REAL ESTATE AND MINERAL DEVELOPMENT CONFLICT ISSUES

• Jurisdiction: United States

Oil and Gas Agreements: Surface Use in the 21st Century (May 2017)
CHAPTER 6A
REAL ESTATE AND MINERAL DEVELOPMENT CONFLICT ISSUES
Randall J. Feuerstein
Polsinelli PC
Denver, CO

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I. HOW AND WHY OF REAL ESTATE AND MINERAL SURFACE CONFLICTS

A. Split Estates

Surface and mineral split estate issues result from the fact that separate surface and mineral estates, as interests in real property, do legally exist. These separate estates may be created by either reservation or grant.¹ The mineral estate may be leased to an operator who, under express rights in the written lease or an implied right of easement, will conduct operations upon the surface to explore for, drill, develop, produce and take to market the oil, gas and other minerals. The numerous issues that occur include access, exploration, extraction operations, subsidence, use of surface resources, noise, dust, traffic and other environmental issues. Because both real property law and contract law will be applicable, the deed severing the minerals by grant or reservation, the oil and gas lease and any addenda or amendments, including surface use agreements or other documents and instruments that may not have been recorded in the real property records, should be reviewed when evaluating the respective rights of the parties and commencing surface use negotiations. Other considerations include residential, commercial and/or industrial unit densities, zoning, local government master plans and other land use or building regulations. Many municipal and county local jurisdictions have their own oil and gas regulations which must also be reviewed and taken into account during surface use agreement negotiations. Counsel should endeavor to bring all parties together to negotiate, draft and enter into a surface use agreement enabling the compatible co-development of surface and mineral resources.

B. Reasonable Accommodation

1. Common Law

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Although statutes and administrative rules and regulations exist to govern the production of oil and gas in Colorado,² the relationship between surface owners and mineral owners (or their lessees) has historically been framed by the common law developed from judicial decisions. The cases generally involve claims based on negligence and trespass where the mineral developer is alleged either to have breached some duty of care owed to the surface owner (negligence) or exceeded the limits of its implied surface easement (trespass). Until relatively recently, a mineral owner's rights to make use of the surface for mineral development purposes generally were not set forth in the deed by which the surface and minerals were severed. In the absence of any express language, the common law has consistently recognized that the surface estate is subject to an implied easement for the benefit of the mineral estate so that the mineral owner may utilize that portion of the surface estate as is reasonable and necessary to extract minerals.

i. Magness

In Gerrity Oil & Gas Corp. v. Magness, 946 P.2d 913 (Colo. 1997) the Colorado Supreme Court addressed a conflict between the surface owner and mineral lessee regarding reasonable use of the surface estate for mineral exploration, development and production. There, the operator sued the landowner for an injunction to prevent the surface owner from interfering with oil and gas operations. Magness had purchased approximately 1300 acres where the minerals had been previously severed from the surface. The minerals had been leased 13 years prior to the purchase by Magness. Gerrity notified Magness of a 4-well drilling program and the parties met to lay out well locations that would minimize crop damage and disruption to livestock operations. At the request of Magness, Gerrity did move a drill site from its initial proposed location. After one drill site location had been agreed to, Gerrity proposed a second well but Magness would not permit entry for conducting operations on any future wells.

Gerrity sued for a temporary restraining order and preliminary injunction against Magness' efforts in preventing access and to order Magness to remove equipment and other materials. The trial court granted the TRO and preliminary injunction. By the time the case went to the permanent injunction phase, Gerrity had completed all four wells. Magness counterclaimed for a declaratory judgment based on Gerrity's alleged negligence and trespass - failed restoration and remediation, drilling mud and foreign substances left in excavated pits and depositing hazardous and toxic substances. Magness also alleged that Gerrity did not follow COGCC rules on notice and consultation. The trial court did not grant the permanent injunction requested by Gerrity because the wells had been drilled and it was moot. The court also denied Magness' request for declaratory judgment, holding that even though Gerrity had been on the Magness property for over a year, the parties had not disputed Gerrity's right to reasonable access and finding the dispute to be factual and not amenable to declaratory relief. The trial court noted that Magness had failed to present any meaningful evidence or expert testimony on

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oil and gas operations and, hence, could not find that Gerrity's operations were negligent. The court also found that Magness did not prove any resultant damages for which Gerrity should be liable.

