2020 real estate seminar: what real estate and probate ...€¦ · after-acquired interests. see...

2020 Real Estate Seminar: What Real Estate and Probate Attorneys

Should Know About Oil and Gas

Friday, September 25th, 2020

WEBCAST

Steven F. Mattoon Matzke, Mattoon, Martens & Strommen

The NSBA’s Real Estate, Probate, and Trust Law Section presents:

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STEVEN F. MATTOON

Steven F. Mattoon practices in the areas of Oil and Gas Law; Probate and Trust Law with the law firm of Matzke, Mattoon, Martens & Strommen in Sidney, Nebraska. He was previously a member of the House of Delegates for over 20 years, served on Executive Council, served as Chairman of the House of Delegates, and is currently President of the Nebraska State Bar Association.

Education:

Law School: University of Nebraska at Lincoln, J.D. – 1976 College: University of Nebraska at Lincoln, B.A.. – 1973

Admitted:

1976 – Nebraska State Bar Association Member: Nebraska State Bar Association President – 2019 - 2020 Executive Council – 1998-2004; 2011-2014 House of Delegates – 1996 - 2016 Chairman House of Delegates – 2013 Natural Resources Section Executive Board – 1982-1988 Secretary – 1987 American Bar Association Rocky Mountain Mineral Law Foundation Trustee – 1988-1999 Present Affiliation: Matzke, Mattoon, Martens & Strommen 907 Jackson Street P. O. Box 316 Sidney, Nebraska 69162-0316 Telephone: (308) 254-5595 Fax: (308) 254-5019

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WHAT REAL ESTATE AND PROBATE ATTORNEYS

SHOULD KNOW ABOUT OIL AND GAS LAW

I. What are Minerals

Minerals are defined to include oil, petroleum and natural gas. Bulger v. McCourt, 179 Neb. 316, 138 N.W.2d 18 (1965); Belgum v. City of Kimball, 163 Neb. 774, 81 N.W.2d 205 (1957).

II. Nature of Mineral Estate When Not Severed from the Surface Estate

Minerals are vested property rights. Wheelock v. Heath, 201 Neb. 835, 272 N.W.2d 768 (1978).

Conveyance of the land without reservation and exception of the minerals not only conveys said mineral interest, but if a Warranty Deed warrants that the deed is conveying the entire mineral estate.

Remedies for breech of warranty clause.

Abatement of Price. A purchaser brought an action for specific performance of a real estate contract. The defendant admitted that the mineral estate in the land was valuable, constituted an essential element of the total valuation, and was ascertainable with a reasonable degree of certainty. The defendant sold the land in fee simple but actually did not own the mineral estate in the land. The court held that the plaintiffs were entitled to abatement of the purchase price to the extent of the value of the mineral estate. Smith v. Hornkohl, 266 Neb. 702, 90 N.W.2d 347 (1958).

Estoppel. Another court applied estoppel principles based on the warranty clause and placed the risk of title failure on the grantor where the deed was ambiguous about whether there was an exception of minerals previously conveyed or a purported reservation in the grantor. Duhig v. Peavy-Moore Lumber Co., 135 Tex. 503, 144 S.W.2d 878 (1940). See sections 20-2(c) and 20-2(d) for further discussion.

After-Acquired Interests. See Neb. Rev. Stat. § 76-209.

Recommendations.

Always include in Warranty Deed language not only excepting easements, rights-of-way, protective covenants, etc., but also prior mineral and or royalty reservations, exceptions and conveyances of record, if any.

With regard to Real Estate Contract and Warranty Deed, be exact as to the mineral interest which is to be reserved to the Grantors.

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If unknown or unsure of, real estate contract should provide that sellers make no representation or warranty as to the mineral interest owned by sellers, and either that purchasers will receive all interest of the sellers/grantors, or that sellers/grantors reserve for example, one-half of their rights, title and interest in and to the oil, gas and other minerals in, on, under and that may be produced.

III. Nature of Severed Mineral Interest

A severed mineral interest occurs when the owner of the mineral interest does not own the surface, whether by way of conveyance or reservation. Minerals are defined to include oil, petroleum and natural gas. Bulger v. McCourt, 179 Neb. 316, 138 N.W.2d 18 (1965); Belgum v. City of Kimball, 163 Neb. 774, 81 N.W.2d 205 (1957).

Minerals are vested property rights. When the mineral estate is severed from the surface, separate and distinct estates are created which are held by separate and distinct titles, and each is subject to the laws of descent, devise and conveyance. The grantee of the minerals becomes the owner in fee simple; interest which is not limited to a mere mining privilege. The severed minerals become a separate corporate hereditament and ownership that has all the attributes and incidents peculiar to the ownership of land. Wheelock v. Heath, 201 Neb. 835, 272 N.W.2d 768 (1978).

