment. The payments contemplated by this section only cover land directly affected by drilling operations.

N.D.C.C. 38-11.1-08.1. Loss of production payments. The mineral developer shall pay the surface owner a sum of money equal to the amount of damages sustained by the surface owner and the surface owner's tenant, if any, for loss of agricultural production and income caused by oil and gas production and completion operations. The amount of damages may be determined by any formula mutually agreeable between the surface owner and the mineral developer. When determining damages for loss of production, consideration must be given to the period of time during which the loss occurs and the damages for loss of production must be paid annually unless the surface owner elects to receive a single lump sum payment. Payments under this section are intended to compensate the surface owner for loss of production.

What Are You Paying For?

1. Loss of Land Value - Once a site has been reclaimed we have not been able to find evidence of reduced land value. This can be partially attributed to the increase in expendable income in a booming region, and all land prices tend to rise over time, especially in “boom towns.”

2. Loss of Use of and Access to the Surface Owner's Land - This is traditionally what we have provided compensation for: the actual value of the land, i.e. the sale price for land. This idea is based on the thought that when you buy a piece of land, you are buying it for the use of and access to the land.

3. Loss of Value of Improvements - This would be compensation for things like grain bins, greenhouses, irrigation pivots, etc. We will typically avoid these scenarios in the first place and rarely need to compensate for them.

4. The mineral developer shall pay the surface owner a sum of money equal to the amount of damages sustained by the surface owner and the surface owner's tenant, if any, for loss of agricultural production and income caused by oil and gas production and completion operations.

This is a recent addition to the law and further expands on access to the land and requires payment for lost income. This is largely dependent on the crop and is an area of heated debate between companies and landowners. Landowners will typically try to attach other issues to the rental such as traffic, dust, long lines at the grocery store and other inconveniences associated with mineral development. A company will try to determine the net acre loss, that is what is the actual profit per acre of crop. Is. For example, if wheat is $12/bushel and yields a 30 bushel/acre crop, the company would like to subtract the cost of the seed, chemicals and other costs to get the actual compensation number. Likewise, a landowner would prefer to take the gross number (12*30 ) and not subtract any costs. You can see the wide array of potential solutions and compromises in calculating an annual rental. In our experience, it has been difficult to come up with a justifiable figure more than $200/acre as an annual payment.

It is in the best interest of the company to provide all the notice and input they can to work with a landowner. Many times the opportunity to be heard is more valuable to the landowner then the actual compensation. However, in the event that negotiations break down or time doesn’t allow for prolonged negotiations, the oil company in most cases still has the right to occupy the land and produce oil and gas while negotiations continue. In the worst case, where an agreement can not be made, the burden falls on the landowner to sue the oil company. The landowner has two years from when the damage is apparent in North Dakota. The landlord is also responsible for any losses by the tenant.

N.D.C.C. 38-11.1-07. Notification of injury.

Any person, to receive compensation, under sections 38-11.1-08 and 38-11.1-09, shall notify the mineral developer of the damages sustained by the person within two years after the injury occurs or would become apparent to a reasonable person.

Comprehending Oil And Gas Leases

Description of Leased Premises This contains the legal description and

county/state of the property. Often there is a "Mother Hubbard" clause in printed forms following the lease description ("This lease also covers any lands of lessor adjacent or contiguous to the above-described lands ….")

  Substances Covered by Lease Most printed form leases cover petroleum

and natural gas and related hydrocarbons produced in association with oil and gas. Some leases may include coalbed methane and other substances.

The Royalty Clause More forms are prohibiting or limiting deductions of

post-production and downstream costs, including transportation, dehydration, compression, treating and marketing costs. Have your title attorney review for any deduction language.

  Definition of "Operations" Look for what is necessary to constitute drilling

operations, and when drilling operations are considered complete. The definition of "operations" will maintain the lease in effect beyond the primary term absent actual production. This definition could be as broad as staking a well location or could require the actual drilling of the well.

United States Court of Appeals, Eighth Circuit

Drilling Operations May Not Require Drilling

“Various provisions of an oil and gas lease make it necessary to determine what constitutes the beginning or commencement of a well or of drilling or reworking operations․ The general rule is that actual drilling is unnecessary, but the location of well sites, hauling lumber on the premises, erection of derricks, providing a water supply, moving machinery on the premises and similar acts preliminary to the beginning of the process of drilling, when performed with the bona fide intention to proceed with diligence toward the completion of the well, constitute a commencement or beginning of a well or drilling operations within the meaning of the lease.”

