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Specialty Law Columns
Natural Resource and Environmental Notes
Tension Beneath the Surface: The Evolving Relationship Between Surface and Mineral Estates
by Rob Witwer
Perhaps as much as any other issue, the proliferation of residential and commercial development—in a word, growth—has emerged as one of the most challenging public policy problems in Colorado.1 However, as elected officials consider how best to manage growth above ground, Colorado faces equally intense subsurface "growth" in the form of natural gas drilling.
Historically, oil and gas operations took place in rural parts of Colorado where they went largely unnoticed by the general public. Times are changing. As agricultural land is converted into subdivisions and thirty-five-acre "ranchettes," the effects of drilling on landowners and the environment are being felt more acutely.2 This is especially true where gas well density has increased as a result of infill drilling (otherwise known as "downspacing"). For example, La Plata County has experienced a simultaneous boom in both residential growth and coalbed methane development.3
As growth increases both above and below the surface, so do conflicts between landowners and those with rights to develop underground oil and gas reserves.4 This article discusses legal matters implicated in surface/mineral conflicts, including recently enacted rules requiring notification to surface and mineral owners. It concludes with a brief discussion of current issues about the relationship between surface and mineral estates, and how recent developments in other states may point to future changes in Colorado law.
Mineral Severance and
The "Dominance"
of The Mineral Estate
To appreciate the problems inherent in surface/mineral conflicts, it is helpful to understand how two or more parties can own valuable property rights with respect to the same piece of land. When one parcel is "severed" into separate estates, two distinct bundles of rights are created: the mineral estate (held by the "mineral owner") and the surface estate (held by the "surface owner"). The rights of each owner exist in relation to, and are limited by, the rights of the other. However, under common law, the line demarcating this relationship is often unclear, and parties sometimes disagree about whether certain activities cross that line. This is why severance (defined as the "separation of a mineral or royalty interest from other interests in the land by grant or reservation")5 is at the heart of most surface/mineral conflicts in Colorado.6
The concept of severance is intertwined with the history of the mineral-rich western United States. In the early twentieth century, the federal government reserved mineral rights from many of the land patents granted to western homesteaders, farmers, and ranchers under the federal surface entry acts.7 Grantees held patents in fee title, with one important exception: the right to access the surface to prospect for, mine, and remove minerals remained in the hands of the federal government and its transferees.8
In similar fashion, over the years, private property owners have separated mineral interests from the surface either by granting or reserving mineral or royalty deeds, either fractionally9 or as a whole.10 While a discussion of the art of drafting mineral grants and reservations is beyond the scope of this article, practitioners should note that it is difficult and should be undertaken with the greatest of care.11
Regardless of how severance occurred, common law generally regards the mineral estate as the "dominant estate" and the surface estate as the "servient estate." In legal terms, the dominant estate is "the estate to which a servitude or easement is due, or for the benefit of which it exists, or to the parcel of land benefited by an easement or a servient estate," and the servient estate is "the estate burdened with a servitude or easement, or the parcel of land burdened by an easement for the benefit of another parcel."12 In practical terms, the mineral owner (or lessee) has a right to access the surface and "use that portion of the surface estate that is reasonably necessary to develop the severed mineral interest."13
This "right of reasonable use" has traditionally given the mineral owner wide latitude to use the surface to extract minerals.14 While it does not include the right to destroy, interfere with, or damage the surface owner’s correlative rights to the surface,15 absent unreasonable use, statutory provisions, or a suit brought in tort for negligence, no payment is due to the surface owner for damages caused by drilling operations.16
Gerrity Oil & Gas Corp. v.