Dominant estate. The mineral estate is considered to be the dominant estate. When the mineral estate is severed, the law implies a means of access to permit owners of the mineral estate to have the benefit of their ownership in the mineral estate. Conveyance of the surface of the land with a reservation of oil and gas contains an implied reservation of right of access to the severed estate below, to remove minerals and reduce minerals to possession. Reed v. Williamson, 164 Neb. 99, 82 N.W.2d 18 (1957).

IV. Creation of Varied Interests in the Mineral Estate

Interests Which May be Created

Undivided interest. The grantor may create an undivided interest in the entire mineral estate. If the mineral estate is subject to an existing oil and gas lease, this will transfer a proportionate share of the remaining lease benefits (usually delay rentals and royalty since the bonus is typically paid at the beginning of the oil and gas lease).

During life of lease. A grantor may create an interest in the mineral estate to endure only for the duration of an existing lease.

Royalty interest. A grantor may create an interest to receive proceeds of production, being the royalty interest, without the right to either explore, develop, execute oil and gas leases, or receive bonus or delay rentals, commonly referred to as a nonparticipating royalty interest. Continental Oil Co. v. Landry, 215 La. 518, 31 So. 2d 73 (1949); Schlettler v. Smith, 128 Tex. 628, 101 S.W.2d 543 (1937).

Nonexecutive mineral interest. This hybrid interest is sometimes called a participating royalty interest. It occurs when grantor conveys a right to share

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in royalty and to either share in bonus or rental or both, under existing or future leases, but the grantee will have no development right and no executory right to join in the execution of leases or to explore and develop minerals. Krontze v. Kirby Lumber Co., 153 F.2d 695 (5th Cir.), cert. denied, 329 U.S. 713 (1940); Harris v. Griffith, 210 So. 2d 629 (Miss. 1968); 1 Williams & Meyer, Oil and Gas Law Section 301 n.31 and n.32. Antelope Production Co. v. Shriners Hosp. for Crippled Children, 236 Neb. 804, 464 N.W.2d 159 (1991).

V. Creation of Mineral Interests

The interests described may be created for the following durations and by the following means:

Durations:

Perpetual duration

Duration for a fixed term of years and so long thereafter as oil and gas is produced;

Duration for a fixed term of years and no longer; or

Duration until the happening of a fixed event or occurrence, such as a life estate.

Means:

Conveyance;

Reservation/exception; or

Descent and devise VI. Mineral – Royalty Distinction

Example:

A conveys to B “1/16 of all oil and gas produced from this land,” subject to an oil and gas lease providing for a 1/8 royalty.

Issues and Consequences. What effect does classifying an interest as mineral vs. royalty have?

Quantum of Production. If the interest described in the example is a 1/16 royalty interest, then B is entitled to 1 out of every 16 barrels of oil produced [1/2 of 1/8 royalty]. If the interest is a 1/16 mineral interest, then B is entitled to 1 out of every 128 barrels of oil produced [1/16 of 1/8 royalty].

Right to share in bonus and delay rental.

Right to execute oil and gas lease.

Right of exploration and development.

The following examples indicate how courts interpret language standing alone in a deed when the parties fail to clarify whether they intend to create a mineral or a royalty interest.

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“[O]il, gas and other minerals in and under and that may be produced from…,” when standing alone, is clearly a mineral interest. Serena v. Rubin, 146 Kan. 603, 72 P.2d 995 (1937); Coker v. Hudgpeth, 308 P.2d (Okla. 1957).

“1/16 oil and gas rights” creates a mineral interest. Starling v. Preston, 144 S.W.2d 1009 (Tex. Civ. App. 1940).

“[O]il, and gas in and under” and “oil and gas in, on and under” create a mineral interest. Prairie Oil & Gas Co. v. Allen, 2F.2d 566 (8th Cir. 1924); Cormier v. Ferguson, 92 So. 2d 507 (La. App. 1957).

“[O]il, and gas that may be produced” creates a royalty interest. Shaffer v. Kansas Farmers Union Royalty Co., 146 Kan. 84, 69 P.2d 4 (1937).

“[T]hat may be produced” creates both a mineral interest, Corlett v. Cox, 138 Colo. 325, 333 P.2d 619 (1958), and a royalty interest, Hardy V. Greathouse, 406 Ill. 365, 94 N.E.2d 134 (1950).

“[P]roduced and saved indicates a royalty interest. Casteel v. Crigler, 266 P.2d 643 (Okla. 1954).

Parties may include additional reservation or grant of rights regarding leasing, receipt of bonus and receipt of delay rentals and may clarify whether the parties intended the instrument to convey a mineral or royalty interest. When only part of those rights are granted or reserved, however, then the parties create even more ambiguity. See 1 Williams and Meyer, Oil and Gas Law Section 304.10 for example.

