CHAPTER 16 DEALING WITH UNLEASED OR UNKNOWN OWNERS
| Jurisdiction | United States |
DEALING WITH UNLEASED OR UNKNOWN OWNERS
Elias, Books, Brown & Nelson
Oklahoma City, OK
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TIMOTHY C. DOWD is an attorney with Elias, Books, Brown & Nelson, P.C., in Oklahoma City, Oklahoma. Mr. Dowd is a past President of the Oklahoma City Mineral Lawyers Society (1996-97); and is past Chairperson of the Oklahoma Bar Association Mineral Law Section (2005-06). Mr. Dowd is the author of the Oklahoma chapter of AAPL's Nationwide Comparison of Laws on Leasing, Exploration and Production (2011) and the chapter on Oil and Gas Titles in West Publishing Company's Oklahoma Real Estate Forms and Practice. Mr. Dowd has written numerous articles for publication including:
Trespass in the Age of Horizontal Drilling Under State Conservation Statutes, 63 Rocky Mt. Min. L. Inst. 6A-1 (2017);
Current and Emerging Issues in Oil and Gas, Title Examination, Oil & Gas 2 Nat. Resources & Energy J. 505 (2017);
Clearing Title of Long-Lost Mineral Owners, 54 Rocky Mt. Min. L. Inst. 30-1 (2008); and
Preferential Rights to Purchase in Oil and Gas Transactions, 49 Rocky Mt. Min. L. Inst. 5-1 (2003).
Mr. Dowd's primary area of practice is oil and gas law, including the rendering of title opinions and the drafting and negotiation of industry contracts.
1. Introduction
2. Tenants in Common
3. Dormant or Abandoned Mineral Acts
[a] Nature of Acts
[b] Constitutional Validity
[c] Typical Acts
[i] North Dakota
[ii] South Dakota
[iii] Washington
[iv] Kansas
[v] Oregon
[vi] California
[vii] Michigan
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4. Receivership and Trust Statutes
[a] Invoking the Statutes
[b] Advantages and Disadvantages
5. Compulsory or Statutory Pooling Statutes
[a] Nature of Statutory Pooling Statutes
[b] Typical Requirements and Procedures for pooling
[i] Statutory Requirements
[ii] Notice Procedures and Opportunity for Hearing
[iii] Can a Mineral Owner Opposed to Development Stop Pooing from Occurring?
[c] The Three Approaches to Carrying Costs Associated With Unleased Owner
[i] Risk Penalty Approach
[ii] Free Ride States
[iii] Surrender of Leasehold Interest Approach
[iv] Statutory Protection for Mineral Owners
[v] Cost Limitations and Access to Production Information
6. Partition, Quiet Title; and Adverse Possession
[a] Partition
[b] Quiet Title
[i] Statutory Relief
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[ii] Void Judgments
[c] Adverse Possession
7. Conclusion
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1. Introduction
At times, there are companies who cannot lease a mineral owner for various reasons. The mineral owner may have an unrealistic viewpoint to lease terms and values. Further, fractionalization of severed mineral estates often results in many mineral owners whose whereabouts are unknown. Further, compounding this problem is that, frequently, these interests are very small. This paper explores what can be done to clear title to such interests.
The paper includes, but is not limited to, (i) operating under cotenancy laws, (ii) dormant minerals statutes, which allow surface owners to reclaim mineral interests, if the mineral owner does not actively pursue the minerals within a certain period of time, (iii) trust and receivership statutes, which allow either an individual or a court to act as a trustee or receiver for mineral owners that cannot be located, (iv) compulsory or force pooling proceedings, and (v) other court proceedings.
2. Tenants in Common
One option available to the operator is just carrying the unleased and unlocatable mineral owner.