Magness and the
"Accommodation Doctrine"
Because reasonable use is usually determined on a case-by-case basis, its specific meaning has proven somewhat elusive over the years. However, in 1997, the Colorado Supreme Court revisited the rule of reasonable use and clarified its scope in Gerrity Oil & Gas Corp. v. Magness.17 Gerrity involved several issues, but the most significant of these was a landowner’s claim that an oil and gas operator’s "excessive surface use" amounted to trespass.18
At common law, a mineral owner’s implied easement to access the surface ends, and trespass begins, when the mineral owner’s activities are no longer deemed reasonable or necessary to develop the mineral interest.19 However, the practical question remains: What is reasonable? On this point, the Court offered the following guidance:
The broad principle by which [tensions between competing surface uses] are to be resolved is that each owner must have due regard for the rights of the other in making use of the estate in question. This "due regard" concept requires mineral rights holders to accommodate surface owners to the fullest extent possible consistent with their right to develop the mineral estate. How much accommodation is necessary will, of course, vary depending on surface uses and on the alternatives available to the mineral rights holder for exploitation of the underlying mineral estate. However, when the operations of a lessee or other holder of mineral rights would preclude or impair uses by the surface owner, and when reasonable alternatives are available to the lessee, the doctrine of reasonable surface use requires the lessee to adopt an alternative means.20
"As growth increases both above and below the surface, so do conflicts between landowners and those with rights to develop oil and gas reserves."
Although Gerrity remains largely untested in lower Colorado courts, it stands as an important milestone in the evolving relationship between surface and mineral estates. By including the concept of "accommodation" in its analysis or reasonable use, the Court took a significant step toward clarifying, and limiting, the mineral owner’s right of access.21
New Rules Requiring
Notice To Surface Owners
The problem of surface/mineral conflicts is exacerbated by the fact that many surface owners are effectively unaware that severance has indeed occurred on their property, and that others have rights to access and use the surface. While all Colorado property buyers are on constructive notice that severance is a possibility, some surface owners (especially newcomers to Colorado who are unfamiliar with the concept of severed estates) express surprise when they discover that a previously unknown party has the right to enter their property and build roads, wells, structures, and flow lines across the surface—all without having to ask permission or pay compensation.
In recent years, the state has taken two steps to ensure that property buyers receive better notice of mineral rights beneath their land. In 1999, the Colorado Real Estate Commission approved language to its form "Residential Contract to Buy and Sell Real Estate" warning the buyer that the surface estate may be owned separately from the underlying mineral estate and that the mineral owner may have the right to enter and use the property to develop such minerals.22 The second step was House Bill 1088 ("Notification Act"), signed by Governor Owens in April 2001.23 The Notification Act24 was designed to minimize conflicts by facilitating the flow of information to surface and mineral owners.
The Notification Act requires title insurance companies, as part of each title commitment, to provide property buyers with written notice that the mineral estate has been severed from the surface estate (if it is indeed determined that such severance has occurred).25 Such notice shall warn of a "substantial likelihood" that a third party holds some or all mineral interests in the property and that such rights may allow the mineral owner to enter and use the property without the surface owner’s permission.26 This language is stronger than typical language currently provided to property buyers, which is often hypothetical or stated in the negative (that is, language to the effect that, should mineral rights exist on the parcel, claims based on such rights are beyond the scope of the policy). Counsel should be aware that the Notification Act places certain limitations on the obligations of title insurance companies.27
New Rules Requiring
Notification to
Mineral Owners
Mineral owners often complain that the pace of surface development is so rapid that they do not have an opportunity to participate in the planning process and share information about mineral rights and how best to avoid surface/mineral conflicts. The Notification Act facilitates the exchange of such information by requiring surface developers to examine county records, identify mineral owners (if any), and notify such mineral owners of impending surface development (including preliminary or final plats, planned unit developments, or any other similar land use designation).28 If a surface developer searches county records but does not locate any mineral owners, it shall be deemed to have acted in good faith under the statute.29 If mineral owners are discovered, however, surface developers must provide notice of their application for surface development not less than thirty days prior to an initial public hearing by a local government.30
The Problem of Unrecorded
Mineral Interests
Because mineral interests are sometimes difficult to locate, counsel should be aware that the Notification Act places significant burdens on title insurance companies and surface developers. At the time it was introduced in the General Assembly, the Notification Act was tied to a Mineral Dormancy Act, which passed the House of Representatives but was killed in the Senate.31 Under the Mineral Dormancy Act, mineral owners who failed to either record, use, or pay taxes on their property for twenty consecutive years would risk having their ownership rights revert to the surface estate.
