CHAPTER 3 SURFACE DAMAGE AGREEMENTS

• Jurisdiction: United States

Land and Permitting II
(Jan 1996)
CHAPTER 3
SURFACE DAMAGE AGREEMENTS
Jeffrey R. Fiske
Pendleton, Friedberg, Wilson, Hennessey & Meyer, P.C.
Denver, Colorado

SURFACE DAMAGE AGREEMENTS

I. BACKGROUND

It was not too many years ago that issues of surface usage and the settling of surface damage claims were considerably down the landman's list of priorities in preparing for the drilling of a well. Although there has been a significant amount of litigation over the years relating to surface damages, historically, the settling of those claims was a post-drilling "clean-up" matter which could be deferred until nearly everything else had been completed. Surface related issues may have been talked about during lease negotiations if the lessor also owned the surface estate, but it was likely to be well after issues such as bonus money, royalty percentage and even pooling considerations had been addressed. And, in those circumstances where the lessor did not own the surface, it would not be unusual for there to be no discussion at all of road or tank battery location, crop damage, pit reclamation or other surface issues. This circumstance was due, in large part, to the universally recognized and near-inviolate rule recognizing the dominance of the mineral estate over the surface estate. It was also a reflection of the disparity, in most cases, between surface land values and the potential value of a productive mineral estate.

Of course, there have been exceptions to this relative inattentiveness to surface use issues. In the author's experience, California has always stood out among the oil and gas producing states as one where the value and importance of surface uses and activities has resulted in greater attention being paid to the impact of oil and gas operations on those uses and activities. Most California lease forms include fairly extensive provisions regarding accommodation of surface uses. The value of such things as wine grapes, almond trees, citrus groves, as well as rapid expansion of urban development put California at the early forefront of the efforts to accommodate both surface and mineral development. The tension between these competing uses of land was something which, until relatively recently, states in the Rockies, the Permian Basin, Williston and other producing areas just did not experience with any significant impact or urgency. Not only because of the dominant/servient relationship between the mineral and surface estates, but also because surface land values outside of Gillette, Wyoming and Havre, Montana did not approach those of the Los Angeles Basin or Central Valley of California. The economics and the politics of these competing interests in most of the producing states weighed so heavily in favor of mineral development that there were seldom any noteworthy efforts to affect the balance. That began to change, however, in the late 1970's as the dominance of the mineral estate came under siege in the courts and was upended in the state houses and negotiated agreements addressing these conflicts are now commonplace in every jurisdiction.

II. LEGAL FRAMEWORK

.A. Reasonable Use

In order to make the best use of surface damage agreements and gain an understanding of their limitations, it is necessary to review the framework in which they have developed and the legal context in which they are to be interpreted. The nearly-universal statement

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describing the relative rights of the surface owner or tenant and the mineral developer holds that an oil and gas lease gives the lessee a right to possess and use the surface of the leasehold to the extent reasonably necessary to enable the lessee to fulfill the purposes and perform the obligations imposed on him by the lease.¹ The widely accepted corollary is that the oil and gas lessee has the dominant estate, and the lessor the servient estate, in so much of the leased premises as is necessary to carry on the oil and gas operations provided for in the lease.²

The underpinnings of these rules are found both in the law of real property and in contract law. The real property law foundation is that the grant of an estate in the oil, gas and minerals must necessarily carry with it the right of ingress, egress and reasonable surface use, lest the grant be rendered wholly worthless by a surface owner who denies access.³ It is a right which is implied in law, even where not expressly stated or reserved. The justification in contract law is much the same in that an oil and gas lease is said to carry with it certain implications, including such rights to the surface as may be necessarily incident to the performance of the objects of the contract. The right to enter and make reasonable use of the surface is the only result the parties could have contemplated at the time the oil and gas lease was entered into and the law will infer such terms as may be necessary to carry out the purposes of the contract.

.B. Compensable Damages

One of the important aspects of the rule permitting reasonable surface use is that it is the yardstick for measuring the liability of an oil and gas owner or the lessee to a surface owner with respect to damages caused by drilling and producing operations. Since the lessee has the right to go upon and use the surface to the extent reasonably necessary for the exploration and extraction of the minerals, he cannot be found liable for an unavoidable loss to the surface owner so long as he was lawfully exercising his own rights. Consequently, unless there are express restrictions on surface use in the lease agreement, the lessee will not be found liable for damage to the soil, trees, crops or even livestock. So long as his operations

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are reasonable and incidental to the exploration and development of the leasehold, such damage is considered to be damnum absque injuria ⁴ and no recovery can be had. There is a recognition that when a lessor makes an oil and gas lease, or a fee owner segregates his mineral and surface estates, he contemplates that some surface damage will occur as a result of mineral or oil and gas operations, and, thus, in order to recover damages, he must show injuries which exceed those contemplated by the lease utilizing either a negligence theory or one based on an unreasonable use of the surface. Moreover, the law presumes that every surface owner took title either with actual or constructive knowledge of a prior severance of the mineral estate and, therefore, knowledge that his estate is encumbered by the rights of the mineral owner such that he will not be permitted to complain of damage, imposition or inconvenience as a result of normal and reasonable operations in connection with the exploration and/or development of the mineral estate.

Where surface owners have sought redress for damages to the land caused by mineral operations, it has generally taken the form of a negligence action. Some cases have considered whether it makes any difference if the harm was intentionally or unintentionally caused. Cases addressing this issue have generally found the intent to be immaterial if the harm was occasioned by operations which were reasonable in extent and incidental to the production of oil and gas.⁵ In order to determine whether an oil and gas lessee or operator is liable for surface damages, two inquiries are usually all that is required. The first is whether the lessee's right or privilege of surface use was exercised in a negligent manner. The second is whether the lessee used more of the surface than was reasonably necessary to fulfill his obligation for the purposes of the lease. If the answer to these two inquiries is negative, it is unlikely that there would be a ruling in favor of the surface owner. Again, this presumes the absence of other limitations or provisions in the applicable lease that expressly require payment for specified damages as well as the absence of any regulatory or statutory violation.

In the absence of any negligent or unreasonable use of the surface, liability may still be found in the violation of an express term of the lease. The most common lease provisions, having made their way into nearly all "Producer's 88" forms, require lessee to pay for damages to growing crops and to remain a certain distance from existing structures. Expansions of these basic requirements include repairing and/or replacing fences, gates, culverts and other structures, express limits on the amount of surface acreage utilized in connection with drilling operations and specific dollar amounts or formulae for calculating

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damages.⁶ These sorts of provisions, incorporated into the lease agreement, are the functional equivalent of a separate surface damage agreement which is entered into with a surface owner who owns none of the mineral estate.⁷

.C. Measure Of Damages

Assuming that a lessee has agreed to pay certain damages under the lease agreement, or is found to be liable for such in a negligence action; what then is the measure of those damages? The courts have enunciated a variety of methods, but the most common measure of damages for permanent injury to the surface of the land is the difference between the fair market value of the land immediately before the harm and the fair market value of that same land after the damage has been incurred. Temporary damages to the land have been measured by a number of means including the difference in the rental value of the land before and after the injury as well as the rental value of the land during the period of time the property was rendered unusable. A third method of calculating damages for temporary damage to the land is the cost of restoring the property to its pre-damage value.⁸

With respect to livestock, the damages often depend on whether the animal(s) is killed, in which case the damages equal the fair market value of the animal. Livestock which are not killed may be said to have been damaged...