VII. Potential Ambiguities

When drafting an agreement or conveyance, the parties should try to avoid inherently ambiguous phrases such as the following:

Reservation in a Deed with warranty clause that purports to cover all (100%) of interest.

Example:

A owns 100% of the surface and 50% of the minerals. Deed reserves to grantor 50% minerals. Is A reserving 50% in addition to the outstanding 50% or is A attempting to limit the warranty clause as to the outstanding 50%?

Reservation in Deed with warranty clause covering less than 100%.

Example:

A owns the surface and 1/2 of the minerals. The Deed conveys a 1/2 interest and reserves a 1/2 mineral interest. Does A reserve 1/2 of 100% or 1/2 of 50%?

Grantor owns a fractional interest in the surface and mineral estate and desires to deed a full share in surface interest and only a part of the mineral interest.

Example:

A owns 1/3 of the surface estate and 1/6 of the mineral estate. A executes a warranty deed to B conveying “all of an undivided 1/3

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interest, reserving, however, a 1/3 of the mineral rights.” What does the 1/3 mineral reservation refer to: the 1/3 interest being conveyed, or 1/3 of the 1/6 mineral interest.

Use of term “mineral acres.”

Example:

A conveys to B land with a metes and bounds description which they believe encompasses a 40 acre tract, reserves 20 mineral acres, and the tract is actually 45 acres.

Recommended Action:

The lesson to be learned: Be specific with regard to the mineral or royalty interest being conveyed or reserved.

Example:

Grantor excepts all prior mineral and royalty conveyances of record, and further excepts and reserves unto Grantor, 1/2 of Grantor’s rights, title and interest in and to the oil, gas and other minerals in, on, under and that may be produced., etc.

VIII. Inclusion of Minerals in Estates

Inventory

I suggest that you not rely upon what your client purports to own at least as far as minerals in counties in which there has previously been active development of oil, but rather research the records in the office of the County Clerk. This would especially be true for the panhandle, southwest Nebraska, and the Falls City area. Note: Most title companies will not research minerals and lack a basic understanding with regard to minerals. It will likely be necessary that you research the records yourself, or contact an attorney, and in some instances, an oil and gas landman, to conduct the research.

In order to locate potential severed mineral interests, we often review the estate proceedings of the parents, grandparents, etc. of the decedent, or review files of the family, such as oil and gas leases, which indicate potential mineral interests.

By describing the land involved, for example SE/4 of Section 3, Township 14 North, Range 51 West of the 6th P.M., with no exclusion or exception of the minerals, the legal description will be deemed to include the entire mineral interest. There are times when we do separate the listing and valuation between the surface interest and the mineral interest. If the minerals have a legitimate value, this will also increase to the potential stepped up income tax basis.

For example, we recently had clients whose mother was deceased and owned several sections of land and portions of the mineral interests with regard thereto in Cheyenne County. They left an entire box of copies of prior oil and las leases, letters from oil companies and mineral deeds.

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Eventually, we determined that not only did she own the quarter sections of land in Cheyenne County, and a portion of the minerals, but also had a potential mineral interest in approximately ten other tracts of land in Cheyenne County, with regard to which she did not own the surface. Furthermore, she also owned mineral interests in Morrill County, Nebraska, and Sheridan County, Nebraska, as well as producing and non-producing mineral interests in Washington County, Colorado, and Laramie County, Wyoming. The family did not have a clue as to these minerals.

Distribution

Mineral interests, working interests and overriding royalty interests are subject to the same language in Deeds of Distribution as surface interests.

Often times minerals are either missed or unknown. We rely upon Title Standard No. 9.11 to cure title to mineral interests. However, said severed mineral interest may still be subject to potential abandonment proceedings pursuant to Neb. Rev. Stat. Section 57-229, which will be discussed later.

Mineral interests may be of such value that an Affidavit for Transfer of Real Property Without Probate pursuant to Neb. Rev. Stat. § 30-24, 129, may be utilized for transfer of the mineral interests. However, it is my opinion that there are several issues with regard to the Affidavit for Transfer of Real Property. I recommended to the Trust and Probate Section of the NSBA that they propose legislation to clarify issues, including issues regarding valuation of minerals, as there are usually no County assessed valuations, the fact that there often is another domiciliary estate proceeding pending, and ambiguities as to whether the Affidavit must be signed by all owners of the severed mineral interest, etc.

Valuation

There is no hard and fast rule with regard to valuation. With regard to a producing mineral interest, working interest or overriding royalty interest, an appraisal by a reservoir engineer would definitely determine the value; however, likely cost prohibitive both to the estate, the county and the Internal Revenue Service.

If a mineral interest, working interest or overriding royalty interest is producing, one rule of thumb is a valuation based upon production during the last three (3) year period of time.

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However, due to recent decline in the price of oil, this should be discounted by perhaps one-half (1/2).