Over time, this would have encouraged mineral owners to record ownership information in the offices of county clerks, where it would be available for search by title insurance companies and surface developers. With the failure of the Mineral Dormancy Act, however, unrecorded mineral interests will continue to be a problem for any party wishing to learn more about subsurface ownership, including surface owners, title insurance companies, and surface developers.
Conclusion
Despite such measures as the Notification Act, the intensity of Colorado’s growth —both above and below the surface—will continue to test the relationship between surface and mineral estates. During the five-year period from 1995 through 1999, the state approved an annual average of 1,035 drilling permits. In 2000, that number increased to 1,529. During the first eight months of 2001 alone, 1,661 permits were approved. If the 2001 figures are annualized, the state can expect to approve 2,495 permits this year—the highest number ever.32 As new wells are drilled in this increasingly populous state, conflicts between surface and mineral owners are inevitable. And inevitably, such conflicts will lead to one question: Which party should bear the costs of damages caused by drilling?
There is no easy answer to this question. Mineral owners argue that the market price of surface property was discounted at the time of severance to reflect the mineral owner’s rights of access and so, in this sense, surface owners have already been "paid" for drilling damages. Regardless of how many times land changes hands, surface owners are at least on constructive notice—and probably on actual notice—that mineral development may occur. In fact, they paid a lower price for their property because of that possibility. Therefore, any change in the law requiring a mineral owner to compensate a surface owner for the costs of drilling damages would augment the value of the surface estate at the expense of the mineral estate and would result in an uncompensated taking of private property.
In response to this argument, surface owners point out that when most severances occurred, the intensity of oil and gas drilling in Colorado (especially with respect to well spacing) was several orders of magnitude less than it is now.33 In the early part of the twentieth century, the extent of "access" needed for modern-day development was unforeseeable and probably not anticipated by either surface or mineral owners.34
Moreover, with the passage of time, surface properties have been "bought, sold, mortgaged, taxed, and speculated upon based upon the maximum surface productibility, and any discount resulting from the mineral severance which occurred years ago has been forgotten."35 These facts, combined with the inadequacy of public knowledge about mineral severance (discussed above), suggest that many modern surface owners have never factored a "severance discount" into their land purchases.36 From this perspective, the mineral owner’s right to damage the surface without paying compensation to the surface estate also results in a taking of private property.
For the time being, the age-old argument between surface and mineral owners over how to allocate the costs of drilling remains unsettled. However, as surface property becomes more valuable for commercial, residential, agricultural, and conservation uses, lawmakers will be under increasing pressure to balance the need for oil and gas production on the one hand with a public desire to minimize environmental impacts and surface damages on the other. On two occasions, the General Assembly has come close to passing a "surface damage act," which would, in the absence of a private agreement between the parties, require operators to compensate landowners for actual damages caused by drilling.37 This type of measure is consistent with recently enacted laws in other states (including resource intensive states such as Oklahoma) requiring mineral owners to internalize the costs of surface damages on severed land.38
Counsel for surface and mineral owners alike should be aware that the time may be approaching when Colorado lawmakers act on legislation recognizing that "the surface of the land constitutes a [no] less vital resource to the [state] than does the mineral wealth which underlies it."39 In the meantime, the best policy for all parties may be to work cooperatively and ensure that productive use of the land, whether above or below the surface, takes place with a minimum of environmental damage, surface impacts, or conflict.40
NOTES
1. Colorado’s population increased by one-third—more than one million people—between 1990 and 2000. See Greene and Soraghan, "Swelling State Gets 7th Seat; Census Counts 4.3 Million Coloradans," The Denver Post (12/29/2000) at 1A.
