Conflicting property rights between conservation easements and oil and gas leases in Ohio: why current law could benefit conservation efforts.

• Author: House, Nicholas R.

Table of Contents INTRODUCTION I. WHY DO CONSERVATION EASEMENTS AND OIL AND GAS LEASES CONFLICT? A. Conservation Easements: Purposes, Enforceability & Deductibility 1. Common Law Negative Easements 2. Ohio's Enabling Statute 3. Internal Revenue Code Requirements. a. Applicable Definitions b. The Effect of Deductibility on Mineral Extraction B. Oil and Gas Leases 1. Ohio's Common Law Rule 2. Implied Easement to Reasonable Use of Surface 3. Right to Protect Mineral Estate from Drainage II. THE PROBLEM A. Scenario One: Unsevered Mineral Estate B. Scenario Two: Severed Mineral Estate III. CONSERVATION EASEMENT LANGUAGE A. Why Attempts to Change Current Law Should Be Abandoned B. How Conservation Organizations Should Change Their Conservation Easement Language 1. No-Inconsistent Use Clause 2. Stricter Monitoring and Enforcement Clauses 3. Amendment Procedures to Retroactively Apply to Old Easements IV. ADDRESSING POTENTIAL CONCERNS A. Risk of Surface Damage from Horizontal Drilling and Fracturing Mining Techniques B. Public Funding Concerns CONCLUSION INTRODUCTION

The centuries-long struggle between development and conservation has gone through numerous iterations. Most recently, the struggle has pitted conservation easements against oil and gas development in Marcellus and Utica Shale states. While conservation organizations have used conservation easements with enthusiasm for many years as a means of preserving land for future generations, (1) new technological breakthroughs and the discovery of deep natural gas deposits have led some commentators to question the continued effectiveness of conservation easements. (2) Moreover, the economic potential from oil and gas development has pressured many state governments to move away from conservation activities. (3) This recent struggle has been particularly acute in the Midwestern United States, where significant Marcellus and Utica Shale natural gas deposits have been discovered. Such discoveries have caused long-dormant property conflicts to surface as individuals and organizations compete to capitalize on the evolving oil and gas market. (4)

Although scholars have written numerous articles discussing conservation easements, addressing issues ranging from the appropriate valuation methods for determining IRS deductions (5) to whether conservation easements are an appropriate means of preserving land, (6) they have neglected to discuss the conflicting property rights between conservation easements and oil and gas leases. In fact, the Land Trust Alliance, one of the largest umbrella organizations for land trusts, is still developing methods to handle these conflicting rights. (7)

This Note will focus on both Ohio's conservation easement law and oil and gas law in order to develop a robust understanding of how conservation easements and oil and gas leases conflict. Unlike other Marcellus and Utica Shale states, Ohio's oil and gas law is largely undeveloped. (8) The undeveloped nature of Ohio's oil and gas law, coupled with its current oil and gas boom, make Ohio an ideal state to discuss these conflicting property rights. (9)

First, this Note will establish why conservation easements and oil and gas leases are likely to conflict. Second, this Note will present two scenarios under which conservation easements and oil and gas leases might conflict and then demonstrate how current law sorts out the conflicting rights. Third, it will advance several arguments for how conservation easements should be adapted, identifying specific provisions that should be altered in light of the Internal Revenue Code and Ohio's current legal structure. By doing so, this Note will elucidate how the oil and gas boom in Ohio offers conservation organizations a unique opportunity to preserve land, while benefiting from the boom themselves. This Note maintains that conservation easements and oil and gas development can both exist and thrive, but only if conservation organizations relax their unitization prohibitions, identify and work around potential conflicts, and draft their conservation easements to protect against such conflicts.

1. WHY DO CONSERVATION EASEMENTS AND OIL AND GAS LEASES CONFLICT?

   The rights that accompany conservation easements and oil and gas leases stem from the same conceptual premise but vary significantly in purpose. In this way, the two property rights might be thought of as two sides of the same coin. Both are products of property law, (10) and both come from a legal tradition that allows a property owner to control his property's destiny with only a few limiting conditions. (11) A property owner can exercise his privilege in numerous ways, including using the land for conservation purposes or for mineral development. (12) However, the conceptual similarities end here.