Non-Producing mineral interest valuation would vary greatly from county to county. In the event of a county which has not been developed or is currently not in development, valuation of severed mineral interests would likely be between $10.00 and $25.00 per net mineral acre.

With regard to counties which are traditionally active in development, such as Morrill, Banner, Kimball, Cheyenne, Perkins, Chase, Hays, Frontier, Hitchcock, Dundy, Red Willow and Richardson, we have usually valued the minerals at anywhere between $25.00 and $100.00 per net mineral acre. This is based in large part on prior third party transactions whereby there was a bona fide sale of minerals in Cheyenne County, Nebraska, for the sum of $105.00 per net mineral acre. However, this sale has now been several years ago, the market for oil has declined, and there has been a decline in wells being drilled. We now place values upon mineral interests in producing counties of $25.00 to $50.00 per net mineral acre.

IX. General Nature of the Rights of the Parties Under an Oil and Gas Lease

Lessee’s Rights

The lease determines a lessee’s rights. Generally, a lessee has a property right to the minerals and the right to locate, sever and remove them. Ordinarily, a lessee acquires no title to the surface. The lessee may utilize the surface for any reasonable use. Moreover, the lessee is entitled to enter on and occupy the surface of the land to the extent reasonably necessary to explore, extract, and market oil or gas.

Lessor’s Rights to Execute Lease

Four distinct incidents of ownership exist: the right to lease (an executory right), the right to bonuses, the right to delay rentals, and the right to royalties. These incidents of ownership may be separately alienated. Furthermore, the right to bonuses and delay rentals does not imply a grant or reservation of the executory right to execute oil and gas lease. Antelope Prod. v. Shriners Hospital, 236 Neb. 804, 464 N.W.2d 159 (1991).

Lessor/Landowner’s Rights Retained After Executing Lease

After executing and delivering an oil and gas lease, the lessor retains three separate and distinct interests in the land conveyed, all of which are part of the land itself and subject to alienation by the lessor/landowner:

The right to the surface, subject to lessee’s right of ingress and egress to carry out the lease itself.

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The right to reversion of the minerals upon termination of the lease.

The right to receive accruing royalties by virtue of removal of the minerals.

Krone v. Lacy, 168 Neb. 792, 97 N.W.2d 528 (1959). X. Payments Under an Oil and Gas Lease

Bonus

The bonus is the payment that the lessee makes as consideration for the lessor’s execution of the lease. Antelope Prod. v. Shriners Hospital. A common practice is to use a “sight draft” with allows lessee a certain number of days to honor the draft or return the lease; if not honored, the draft is referred to as a “cold draft.” Although the reasoning behind such a draft is that the lessee must satisfy itself as to title, the effect of using a cold draft is to allow the lessee to hold the lease for a period of time before deciding whether to honor the draft.

If a “sight draft” is utilized, the lessor/landowner must forward the draft and executed lease to the depository bank, which then forwards the draft and lease to lessee’s bank for collection, which in turn holds the lease to be returned if the draft is not paid. Although sight drafts are still commonly used, a lessor/landowner can require a check or, if appropriate, a cashier’s check, or at least a non-refundable down payment. Since the lessee’s use of a sight draft is justified by the need to test the sufficiency of the lessor’s title, lessors/landowners may require a check or cashier’s check if the parties have stricken the warranty clause in the lease or if title to the mineral estate has already been examined.

Recently oil and gas companies have been utilizing “Orders of Payment”, whereby the lessor grants a period of time for the lessee to make the payment required under the terms of the lease, usually 45 to 90 business days. Once again, this allows the lessee a period of time to not only examine title issues, but also to make a determination of whether the company desires to proceed with leasing. Lessor may attempt to strike the common provision in the Order of Payment that the lessee has discretionary authority to not make any payments after said period of time, altering a provision in the Order of Payment to provide that the lessee is obligated to make the payment unless there are significant title issues, such as land held by production or land already leased or as set forth previously, to require a non-refundable down payment.

Delay Rentals

The delay rental is the consideration the lessee pays to the lessor in return for permission to delay drilling or production each year after the first year of the lease. Antelope Prod. v. Shriners Hospital. Delay rentals must be paid to the depository named in the lease prior to the anniversary date in order to keep the lease in effect for each additional year. The usual amount is $1.00 per net

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mineral acres, but this may be negotiated; for example, $3.00 to $5.00 per net mineral acre would be allowed. Delay rentals are not due if the lease is “paid-up lease”, i.e., a lease in which the bonus and any rentals due for additional years are paid at the outset. The current common practice is to utilize a paid-up lease whereby there are no delay rentals paid.

