CHAPTER 6 THIRD PARTY INTERESTS

• Jurisdiction: United States

Federal Mineral Leasing
(Nov 1971)
CHAPTER 6
THIRD PARTY INTERESTS
James T. Moran
Holland & Hart
Aspen, Colorado

The previously delivered papers in this seminar on federal mineral leasing have informed you of the minerals and substances which are available for leasing, and of the lands on which permit and lease, rather than location, are the methods of acquiring the right to look for, hopefully find, and perhaps more hopefully extract at a profit such minerals from such lands. You have learned something about the leasing system, something about the terms and conditions of federal mining leases and something about the federal agencies involved and their leasing procedures.

We now turn our attention to third party interests, that is interests which are created under or "carved out" of the greater interest held by the original permittee or lesses. Within the framework of the statutes and regulations which govern federal mineral leasing, the strictly legal aspects are quite elementary. These concern the requirements for governmental approval of, and certain quantum limitations upon, third party interests that the permittee or lessee may find it desirable or opportune to create. In their contract study of nonfuel mineral resources for the Public Land Law Review Commission,¹ Messrs. Twitty, Sievwright and Mills of Phoenix, Arizona cover the subject quite completely in less than 6 pages.² I recommend their work to you although

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you will have to arm yourself with Redesignation Table No. 2³ because the pertinent regulations cited therein have since been consolidated, reorganized and given new section numbers.

Because the legal and procedural requirements for obtaining approval of any transfers of interest can be covered in far less than the time alloted for this paper, I've puzzled myself a little bit about what other aspects of the third party interest might be interesting and/or informative to this group. It is apparent that third party interests are almost invariably created because of economic considerations. The permittee or lessee needs money or its equivalent in order to perform his obligations or realize his expectations. This leads me to think that it is appropriate to comment briefly on some of the ways in which third party interests are utilized, directly or indirectly, in raising the funds that are needed to explore, to develop, to operate.

First however let us take a look at the statutes and regulations which govern the creation of third party interests in federal permits and leases.

I. LEGAL AND PROCEDURAL REQUIREMENTS

A. The requirement that third party interests be approved.

The general provisions of the Mineral Leasing Act of 1920 contain the following prohibition:

"No lease issued under the authority of this chapter shall be assigned or sublet, except with the consent of the Secretary of the Interior."⁴

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This statutory requirement for transfer approval applies as well to prospecting permits for sulfur in Louisiana and New Mexico⁵ ; potassium prospecting permits⁶ and to permits and leases on acquired lands⁷ . The regulations plug any hole that one might think possibly exists in the statutes by providing that:

"Transfers of permits and leases, whether by direct assignments, working agreements, transfer of royalty interests, subleases or otherwise, must be filed for approval within 30 days from final execution and must contain evidence of the qualifications of the assignee or transferee, consisting of the same showing required of a lease or permit applicant by subpart 3502."⁸ (Emphasis supplied)

Most of the government permit and lease forms now in use contain provisions similar to this regulation requiring any transfers of interest to be filed for approval.⁹ Prior to June 13, 1970, the time for filing was within 90 days from date of execution.¹⁰ Obviously many permits and leases now in force contain the 90 day provision and generally they will retain the benefit of the longer filing period. Typically such forms contain a provision which makes them subject "to all reasonable regulations of

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the Secretary of the Interior now or hereinafter in force, when not inconsistent with any express and specific provisions herein."¹¹

As a matter of curiosity there is an apparent inconsistency in the regulations themselves concerning the time within which transfers of royalty interests must be filed. Section 3506.3-1, supra, says within 30 days from final execution while Section 3506.4 says transfer of royalty interests must be filed within 90 days from final execution.¹² It might be possible to argue that the two regulations can be reconciled on the basis that the 30 day provision applies to transfers of permits and leases by transfer of royalty interests while the 90 day provision applies to the transfer of royalty interests as such which do not effectuate a transfer of the underlying permit or lease itself. I must confess that I have not been imaginative enough to figure out how one could transfer a permit or lease by transferring royalty interests.

The 1970 revision and reorganization of Chapter II of Title 43¹³ eliminated separate and repetitive regulations governing transfers of interests in non-oil and gas permits and leases¹⁴ and consolidated them in Subpart 3506¹⁵ of the Code of Federal Regulations. This is very convenient; the application requirements are quite straight forward and it seems appropriate to summarize them briefly.

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There is no specific approved form of assignment or other transfer, or of the application or request for approval. You may compose your own instruments but you must describe the lands involved in the same manner as they are described in the lease or permit.¹⁶ If transfer of record title is involved you must file, in triplicate, a separate instrument of assignment or transfer for each permit or lease transferred in whole or in part. If more than one lease or permit is being transferred to the same party by separate instruments, one request for approval of all such transfers is sufficient. When a third party interest is created which does not involve transfer of record title, only one copy of the instrument need be filed.¹⁷

The transferee must be a person, association or corporation qualified to hold leases or permits; otherwise the transfer will not be approved.¹⁸ Evidence of the transferee's qualifications must be contained in the application for approval.¹⁹ A minor is not qualified to hold a permit or lease and a transfer to a minor will not be approved provided, however, that an assignment in behalf of a minor heir or devisee of a permittee or lessee to his legal guardian or trustee may be approved.²⁰ Only one executed copy of qualifications must be filed,²¹ Subpart 3502²² of

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the regulations deals with qualification requirements including what statements and documents are required of individuals, associations, partnerships, corporations, attorneys in fact, and estates and municipalities.

The application for approval of transfer and supporting documents must be filed in the land office having jurisdiction over the lands involved and is considered filed when it is received.²³ Locations of the various land offices, their areas of jurisdiction and business hours (10 a.m. to 4 p.m.) are set forth in 43 CFR § 1821.2-1 . The filing fee is $10.00 for each application.²⁴

If the permit or lease being transferred requires the maintenance of a surety bond, either the consent of the surety to a substitution of the transferee as principal obligor or a new surety bond must be furnished before the transfer will be approved. Where only part of the land covered by the permit or lease is transferred the existing surety must consent to the transfer and agree to remain bound as to the lands retained, while the transferee must submit a new surety bond with himself as principal on the lands transferred. Until the effective date of the approval of the transfer, the original permittee or lessee and his surety are liable for the performance of lease or permit obligations. After approval, the transferee and his surity are liable notwithstanding any terms in the transfer to the contrary.²⁵

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The lease or permit account must be in good standing or the transfer will not be approved.²⁶ Presumably the land office consults the Regional Mining Supervisor to find out whether or not the permit or lease is in good standing.²⁷

The effective date of an approved transfer is the first day of the month following approval or, if the transferee requests it, the first day of the month in which approval is given.²⁸

Needless to say, an approved transfer does not extend the life of any permit, nor does it defer the periodic readjustment dates of any lease.²⁹

If only part of the lands under a permit or lease are transferred, upon approval of the transfer the land office will create a new permit or lease for the lands so transferred and will give it a current serial number. Thereafter, discovery under one permit will not inure to the benefit of the other.³⁰ A transfer of part of the lands covered by a permit or lease must cover a legal subdivision or subdivisions.³¹

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B. Special Provisions for Involuntary Transfers.

Almost all of what has been...