   In particular, the interests promoted by conservation easements can be directly adverse to the interests promoted by oil and gas leases. In general terms, this conflict can be characterized as property development versus property preservation. This seemingly obvious conflict sets the stage for understanding how and why these interests are adverse to one another. In order to truly appreciate the conflict, one must first gain a detailed understanding of the laws governing each interest.

   1. Conservation Easements: Purposes, Enforceability & Deductibility

      A conservation easement is a tool used by conservation organizations to preserve and conserve land for future generations based on its natural, scenic, ecological, or historic property value. (13) In particular, a conservation easement "restrict [s] the type and amount of development that may take place on [a particular landowner's] property" through the use of a legally enforceable agreement. (14) In addition to creating restrictions on the landowner, a conservation easement also grants an enforceable, nonpossessory property interest to the easement holder, usually a nonprofit conservation organization or governmental entity. (15) In exchange for granting such an interest, the landowner usually realizes a tax benefit under a qualified deduction for a charitable contribution. (16)

      Under the modern understanding, a conservation easement exists in perpetuity and is fully alienable. (17) Although the term conservation easement implies a traditional understanding of real property easements, conservation easements could not have existed under the common law. (18) In recognition of this and in order to promote land preservation, every state has passed a conservation easement enabling statute that overcomes the common law impediments and incorporates the requirements for a qualified charitable contribution under the Internal Revenue Code (IRC). (19) Thus, conservation easements are creatures of the common law, state statutory law, and federal tax law. (20) This unique background raises an array of issues that require discussion beyond the scope of this Note. However, a brief overview of the legal background that allows conservation easements to exist will help elucidate how and why conservation easements conflict with oil and gas leases.

      1. Common Law Negative Easements

         Under the common law, a conservation easement would be considered a negative easement in gross, and as such, would be unenforceable. (21) Such a characterization comes from the fact that a conservation easement places negative restrictions, or prohibitions, on the type and magnitude of development on a landowner's property. (22) The common law recognized only four kinds of negative easements: prohibitions on blocking sunlight; prohibitions on blocking air movement; prohibitions against removing subjacent or lateral support from adjacent properties; and prohibitions against interfering with the flow of artificially created streams. (23) Because conservation easements do not neatly fit into any of these categories, the common law would have held them unenforceable. (24)

         In addition to the narrow categories of negative easements recognized by the common law, courts greatly disfavored easements in gross, particularly negative easements in gross. (25) Specifically, the way in which property transfers were recorded made tracking the assignment, termination, or disposition of easements in gross extremely difficult. (26) The difficulty comes from the fact that an easement in gross does not benefit a particular appurtenant parcel of land; (27) therefore, the easement would not be identifiable through the real property recordation process. (28) Because easements in gross could not be tracked, the common law did not allow them to be alienable or to perpetually exist. (29)

      2. Ohio's Enabling Statute

         In order to overcome the impediments the common law presented, all states and the District of Columbia have passed some form of a conservation easement enabling statute. (30) Nearly all enabling statutes are based on the Uniform Conservation Easement Act (UCEA), which was promulgated in 1981 and explicitly validates conservation easements. (31) Ohio's enabling statute is substantially similar to the UCEA. (32) Like the UCEA, Ohio's enabling statute overcomes the common law impediments by explicitly removing the common law restrictions on negative easements in gross. (33)

         In addition to removing the common law impediments, Ohio's enabling statute incorporates elements of the IRC. This allows landowners to more easily take advantage of charitable tax deductions when donating their conservation easements to conservation organizations. Specifically, Ohio's enabling statute authorizes only certain entities to hold conservation easements, limiting holders to only those that meet the requirements of "qualified organizations" under the IRC. (34) Ohio's enabling statute also embodies the IRC's definitions of conservation purposes. (35) By overcoming the impediments of the common law and incorporating many of the IRC's definitions, Ohio's enabling statute allows landowners and conservation organizations to...