2. See generally Greene, "Coal-bed Methane Fueling Dispute," The Denver Post (Sept. 9, 2001) at 1A (on the Web at: http://www.denver post.com/Stories/0,1002,53%257E140385,00. html).
3. See generally archived articles on oil and gas development on the Durango Herald website: http://durangoherald.webdurango.com/
index_ ilgas.asp.
4. See generally Arrelano, "Drilling on Others’ Lands Fuels Debate; Mineral Rights a Hot Issue," The Denver Post (6/24/2000) at 1K.
5. Meyers and Williams, Manual of Oil and Gas Terms, 9th ed. (New York, NY: Matthew Bender, 1994) at 1013.
6. Thirty-five percent of Colorado land is "severed." See Kohler, "Oil, Gas Drilling Spurs Backyard Boom," Denver Rocky Mtn. News (8/16/2001) at 4A (on the Web at: http://www. insidedenver.com/drmn/state/article/0,1299, DRMN_21_802614,00.html).
7. See, e.g., 30 U.S.C. § 81 (Coal Lands Act of 1909); 30 U.S.C. §§ 121 and 122 (Agricultural Entry Act of 1914); and 43 U.S.C. § 299 (Stock Raising Homestead Act of 1916).
8. Id.
9. See generally Dufford, "Conveyancing Oil and Gas Interests," in Colorado Methods of Practice, 4th ed., Krendl, ed., Pt. II, Ch. 10 at § 10 (St. Paul, MN: West Pub. Co., 1997).
10. See Mitchell v. Espinosa, 243 P.2d 412 (Colo. 1952).
11. See generally Barber in Colorado Methods of Practice, supra, note 9 at § 10.1.
12. Meyers and Williams, supra, note 5 at 302 and 1011. See also Kinney-Coastal Oil Co. v. Kieffer, 277 U.S. 488, 504 (1928) (the fact that mineral estate is servient to surface estate is "naturally suggested by their physical relation and relative values").
13. Notch Mountain Corp. v. Elliott, 898 P.2d 550, 556 (Colo. 1995). See also Rocky Mtn. Fuel Co. v. Heflin, 366 P.2d 577, 580 (Colo. 1961) (severed mineral owner’s right of access includes the "rights of ingress and egress, exploration, and surface usage as are reasonably necessary to the successful exploitation of [the mineral] interest").
14. See generally id. See also Smith v. Moore, 474 P.2d 794 (Colo. 1970); Frankfort Oil Co. v. Abrams, 413 P.2d 190 (Colo. 1966); and Barker v. Mintz, 215 P. 534 (Colo. 1923).
15. Gerrity Oil & Gas Corp. v. Magness, 946 P.2d 913, 926 (Colo. 1997).
16. Frankfort, supra, note 14 at 195.
17. Gerrity, supra, note 15. For a detailed discussion of Gerrity, see Johnson, "Gerrity Oil & Gas Corp. v. Magness: Colorado’s Furtive Shift Toward Accommodation in the Surface-Use Debate," 33 Tulsa L.J. 943-957 (1998).
18. Gerrity, supra, note 15 at 921.
19. See id. at 927.
20. Id., citing, Grynberg v. City of Northglenn, 739 P.2d 230, 234 (Colo. 1987) and Getty Oil Co. v. Jones, 470 S.W.2d 618, 622 (Tex. 1971).
21. However, it is important to note that Gerrity does not expressly abrogate or reverse the dominance of the mineral estate, supra, note 15. But see Gerrity, supra, note 15 at n.8 ("Although we have referred to the mineral estate as the dominant estate and the surface estate as the servient estate, our cases have consistently emphasized that both estates must exercise their rights in a manner consistent with the other. Hence, in a practical sense, both estates are mutually dominant and mutually servient because each is burdened with the rights of the other.").