The Court of Appeals reversed finding that a new trial was necessary to evaluate whether the operations were negligent, rejecting the notion that expert testimony is needed for that adjudication. It also held that § 34-60-114, 14 C.R.S. (1995) created a private right of action in those surface owners injured by the failure of an operator to comply with regulatory requirements. The Supreme Court granted certiorari to consider (a) whether breach of a regulatory duty gives rise to a private right of action, (b) whether reasonableness of the operator's conduct is relevant to trespass, (c) whether expert testimony is necessary to adjudicate breach of the operator's duty and (d) whether the Court of Appeals erred in holding that the trial court's finding that Magness suffered no damages as a result of Gerrity's operations was incorrect because of the trial court's use of erroneous legal bases to determine liability.

With respect to the use of the surface for mineral extraction operations, the Court held that even though a private right of action does not exist under the Oil and Gas Conservation Act, Section 34-60-114, 14 C.R.S. (1995) does recognize that an aggrieved surface owner may bring a common law action in tort against an operator who has used the surface in an unreasonable manner. Id. at 926. The Court also held that when trespass is alleged for an excessive surface use, then the trier of fact must consider "whether the operator's use of the surface was reasonable and necessary." Id. The Court noted that a mineral owner or lessee "is privileged to access the surface and 'use that portion of the surface estate that is reasonably necessary to develop the severed mineral interest.'" Id. quoting Notch Mountain Corp. v. Elliot, 898 P.2d 550, 556 (Colo. 1995). This "rule of reasonable surface use" does not include the right to destroy, interfere with or damage the surface owner's correlative rights to the surface. Id. citing Colorado Fuel & Iron Corp. v. Salardino, 125 Colo. 516, 522, 245 P.2d 461, 464 (1952), overruled on other grounds, Gladin v. Von Engeln, 195 Colo. 88, 575 P.2d 418 (1978). "[U]nless the conduct of an operator in accessing, exploring, drilling, and using the surface is reasonable and necessary to the development of the mineral interest, the conduct is a trespass." Id. at 927 citing Frankfort Oil Co. v. Abrams, 159 Colo. 535, 545, 413 P.2d 190, 194 (1966). The right of access to the mineral estate is in the nature of an implied easement over the surface estate since it enables the mineral owner to a limited right to use the surface to reach and extract the minerals. As such, the surface owner continues to enjoy all rights and benefits of proprietorship consistent with the burden of the easement (the surface owner may not preclude exercise of the lessee's privilege). Id. In footnote 8 of the opinion, the Court notes that although it has referred to the mineral estate as the dominant estate and the surface estate as the servient estate, "both estates must exercise their rights in a manner consistent with the other. Hence, in a practical sense, both estates are mutually dominant and mutually servient because each is burdened with the rights of the other." Id. at Note 8.

The Court further stated that "'each owner must have due regard for the rights of the other in making use of the estate in question.'" Id. citing Grynberg v. City of Northglenn, 739 P.2d 230, 234 (Colo. 1987). The "due regard concept" requires mineral owners to accommodate surface owners to the fullest extent possible consistent with their right to develop the mineral estate. Id. The nature of the accommodation by the mineral owner is fact driven based upon the surface uses and on alternatives available to the mineral owner for exploitation of the underlying

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mineral estate. Where the operator's operations would "preclude or impair uses by the surface owner, and when reasonable alternatives are available to the lessee, the doctrine of reasonable surface use requires the lessee to adopt an alternative means." Id. citing 6 American Law of Mining §200.02 [1][6][iii] (Rocky Mountain Mineral Law Foundation, ed. 1996).

With respect to trespass, because the operator is legally privileged to make such use of the surface as is reasonable and necessary to develop the minerals, a trespass exists when the operator exceeds the legal authorization permitting mineral operations. Id. Because the scope of the easement is determined by reasonableness and necessity, reasonableness of use is...