ANDERSON v. HESS CORP. 649 F.3d 891 (2011)

Pooling, Unitization and Pugh Clauses Pooling grants the lessee the right to pool. Look for the

maximum size of pooled units or language authorizing any sized unit approved by governmental authority. More forms are striking the lessor’s consent to unitization. Voluntary units in North Dakota require consent from 60% of the mineral owners and 60% of the working interest owners. A "Pugh Clause" provides that production from a pooled unit will not hold that portion of the lease not included in the unit.

  Continuous Operations Clauses A continuous operations clause requires the lessee to

release portions of the leased premises not included within "production units" designated around producing wells, at some time after the end of the primary term. This clause provides the timeline necessary for the commencement of the next well in order to keep the lease in force as to all lands beyond the end of the primary term (typically 90 days to one year). Watch for automatic one-year extensions of lease for every well drilled to completion.

Depth Severance (Vertical Pugh Clause) Requires the lessee to release certain depths at the end

of the primary term. Pay attention to the specific language (100 feet below the deepest producing formation, the stratigraphic equivalent, wellbore rights only, etc.).

  Warranty of Title Check to see if the warranty clause has been struck or

modified to a special warranty. Note: striking the warranty clause may not absolve the mineral owner from having to pay back the bonus under an implied covenant of seizin.

Right of Refusal Look for language granting the lessee right of first refusal

or other preferential leasing rights, including extensions.

Top Lease A “Top Lease” is designed to be subordinate to the current

lease (“Bottom Lease”) and only activates when the bottom lease expires. Be wary of subsequently recorded leases not styled as a Top Lease as it is unclear if this lease is invalid or will be treated as a Top Lease if its primary term extends beyond the primary term of the first recorded lease. North Dakota is a Race-Notice state, meaning the first recorded lease is valid, but only if the lessee had no notice/knowledge of a pre-existing unrecorded lease.

See N.D.C.C. 47-19-41. Effect of not recording - Priority of first record - Constructive notice

Term Unless otherwise agreed to, a lease expires at midnight on

the final day (i.e. one year from January 1, 2010, the lease will expire at midnight at the end of day January 1, 2011)..

Supreme Court of North Dakota

How Important is Paying the Lease Bonus? Irish Oil & Gas, Inc. v. Riemer, 2011 ND 22, 794 N.W.2d 715 “We cannot conclude as a matter of law that the possibility of

future production and future royalties is so speculative as to provide no consideration supporting the existence of a fact issue on the question of failure of consideration. We note that, in the context of breach of an obligation to pay royalties, the legislature has provided: "The obligation arising under an oil and gas lease to pay oil or gas royalties to the mineral owner . . . is of the essence in the lease contract, and breach of the obligation may constitute grounds for the cancellation of the lease in cases where it is determined by the court that the equities of the case require cancellation." N.D.C.C. § 47-16-39.1. This public policy statement suggests that the possibility of future royalties is, or at least might be in a given case, an important component of the oil and gas lease.”

Practical Note: just pay the lease bonus.

Do you have any questions as to the components of an oil and gas lease?

Common Title Issues and Curative Statutory Reservations - The United States

of America and the State of North Dakota reserved certain mineral rights based on statutory reservations in effect at the time of the conveyance. (See North Dakota Mineral Title Standards for a comprehensive compilation). Example: the State reserved a 5% mineral interest from March 13, 1939 through February 20, 1941.  After February 20, 1941 the State typically reserved a 50% mineral interest (even though the deed may not specifically reference a mineral reservation).

Note: For North Dakota counties, the county may not reserve the minerals in conveyances made after July 1, 1951.

Title vs. Ownership - Upon death, you cease to own property rights, but the record title remains with the decedent. When an interest is not passed through a North Dakota probate or otherwise, you may decide to accept recorded Affidavits of Heirship, signed/attested by a disinterested party when accompanied by a death certificate and a foreign probate and Will, if available.

Note: Recording of these documents is imperative (notice), but there is no substitute to a probate, especially if the title is in dispute. A Will not probated within three years of the decedent’s death may not be recognized in a North Dakota probate.

N.D.C.C. §30.1-12.08  Probate, testacy and appointment proceedings ‑‑ Ultimate time limit.

No informal probate or appointment proceeding or formal testacy or appointment proceeding, other than a proceeding to probate a will previously probated at the testator's domicile and appointment proceedings relating to an estate in which there has been a prior appointment, may be commenced more than three years after the decedent's death, except 1) a previous proceeding was dismissed; 2) an absentee for whom a conservator was appointed; 3) some situations where a proceeding to contest the will is instituted; 4) certain actions may be brought to confirm title in estate assets or establish an instrument to direct or control the ownership of property. The three year limitation does not apply to proceedings to construe probated wills or determine heirs of an intestate. 