22. See § 8(f) of the Colorado Real Estate Commission’s approved form, "Residential Contract to Buy and Sell Real Estate," which can be found at http://www.dora.state.co.us/Real- Estate/contrcts/contrcts.htm.
24. Proposed by Greg Walcher, Executive Director of the Colorado Department of Natural Resources, and sponsored in the legislature by Rep. Gregg Rippy (R-Glenwood Springs) and Sen. Jim Dyer (D-Durango).
25. CRS § 10-11-123(d)(2)(a).
26. CRS § 10-11-123(d)(2)(a) and (b).
27. CRS § 10-11-123(d)(3) (title insurance companies may rely on, and are not liable for errors or omissions in, recorded county documents); CRS § 10-11-123(d)(4) (title insurance companies may rely on documents purporting to sever mineral interests to act as notice for such severance); CRS § 10-11-123(d)(5) (title insurance company shall be deemed to be in compliance with section when relying on documents purporting to sever mineral interests) and (liability is limited to the amount stated in the title insurance policy).
28. CRS § 24-65.5-103(1).
29. CRS § 24-65.5-103(2)(a)(III)(b). Also, the surface developer will not be liable for any errors or omissions in such county records. Id.
30. CRS § 24-65.5-103(1).
31. HB-1068, sponsored by Rep. Shawn Mitchell (R-Broomfield) and Sen. Jim Dyer (D-Durango).
32. Statistics courtesy of Richard Griebling, Director of Colorado Oil and Gas Conservation Commission, interviewed in Denver, CO, Sept. 14, 2001. For more information about state permitting activities, see the Colorado Oil & Gas Conservation Commission website at http://oil- gas.state.co.us.
33. For example, in 2000, one operator submitted an application to drill near Rifle, Colorado, at a density of one natural gas well per twenty acres. Ten-acre density in the future is not inconceivable. See Stein, "County to Police Drilling Project; State Regulators Place Restrictions on Well Field in Picturesque Valley," The Denver Post (11/1/2000) at 6B. See also Clarren, "Colliding Forces, Has Colorado’s Oil and Gas Industry Met Its Match?" High Country News (9/25/2000) at 1; on the Web at: http:// www.hcn.org/servlets/hcn.Article?article_id= 6046.
34 . See Welborn, "New Rights of Surface Owners: Changes in the Dominant/Servient Relationship Between the Mineral and Surface Estates," 40 Rocky Mt. Min. L.Inst. 22-1, 22-38 (1994) ("It is one thing to imply a right of access and reasonable use for one or two oil and gas wells on a 320-acre farm, say, in 1992. It is quite another to imply such a right in 1994 for eight more wells on the same farm as a result of changes in technology and markets.").
35. Id. at 22-38 and 22-39.
36. See id. at 22-39.
37. Senate Bill 230 (1993) and House Bill 1062 (2001). For a detailed discussion of the 2001 legislation, see Proctor, "Property Owners Poised to Profit," The Denver Business J. (11/17-23/2000) at 1A.
38. See 765 Ill.Comp. Stat. §§ 530/1 et seq. (Illinois); Ky. Rev. Stat. Ann. § 353.595 (Kentucky); Mont. Code Ann. §§ 82-10-501 et seq. (Montana); N.D. Cent. Code §§ 38-11.1-01 et seq. (North Dakota); Okla. Stat. Tit. 52, §§ 318.2 et seq. (Oklahoma); S.D. Codified Laws §§ 45-5A-1 et seq. (South Dakota); Tenn. Code Ann. §§ 60-1-601 et seq. (Tennessee); and W. Va. Code §§ 22-7-1 et seq. (West Virginia).
39. Davis Oil Co. v. Cloud, 766 P.2d 1347, 1351 (Okla. 1986) (upholding constitutionality of Oklahoma surface damage statute).
40. For example, through the development and improvement of technologies such as directional drilling, operators are already finding ways to drill multiple oil and gas wells from single surface locations, substantially limiting surface impacts in the process.