Royalty

The lessor/landowner receives royalty payments from actual production of oil or gas. Although the customary royalty utilized in Nebraska, for the past five decades has been one-eighth, the actual amount may be negotiated with the lessee, e.g., 3/16. Several companies will refuse, however, to alter the 1/8 royalty provision. The lessor must execute a division order prior to disbursement of payments due as royalties, setting forth the division of the production among the royalty owners. However, execution of division order may not estop landowner from asserting rights under an erroneous division order. Hafeman v. Gem Oil Co., 163 Neb. 438, 80 N.W.2d 139 (1958).

There is a developing practice in oil and gas lease to provide that lessor will only receive 1/8 of the “net proceeds” from the sale of gas. You may wish to advise your client to attempt to negotiate gross proceeds rather than net proceeds. Furthermore, several companies are attempting to place a provision in the lease which provides that the lessor shall share proportionately with lessee in post-production costs to market, transport or condition the oil. Once again, if possible, this phrase and deduction of the royalty payment should be eliminated from any proposed oil and gas lease, especially with regard to oil production.

The covenant in an oil and gas lease to pay rent or royalty is not personal or collateral but runs with the land. Id.

Recommended Action.

Be more concerned with a fair bonus, limited term and pugh clause, than the amount of royalty, as there may never be a well drilled under the Lease, and even if drilled, the well may be a dry hole.

XI. Relations Between Lessor and Lessee as to the Use of the Surface

In General

The extent to which the lessee may use the surface without violating rights of

the landowner or the landowner’s successors in interest depends primarily upon express and implied provisions of the lease relative to the surface use. Usually leases grant very broad powers, as the following provision demonstrates:

[A]nd by these presents does grant, demise, lease and let unto the lessee,

for the purpose of investigating, exploring by geophysical and other means, prospecting, drilling, mining and operating for and producing

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oil, liquid hydrocarbons, all gases, and their respective constituent products; injecting gas, waters, other fluids, and air into subsurface strata; laying pipe lines, storing oil, building tanks, power stations, roadways and other structures and things thereon to produce, save, take care of, treat, process, store, transport and market the oil, liquid hydrocarbons, gases, and their respective constituent products…

Even in the absence of such an extensive grant of powers, the oil and gas lease carries with it the right to possess and use as much of the surface as is necessary and reasonable to perform the obligations under the lease and to remove the minerals. Once again, this right is based upon the concept of the mineral/leasehold estate being the dominant estate. 4 Summers, Oil and Gas, Section 652 at 2; Mingo Oil Producers v. Kamp Cattle Co., 776 P.2d 736 (Wyo. 1989); Kinney-Coastal Oil Co. v. Kieffer, 277 U.S. 488 (1928); Getty Oil Co. v. Royal, 422 S.W. 2d 591 (Tex. 1967); Warren Petroleum Corp. v. Martin, 153 Tex. 465, 271 S.W.2d 410 (1954); Flying Diamond Corp. v. Rust, 551 P.2d 509 (Utah 1976); Bonds v. Sanchez-O’Brien Oil & Gas Co., 289 Ark. 582, 715 S.W.2d 444 (1986). Although the lessee may not be liable for reasonable surface damages caused by the drilling of the well, most oil and gas companies are reluctant to invoke this theory and will attempt to negotiate with the landowner regarding payment of surface damages.

The landowner retains the privilege of using the surface as long as such use is not inconsistent with the lessee’s rights. Krone v. Lacy, 168 Neb. 792, 97 N.W.2d 528 (1955); 4 Summers, Oil and Gas Section 652 at 9.

Recent issues have developed as to the conflict between oil and gas development and either wind energy development or solar development. In the absence of protective provisions within either lease or agreement, it appears that the priority of execution and/or recording will control in the event of a conflict as to reasonable usage.

Reasonable Uses of Surface and Protective Provisions for Lessor

In General

In the absence of express provisions in a lease or statutory provisions,

the lessee generally has the right to possess and utilize the surface to the extent reasonable and necessary for the removal of minerals from the land. This doctrine of reasonable necessary use is recognized by a majority of jurisdictions. Kinney-Coastal Oil Co. v. Kieffer, 277 U.S. 488 (1928); Bordieu v. Seaboard Oil Corp., 119 P.2d 973 (Cal. App. 1941); Holbrook v. Continental Oil Co., 73 Wyo. 321, 278 P.2d 798 (1955); Vest v. Exxon Corp., 752 S.W.2d 959 (Ct. App. Tex. 1985); but not specifically by Nebraska.

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Right of Access

Even if the lease does not specifically grant an easement upon the leased lands, an easement is implied in the oil and gas lease, together with the right to build and improve roads. 4 Summers, Oil and Gas Section 652 nn. 19, 21; Campbell v. Schrock, 165 S.W.2d 165 (Tex. Civ. App. 19028). The right of access includes access for seismic explorations. Hunt Oil Co. v. Kerbough, 283 N.W. 2d 131 (N.D. 1979). Likewise, the owner of a severed mineral interest has an implied right of access to the severed mineral estate. Reed v. Williamson, 164 Neb. 99, 82 N.W.2d 18 (1957); 4 Summers, Oil and Gas Section 652 nn.3, 19; 1A Summers, Oil and Gas Section 133 n. 16.