Duhig Rule - Courts generally deal with the problem of an overconveyance through a warranty deed by deducting the overconveyance from the grantor’s interest, to the extent possible. Example: Grantor and a third party each owned 1/2 mineral interest. Grantor conveyed the land to a Grantee reserving 1/2 of the minerals. Grantee gets 1/2 and the third party gets 1/2 leaving the grantor with nothing, because all he had was 1/2. To protect himself, the deed should have said reserving 1/2 of the minerals subject to the third party’s 1/2 mineral interest.

Note: the Grantee must not know of the third party’s interest so it’s a factual question whether or not they had notice of this outstanding interest. Quit Claim Deeds do not generally carry after acquired title.

After Acquired Title - If a Grantor conveys through a Warranty Deed what is mistakenly believed to be good title to land that he or she did not own, and the Grantor later acquires that title, it vests automatically in the Grantee.

Note: Courts consider fairness, so the Grantee must be harmed in order to invoke after acquired title. Simply acquiring a new mineral interest will not normally invoke after acquired title in a previous transaction. You should require a Stipulation of Interest among the affected parties.

Third Party Reservations - Spouses may not be strangers to title in North Dakota. Example: Joe Smith owns minerals. Joe Smith and Mary Smith, husband wife, convey an interest to Bill White, reserving a 50% mineral interest to Grantor(s). Joe and Mary Smith may now own an interest as tenants in common, even though Mary Smith was never an owner.

See Malloy v. Boetcher, 334 N.W.2d 8 (N.D. 1983) “…a reservation or exception can be effective to convey a

property interest to a third party who is a stranger to the deed or title of the property where that is determined to have been the grantor's intent.”

Statements of Claim - Statements of Claim, Affidavits of Heirship, Oil and Gas Leases, etc. do not vest title. A Notice of Succession by the surface owner for abandoned minerals is perfected by a quiet title action. Note: A judgment is effective against all parties, named or otherwise, even those with valid mineral claims.

Capacity to Sign - Always document/record missing Powers of Attorney, Letters Testamentary, Successor Trustees, Guardianships/Conservators, or anything else which might call into question the person’s authority to act on behalf of another. Note: As a minimal business risk, you may choose to rely on apparent authority (president, manager, trust officer).

Fractional vs. Stated Mineral Interests - Any internal discrepancy within a deed requires a note for a Stipulation of Interest, corrective deed or judicial determination. Note: Intent clauses may prevail, but this is not a settled matter of law in North Dakota, but in my opinion, it does evidence the intent of the parties. Example: Bob Smith conveys an undivided 5/250ths mineral interest in multiple tracts containing 252.00 gross acres with an intent to convey 5 net mineral acres. Did the parties intend to convey a 2% (5/250) mineral interest or a 1.9841% (5/252) mineral interest?

Severed Royalty Interests Acoma Oil Corporation v. Wilson and Universal Resources

Corp., 471 N.W.2d 476 (ND 1991) One thing that may raise a question in the formulas for net

royalty interests and cause confusion is the presence of severed royalty interests . For example, an interest leased at a 1/6 lease royalty will not receive that much if there are pre-existing carved out royalties. If there is an outstanding aggregate of 7.5% perpetual royalty interest, an owner of a 1/5 leased mineral interest will receive 1/5 x (1/6 - 7.5%). 

These perpetual royalty burdens sometimes come as a surprise to mineral owners and was one of the main reasons for the Abandoned Minerals Acts. It is further complicated by the North Dakota Supreme Court decision referenced above which holds that fractional mineral interests are free of such royalty burdens if the grantor of the interest owned enough to grant the purported mineral interest with a royalty burden.  Note: this means that the royalty burden can "pile up" on the last of the mineral interests to be conveyed out.

Rivers, Lakes, Water Issues“North Dakota Shale-Oil Boom

Rushes Past Riverbank Dwellers”http://www.bloomberg.com/news/2012-03-15/north-dakota-shale-oil-boom-rushes-past-riverbank-dwellers.html

There are ongoing disputes regarding competing claims for minerals underlying the riverbed and lots adjoining bodies of water.

Make sure you have a competent surveyor and title attorney aware of river boundary issues and how shifts in the river could affect the mineral ownership.

Consider placing disputed royalties with the Court and interpleading the funds, forcing the parties to acknowledge the dispute and have them petition the Court for relief.

Don’t be Afraid to Suspend a Mineral or Royalty Owner as Recommended by your Title Attorney What is the risk of title failure?1) Not being able to collect on a bad payment,2) Undisclosed or unknown title issues,3) Paying the wrong party, or paying the wrong

amount.

You have a title opinion and you should manage the requirements. Title curative helps the oil company and it helps the owner, but ultimately, the owner’spayment is conditioned upon the status of their title,and it is their responsibility to cure when you put

them onnotice of title defects.

Do you have any questions as to title curative or title issues?