CHAPTER 6 AREA OF INTEREST PROVISIONS

• Jurisdiction: United States

Mining Agreements II
(May 1981)
CHAPTER 6
AREA OF INTEREST PROVISIONS
Larry D. Clark
Verity, Smith & Clark, P.C.
177 N. Church Avenue, Suite 902
Tucson, Arizona 85701

It is common for mineral agreements, whether exploration agreements, options or long-term leases, to contain a provision pursuant to which property other than that specifically described in the agreement may be made subject to and included within the terms and conditions of the agreement. Clauses effectuating this purpose bear varying titles, including "area of interest," "boundary protection," "additional claims," and "other property." Clauses of a similar type are also found in oil and gas leases and are variously referred to as "cover-all," "Mother Hubbard" and "all-inclusive" clauses.¹ Whatever labels may be attached to clauses of this type, the general purpose of each is the same — to include lands in addition to those specifically described within the terms of the agreement.

The specific purposes of clauses of this type vary, depending on the party requesting the inclusion of the clause in the agreement and the nature of the property which is subject to the agreement. A landowner will often insist on a clause which provides that all property situated within a specified distance from the property he is leasing or optioning will be subject to the terms and conditions of the agreement, including any production royalty which may be payable. In such situations, the landowner is of the opinion that it is as a result of his efforts that the exploration company is in the "area" and that he should participate in any proceeds derived from that locale. The exploration company may have several purposes in utilizing an area of interest clause. One principal purpose is to ensure that all property which it seeks to acquire is in fact made subject to the agreement, thus avoiding the exclusion of property as a consequence of errors or omissions in the preparation of the description of the property which is intended to be made subject to the agreement. Another common purpose of such a clause is to preclude competition from the landowner for the acquisition of nearby or adjoining lands or areas within a claim block in the case of fractions within a group of unpatented mining claims. This paper will consider the area of interest clauses with these principal purposes in mind.

In reviewing agreements containing area of interest clauses, it quickly becomes evident that there is no standard form of clause, there being substantial variations in the form and content the clauses. Two general categories of clauses can be noted, however. The first are those which contain substantial detail, addressing such matters as the effect of termination,

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the applicability of production royalty provisions and similar detailed terms. These clauses are generally the product of careful negotiations between the parties. The second category may be loosely termed as "boiler-plate" or standard agreement clauses, having been included in the agreement as a matter of course. These clauses are often included in an agreement without complete consideration of the potential effect of the clause in light of the specific circumstances of the transaction, including such matters as the land status, the status of the parties and the interrelationship with the other terms of the agreement.

This paper will consider generally the various matters which should be addressed in an area of interest clause and some of the pitfalls which may result from the use of such clauses. In the interest of consistency, the phrase "area of interest" will be used to describe clauses of the type under consideration. Similarly, the terms "landowner" and "exploration company" will be used to refer to the lessor or optioner and the lessee or optionee, respectively. Generally, the situations discussed below are relevant for consideration, irrespective of the type of agreement or transaction involved, the type of property involved or the status of the parties as individuals or corporate entities.

An area of interest clause can be viewed as an agreement within an agreement. Properly drafted, the area of interest clause will address such matters as the parties to which it is applicable, the property interests which are subject to its terms, the geographic applicability of the clause, the mechanics of including an area of interest property within the terms of the agreement and termination. These principal aspects of area of interest clauses will be considered below.

The Parties to Which the Clause is Applicable

The determination of which parties are to be named in the area of interest clause as being subject to its terms will be dependent upon the objectives sought to be accomplished by the clause. The landowner seeking to obtain participation in nearby properties will be satisfied if the area of interest clause is applicable solely to properties acquired by the exploration company. Conversely, where the exploration company seeks only to ensure that all of the landowner's property within a specified area is subject to the agreement, the clause can be made applicable only to property interests held by the owner.

Area of interest clauses are frequently encountered which are, to varying degrees, applicable to both parties. While an exploration company may seek to have an agreement which contains an area of interest clause which is applicable only to properties acquired by the landowner, most landowners or their attorneys, when presented with this situation, will seek to

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have the area of interest clause made applicable to property acquired by both the landowner and the exploration company. Similarly, when an exploration company is presented with a demand by the landowner that an area of interest clause be included in an agreement, it will seek to have the clause made applicable to the properties of both parties.

Particular care must be taken when an area of interest clause is originally inserted in an agreement with the intent that it be applicable to only one party and, as a consequence of negotiations, the clause is made applicable to both parties. In such situations, the original terminology of the clause cannot be made applicable to both parties without a careful review of all of the terms of the agreement because of the possible effects of the area of interest clause on other agreement terms. For example, the applicability of the area of interest clause to both parties may affect the provisions of the agreement addressing termination. If the agreement was originally drafted with the area of interest clause applicable solely to the landowner, the termination clause is not likely to address the issue of how the company may dispose of unpatented claims which it locates in the area of interest and which it subsequently wishes to abandon. If the area of interest clause is subsequently made applicable to both parties, the termination clause of the agreement should be amended to provide a mechanism for the abandonment of claims located in the area of interest.

The specific terminology utilized in the area of interest clause to describe the parties to which it applies will affect the applicability of the clause to associated or related entities or individuals. Where the sole purpose of the clause is to ensure that all property presently held by the landowner within a given geographic area or within a specified perimeter is rendered subject to the agreement, it will be sufficient to specify that the clause is applicable solely to the landowner. In the case of a corporate landowner or other form of business entity, even when the purpose of the clause is limited to obtaining the entire interest then held by the landowner, it may be desirable to expand the applicability of the area of interest clause to include associated or affiliated entities or individuals since it is common, particularly in transactions involving unpatented mining claims, to find that the title to the property, or an interest therein, is held by an affiliated party which has not yet conveyed its interest to the corporation or entity which is a party to the agreement.

In those instances where the area of interest clause is intended to ensure that the landowner participates in any mineral properties within a specified area, or where the exploration company seeks to preclude competition by the landowner, the parties will also seek a broadened definition of the applicability of the area of interest clause so that entities or individuals acting by or on behalf of the parties to the

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agreement will be specifically included. In this situation, the clause might specify its applicability to "Owner and any individual, entity or association acting by, for or on behalf of Owner." Where a corporation is a party, the description of the applicable parties may be further expanded by including terminology which renders the area of interest clause applicable to "Owner, or any subsidiary, parent or subsidiary of a parent of Owner." Potential problems with such expanded definitions are discussed below.

An area of interest clause containing an expanded definition of the parties and the associated or affiliated entities to which it is to be applicable should be used only after a careful analysis of the status of the parties and the present and potential landholdings of the parties in the area of interest. For example a landowner dealing in his individual capacity will undoubtedly be aware of the applicability of the area of interest clause to other property interests which he holds in his individual capacity and which are situated within the defined area. He may not, however, give consideration to whether such a clause is sufficiently broad to include property held by a corporation in which he is the sole stockholder or property held in a trust, one of the beneficiaries of which is the landowner.

An even more difficult...