The access to the land must be reasonable, especially if a practical alternative is available. For example, a court allowed a landowner damages because access to the well site was available from a different direction – a practical alternative. Flying Diamond Corp. v. Rust, 551 P.2d 509 (Utah 1976).

A lessee may be liable for negligent construction of the access road. Hurley v. Northern Pac. Ry. Co., 153 Mont. 199, 455 P.2d 321 (1969) (construction of a road over the spillway of a dam).

Pipelines

Beware of lease provisions which provide that the lessee may use pipelines to convey oil onto or from adjoining lands, even if there is no production upon the leased land.

Buildings

A lessor/landowner cannot erect buildings or obstructions that interfere with lessee’s right of ingress and egress. 4 Summers, Oil and Gas Section 652 n. 20. See, e.g., Fry Land & Cattle Co. v. Colorado Interstate Gas Co., 805 P.2d 695 (Okla. Ct. App. 1990) (lessee/operator had no obligation to construct a new fence after removing a fence that obstructed access to a well site).

Location of Roads, Wells and Structures

Wells. The lessee decides on the locations of wells for optimum chance of success. However, one court held that as a matter of reasonable accommodation, the lessee could have drilled a gas well in a less valuable area of the lessor’s land. The court allowed the lessor to recover damages. Diamond Shamrock Corp. v Phillips, 256 Ark. 886, 511 S.W.2d 160 (1974).

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Setback. Most leases provide for a 200 foot setback from residences, barns and other structures. We suggest that the provision be increased, for example, to 500 to 1,000 feet, without written consent of the lessor.

Roads and Structures. As long as roads and structures are necessary to produce oil or gas and absent provisions within the oil and gas lease, the location of access roads, structures (such as tank batteries, treaters, etc.), the location of the roads and structures, and the nature of the structures are subject only to a reasonableness standard. 4 Summers, Oil and Gas Section 652 n.16.

Protective Clauses for Lessor. The following clauses are examples that may be placed in an oil and gas lease in order to protect the lessor/landowner.

Lessor reserves the right to designate the location of roads to and

from the drillsite. Lessor and lessee specifically agree that lessee or its assigns will use only such designated roads.

Lessor and lessee will mutually agree upon the reasonable location of the tank batteries, treaters and other necessary structures.

Operations Connected to Use of Surface

If the lessee’s use of the surface allegedly causes injury to the land, buildings, improvements, crops, livestock, etc., the lessee is only liable for unreasonable and unnecessary acts in developing and producing oil and gas from the land. This negligence standard applies unless the damage was caused by uses expressly prohibited in the lease or in the statutes. 4 Summers, Oil and Gas Section 652 at 20 n.3.1.

The following cases are examples of permissible operations:

Digging of slush pits and drainage ditches and the erection of storage tanks, treaters, etc., so long as they do not cover an excessive area. 4 Summers, Oil and Gas Section 652 nn.15, 18; Charles F. Hayes & Assoc., Inc. v. Blue, 233 So. 2d 127 (Miss. 1970); Powell Brisco, Inc. v. Peters, 269 P.2d 787 (Okla. 1954); LeCroy v. Barney, 12 F.2d 363 (8th Cir. 1926); Holbrook v. Continental Oil Co., 73 Wyo. 321, 178 P.2d 798 (1955); Bell v. Cardinal Drilling Co., 85 N.W.2d 246 (N.D. 1957).

Removal of trees if necessary to clear drilling site. Pinkerton v. Crann, 113 Cal. App. 484, 298 P. 532, (1931) (orange trees); LeCroy v. Barney, 12 F.2d 363 (8th Cir. 1926).

Opening road for ingress and egress.

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Construction of residence for oil company’s employees. Holbrook v. Continental Oil Co., 73 Wyo. 321, 178 P.2d 798 (1955), which seems extreme.

Conducting seismograph tests. Gulf Oil Corp. v. Whitaker, 257 F.2d 157 (Ct. App. Tex. 1958); Hunt Oil Co. v. Kerbough, 283 N.W.2d 131 (N.D. 1979).

Building pipelines across leased land, if necessary for operations

conducted on that land.

Use of so much of surface necessary to conduct waterflood

operations. Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972).

The following cases are examples of unreasonable operations or activities.

The size of the area utilized for the well location, roads, and structures must not be excessive. Humble Oil & Refining Co. v. Williams, 420 S.W.2d 133 (Tex. 1967); Macha v. Crouch, 500 S.W.2d 902 (Tex. Civ. App. 1973).