Cotenancy in property arises when two or more persons become owners of property in such a manner that they have an undivided right of possession. The only element essential to a cotenancy is the right of simultaneous possession.1
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The earliest questions that arose in applying the laws of cotenancy to oil and gas matters dealt with the issue of whether a cotenant or his lessee, could produce oil or gas without the consent of the other cotenants. The courts established that owners of undivided mineral interests are tenants in common, and that a lessee of a cotenant stands in the shoes of the lessor, becoming a cotenant with the lessor's cotenants.2
The courts are divided as to whether a cotenant may drill, produce and market oil and gas from a commonly owned tract. A majority of the states have ruled that each cotenant has the undivided right to drill for and produce oil and gas without the consent of the cotenants. The majority rule has been adopted in Alabama, Arkansas, California, Florida, Georgia, Kansas, Kentucky, Missouri, Mississippi, Montana, North Dakota, Oklahoma, Pennsylvania, Texas and Wyoming.3
At least one state has held that a cotenant does not have the right to produce oil and gas without the consent of all his cotenants.4 The West Virginia case of Law v. Heck Oil Co., articulated the position that to allow the drilling cotenant to develop the land without the cotenant's consent is to compel the noncconsenting owner to exchange or convert his real
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property into personal property.5
However, in 2018, West Virginia passed the Cotenancy Modernization and Majority Protection Act which allows drilling or a well with the consent of leasing of at least 75% of the royalty owners.6
The states adhering to the majority rule have concluded that a producing cotenant is obligated to account to the nonproducing cotenant for his share of the market value of the oil and gas produced, less the expense of developing, producing and marketing the product.7 The costs that the producing cotenant is allowed credit for in the accounting have not been extensively discussed. The cases generally recite that the producing cotenant may recover his costs of drilling, developing and producing the oil and gas before accounting to the nonproducing cotenant, but do not elaborate as to the specifics.8
The nonconsenting cotenant is essentially "carried" in the well and is not obligated to pay for his share of any dry hole.9 In the event of production, in essence, the nonconsenting owner possesses a "back-in after payout." Because the operator is bearing all the costs, this is not the most attractive option to the operator.
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3. Dormant or Abandoned Mineral Acts
[a] Nature of Acts
When, after diligent inquiry, no information can be found regarding the location of a mineral owner, or whether he is living or deceased, and if deceased, whether or not he left any successors, contacting the rightful, present owner to explore and produce minerals can be nearly impossible.
Because of the burdens of having severed mineral interests, many states have attempted to remedy some of the by enacting statutes that attempt to reunite the dormant mineral estate with the surface estate. States term these statutes "abandoned mineral" or "dormant mineral" acts. These statutes provide a mechanism for ownership of severed mineral interests to pass to the surface owner, by law, because of "non-use" by the mineral owner.10 As a result, the ownership of the severed mineral interest is deemed by operation of law to vest in the surface owner or the state.
Dormant mineral statutes act to overrule the common law doctrine that mineral interests cannot be abandoned.11 The professed goal is to promote the development of mineral interests.12
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[b] Constitutional Validity
In Texaco v. Short,13 the United States Supreme Court upheld the Indiana Dormant Mineral Interests Act14 against a constitutional challenge to due process, which alleged the taking of private property without just compensation. The Court found (1) the state could enact legislation causing the retention of a property right to be contingent upon the performance of an act within a specified period of time, and (2) that failure to exercise some right of ownership over property for a specified period of time amounts to abandonment as a matter of law.15 The Court found the Indiana Dormant Mineral Interests Act is rationally related to legitimate state goals.16 The requirement that a personal owner must file a public statement of claim facilitates the identification and location of mineral owners, from whom developers may acquire operating rights from whom the county may collect taxes.17 The court held that Indiana had the power to condition the ownership of property on compliance with conditions that impose a slight burden on the owner with clear benefits to the state.18
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The Court further held that the mineral interest was not taken without just compensation, because the interest was "abandoned" and, therefore, the mineral owners could no longer claim an interest that could be subject to being taken.19 Further, the Court held, that prior notice to severed mineral owners on the impending lapse of their interests was not constitutionally required.20 The Court suggested, however, that a quiet title judgment might be required in order to be absolutely certain that the mineral interest has passed to the surface owner.21
[c] Typical Acts
Like Indiana, a number of states have enacted "dormant mineral" acts to aid in quieting title of old unlocatable mineral interests, and to aid in facilitating development by simplifying the identification of current mineral owners. The 1986 Uniform Dormant Mineral Interests Act (UDMI) contains most of the concepts embodied in different states, although it has only been adopted in Connecticut.22 The UDMI's overall policy is to enable and encourage marketability of real property and to mitigate the adverse effect of dormant mineral interests.23 It allows the
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surface owner to maintain an action to terminate a dormant mineral interest if such interest is unused for 20 years or more immediately preceding commencement of the action and has not been preserved, meaning filing a notice of intent to preserve the interest.24
Among the remaining states, there are generally two groups of statutes...
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