CHAPTER 4 ACQUISITION OF FRACTIONAL MINERAL INTERESTS
| Jurisdiction | United States |
(May 1981)
ACQUISITION OF FRACTIONAL MINERAL INTERESTS
MACKOFF, KELLOGG, KIRBY & KLOSTER, P.C.
Dickinson, North Dakota
The preparation of a lease for the acquisition of fractional solid mineral interests requires consideration of the possibility that the Lessor may not in fact own the interests he represents to own. One of the safeguards utilized to protect the Lessee in these circumstances is the proportionate reduction clause.
The proportionate reduction clause, often referred to as the "lesser interest" clause, is a common sight in virtually all modern oil and gas lease forms. While there are many variants of the clause,1 the clause might contain language as follows:
"If Lessor owns a less interest in the oil or gas in said land than the entire undivided fee simple estate, then the rental and royalties hereunder shall be paid to Lessor only in the proportion which Lessor's interest bears to the whole and undivided fee."
Proportionate reduction clauses are not quite so common in solid mineral leases and there is a great absence of case law interpreting them.2 Consequently, we must to a large extent look to oil and gas law for possible interpretation of the solid mineral lease proportionate reduction clause.3
It is the purpose of this paper to explore some of the aspects, workings and effects of the proportionate reduction and related clauses in solid mineral leases with a view toward the Lessee obtaining all the Lessor has to lease and at the same time paying no more than the agreed rate, regardless of whether the Lessor's estate is increased or diminished as a result of title evidence reflecting different interests
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than expected, some other full or partial failure of title, or after-acquired title.
The need for the proportionate reduction clause varies greatly depending upon the sufficiency of the prospective Lessee's title evidence. The clause can undoubtedly be omitted in cases where complete title evidence is available and the lease is individually negotiated and prepared to accommodate a specific tract of land. In fact, it has been suggested that a proportionate reduction clause should not be necessary in an oil and gas lease in that the reduction may be inferred from the custom of the industry.4 The inference from industry custom, however, is probably based to a large extent on the former usual one-eighth oil and gas royalty, a custom or standard which probably has no equal in any solid mineral mining industry. Thus, a wiser course would be to consider the proportionate reduction clause a necessary part of both oil and gas and solid mineral mining leases. This is particularly true in the case of large solid mineral leasing programs where the Lessee is anxious to obtain as many leases as possible in as short a time as possible. Often the landman will either have very little title information, or title evidence of questionable validity, when attempting to secure such leases and he must be provided with a form that will give the Lessee an interest reasonably and economically minable.
It would be impractical, if not impossible, to attempt to discuss herein all of the ramifications and effects of the various proportionate reduction clauses. No comprehensive study of that nature has been found which discusses the clauses insofar as they relate to or are limited in use to solid mineral leases and consequently the reader is referred to a recognized oil and gas writer.5 We proceed then to a discussion of selected lease provisions and topics affecting the acquisition of fractional mineral interests.
THE SURFACE AND MINERAL LEASE
A major difference between leases providing for oil and gas drilling operations and leases providing for mining and
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removal of solid minerals, as indicated above,6 is that many solid mineral mining operations require substantially greater use of the surface. The oil and gas operator has, if not expressed, an implied right or easement to come upon and use so much of the surface as may be reasonably necessary to explore for and produce that mineral7 and he may do so upon a lease of severed oil and gas interests without a lease from the surface owner on the theory that the mineral comprises the dominant estate and the surface is the servient estate.8 While the dominant estate—servient estate distinction also exists in the case of solid minerals, it is often held that mining operations disrupting or consuming substantial portions of the surface cannot be conducted without the agreement of the surface owner, particularly in cases where the land is to be mined by strip mining or surface mining techniques.9 Thus, the oil and gas developer in acquiring a lease has little interest in the surface and may direct his attentions primarily to the mineral, while the solid mineral developer must be sure that he has leases extending both to the surface and the mineral. While oil and gas lease proportionate reduction clauses such as the one set forth above have certainly not been without their construction problems, the difficulties are magnified significantly when attempting to apply similar provisions to leases covering both the surface and the mineral.
No unusual lease drafting problems pertinent to the subject here under discussion are presented when a single Lessor owns all of the minerals, or all of the surface or all of both the surface and the minerals to be included within the lease.
Separation of mineral ownership from surface ownership began relatively early in the development of the western United States. Many of those earlier separations were the result of reservations by the United States and railroad companies. In many areas it later became common for the individual farmer or rancher to retain a portion of the minerals under the land when he sold the property. Subsequent sales often found further fractionalization of the mineral estate. Finally, in more recent times, in many areas it is
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uncommon to see conveyances of agriculture lands that do not reserve all of the minerals or any of them that remain unsevered. Thus, in many places the would-be Lessee will frequently encounter desirable properties in which the surface is owned by one party or a group of parties and the minerals are owned by others or where all of the surface and a fraction of the minerals are owned by one party or group and the remainder of the severed minerals are owned by others. While the mineral owner has customarily been paid royalty based upon the quantity of mineral removed, it is not now uncommon to also provide compensation to the surface owner based upon the quantity of mineral produced from under his surface. It is in these situations where the surface and minerals are owned in different proportions that present a challenge to the draftsman.
Many solid mineral mining leases now in use in the western United States are to a large extent following the format and terms of an oil and gas lease.10 They provide a grant for a primary term to be continued by production with periodic payments to continue the lease in force until production operations are commenced. This lends some credence to reliance upon oil and gas law as forming a basis for the drafting of solid mineral lease provisions. Perhaps more significant is the fact that oil and gas leases commonly contain forfeiture provisions based upon a special limitation designed for their automatic termination in the event of failure to properly and timely pay the rental or commence drilling operations prior to an annual lease anniversary. When these forfeiture provisions are continued through to solid mineral leases it becomes of extreme importance to the solid mineral Lessee that his leasehold is based upon documents not only clearly specifying the royalty, but also clearly defining the minimum or advance royalties he must pay to perpetuate that leasehold to the end that he does not expend substantial sums in mining preparation only to learn that his mining right has terminated.
There are attached hereto as appendixes A, B, C and D sample forms of portions of mining leases to which reference will be made to illustrate parts of the remaining discussion of this paper. It is assumed that the Lessor is the owner of the entire surface and one-half of the minerals under the S1/2 of Section 10, a tract of land comprising 320 acres.
DESCRIPTION OF "THE PROPERTY"
Before attempting to draft lease provisions specifically designed for the acquisition of fractional mineral interests
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a determination must be made of what property will be included within the fractional mineral lease. This definition must be drafted with care in order to avoid ambiguities and set forth terms consistent with the granting clause, rental and royalty clauses, and proportionate reduction clause. Ambiguities of course open the door to parole evidence and its uncertainties. Even if the mineral lease is not ambiguous, however, careful drafting may limit the opportunity for a court to place an unfavorable construction upon the document or a construction inconsistent with that adopted and acted upon by one or more of the parties to the agreement.
An illustration of the problem of defining the property or land leased is the leading case of Texas Co. v. Parks.11 There the Lessors were owners of an undivided one-half interest in a 320 acre tract. The oil and gas lease apparently purported to grant a leasehold in an undivided one-half interest in and to the 320 acres of land. The lease further provided for delay rentals of $160.00 on "said land" and the proportionate reduction clause read that if Lessor "owns an interest in said lands less than the entire fee simple estate," then the royalties and rentals shall be reduced proportionately. Prior to the anniversary date the Lessee tendered $80.00 which was refused by the Lessor who then brought an action to show termination of the lease...
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