The leased land may not be used as a base of operations on other lands. 4 Summers, Oil and Gas Section 652 at 19; Franz Corp. v. Fifer, 265 F. 106 (9th Cir. 1924).

The lessee may not use leased lands to lay pipelines to convey oil and gas from adjoining lands unless the lessee is also conducting operations on the leased land. Kentucky Pipeline Co. v. Hatfield, 223 Ky. 315, 3 S.W.2d 654 (1927).

The lessee was liable for tearing up the surface with heavy equipment while the land was wet. Illinois Basin Oil Ass’n. v. Lynn, 425 S.W.2d 555 (Ky. 1968).

Protection of water. The rules and regulations promulgated by

the Nebraska Oil and Gas Conservation Commission may be useful guidance in protecting water.

No oil, saltwater, brackish water or other water unfit for domestic, livestock, irrigation or other general use shall be allowed to flow over the surface or into any stream or underground freshwater zone. See Nebraska Oil and Gas Conservation Commission Regulations 3-022.

The lessee must exercise due care to protect water bearing formations. See Nebraska Oil and Gas Conservation Commission Regulations 2-006.

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The Nebraska Oil and Gas Conservation Commission must approve enhanced recovery wells, storage wells, and disposal wells. See Nebraska Oil and Gas Conservation Commission Regulations Chapter 4.

Any subsequent agricultural lessee or purchaser of surface takes with actual or constructive notice of the prior oil and gas lease and the uses thereof. 4 Summers, Oil and Gas Section 652.

Damages to Growing Crops

Leases almost always include provisions for damages “to growing crops”

caused by lessee’s operations.

Use of the phrase to “growing crops” is actually a limitation upon the damages and may not include pasture, roadways, livestock, soil contamination, irrigation facilities, buildings and other structures.

Several cases have held that the term “growing crops” includes only plants that have been seeded, fertilized, and cultivated. Trotter v. Wells Petroleum Corp., 11 Kan. App. 2d 679, 732 P.2d 987 (1987). At least one court allowed recovery for damage to soybean crops. Andrepont v. Acadia Drilling Co., 255 La. 347, 231 So. 2d 347 (1969). A question remains about whether pasture is included in the term “growing crops.” At least one court was held that grasses and legumes seeded for pasturage are also growing crops. See Superior Oil Co. v. Griffin, 357 P.2d 987 (Okla. 1960).

Another court held that a “damages to crops” lease clause did not include damages to soil fertility in the area of filled slush pits and broken-up roadways. Phillips Petroleum Co. v. Morris, 518 S.W.2d 444 (Tex. Civ. App. 1975).

Injuries to Livestock

A typical lease will not compensate injuries to livestock; therefore, the lessor may be limited to a cause of action based on negligence under the reasonable use standard.

The lessee is not liable, for example, when livestock drink from blow

pits or slush pits. The lessee does not even have a duty to fence such pits. Pitzer & West v. Williamson, 159 S.W.2d 181 (Tex. Civ. App. 1942); Benefield v. Pure Oil Co., 322 Ill. App. 57, 53 N.E.2d 726 (1944); Young v. McGill, 473 S.W.2d 672 (1971). Other courts have held that the lessee has no duty to fence in wells, tanks, machinery, and the like, and is not liable absent negligence. Baker v. Davis, 211 S.W.2d 246 (Tex. 1948); Malernee Oil Co. v. Kerns, 187 Okla. 276, 102 P.2d 836 (19400. But one court held that injuries to cattle from salt water escaping and flowing over the surface of the land were compensable. Phillips Petroleum Co. v. Bartness, 181 Okla. 501, 76 P.2d 352 (1937).

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A lessor/landowner may wish to protect livestock by adding a lease clause requiring the lessee to fence the drillsite area and tank battery site and to install necessary cattle guards in addition to including livestock in the damage provision.

Recommended Damages Provisions

Since the standard lease provides that “lessee shall pay for damages caused by

its operations to growing crops”, which is a limited damage provision, lessors are advised at a minimum to strike the phrase “growing crops” in order that the language refers provides that the Lessors shall pay “for damages caused by its operations on this land”. Lessors may want to attach a provision elaborating on the damages recoverable.

Lessee shall pay the Landowner all damages occasioned by lessee’s

operations under the terms of this lease, including, but not limited to, damages to growing crops, pasturage, livestock, the surface of the land, soil contamination, buildings, irrigation facilities, structures and other improvements.

Landowners may consider requiring a specific amount for road damages and drillsite location damages, payable before the lessee moves onto the location. As such a clause may limit the damages recoverable; landowners should utilize the clause only to establish the minimum amount payable. Examples of such provisions follows:

The lessee and/or its assigns agree to pay minimum location and road damages in the sum of $____ prior to moving onto any proposed drilling site; and provided further, that if more than three acres are utilized for the location site and access roads, such additional amounts shall be paid as damages at the minimum rate of $____ per acre. These minimum damages shall not constitute a waiver of the provisions for payment of damages under paragraph ____ of this lease.

Lessee agrees to pay to lessor for crop, location and road damages a minimum of $____ payable to lessor at the bank designated in the lease prior to or concurrently with the time it moves the rig on the premises to commence drilling an oil and gas well. Lessee further agrees that if more than three acres are utilized in road and location for any one well, lessee shall pay lessor’s damages and an additional minimum amount at the rate of $____ per acre or fraction thereof. Lessee also agrees to restore the surface to as near its original condition as possible after each operation on the land has been completed. If damages for any one operation have been paid and lessee or its assigns create damages caused by second or successive operations, lessee shall pay lessor for the

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subsequent damages at a minimum rate of $____ per acre or a fraction thereof.

Landowners also may want to require a specified amount placed in an escrow account to secure the payment of surface and location damages.

Further, the lessor may want to have the lessee also pay damages/rent for use of the land during each year of production. Such a clause might provide, for example: “The lessee shall pay lessor rent of $____ each lease year for each tank battery site, limited to ____ acres. After the lease year of installation of a road, lessee shall pay lessor $____ per year for the use of the road each lease year a road is used.”

Irrigation Systems

Irrigation systems create very serious problems since oil and gas production

will continue to interfere with the entire irrigation system for years to come. Any damage clause similar to the samples given should include damages to irrigation systems. Beyond the damage clause in a lease, specific provisions should be inserted to protect the irrigation system of the lessor/landowner. For example, lessor/landowners may want to restrict the initial drilling operations on irrigated lands to the time when the land is not being irrigated, for example:

Lessee shall not conduct drilling operations on the irrigated land

described in this lease from April 1 through October 31st of each year, without lessor’s prior written consent.

Likewise, the lease can provide that the lessee cannot interfere with the irrigation system.

Example:

Lessee’s producing operations shall not interfere with lessor/landowner’s irrigation system on this land.

Should any well be developed on irrigated land, it shall be operated in a manner so as to not interfere with the irrigation, whether irrigation be by flood, by center pivot, or by other method.

Problems regarding sprinkler irrigation systems may require lease clauses about

recessing the well in the cellar of the pit, using lower clearance hydraulic pumps, or building ramps so that the sprinkler may pass over the wellsite.

The “Accommodation Doctrine” may be useful. See Getty Oil Co. v. Jones,

470 S.W.2d 618 (Tex. 1971) (lessee required to recess well in cellar or use the lower clearance hydraulic pump in order to not interfere with sprinkler irrigation equipment). A discussion of the Accommodation Doctrine follows.

Restoration of Surface

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Unless a statute, lease provision, or negligence principles require differently, technically lessees may not be obligated to restore the surface to its original condition after the completion of drilling operations. Solleau v. Yates Drilling Co., 183 So. 2d 62 (La. Ct. App. 1966). However, the Arkansas Supreme Court found an implied duty in the oil and gas lease to restore the surface as nearly as practicable to the same condition as it was before drilling. Bonds v. Sanchez-O’Brien Oil & Gas Co., 289 Ark. 582, 715 S.W.2d 444 (1986).

However, the Rules and Regulations of the Nebraska Oil and Gas Conservation Commission have protective provisions:

Bond. Recent revisions to the Regulations have increased the bond. Before commencing drilling, the lessee must file a $10,000.00 bond with the Commission for each well conditioned upon performance of the provisions of the laws of the State of Nebraska and the rules, regulations, and orders of the Commission. The bond remains in effect until the plugging of the hole is approved. A $100,000.00 blanket bond covering all wells or holes in the State of Nebraska may be filed in lieu of separate bonds. Chapter/Rule 3-004.

Following abandonment. “Following abandonment, working pits, reserve pits and/or burn pits shall be backfilled, paths leveled, debris removed or buried, and land restored to the reasonable satisfaction of the Director,” Chapter/Rule 3-028.07.

Plugging. Chapter/Rule 3-028 provides specific requirements regarding

the plugging of wells.

Spills. Chapter/Rule 3-022.01 et. seq. set forth requirements for reporting and cleanup of spills of oil and/or produced water.

The lessor may still wish to place provisions in the lease regarding restoration of the surface. Examples follow:

When drilling has been completed, lessee and its assigns agree to restore the surface of the premises as nearly as possible to its original condition, including the removal of all structures and the filling of all slush pits, or making satisfactory arrangements with the lessor in the event the slush pit is left open for a period of ____ days.

Lessee also agrees to restore the surface to as near its original condition as soon as possible after each operation on the land has been completed.

If the lessee has not removed its property within a reasonable time after termination of the lease, then the lessee may be liable for damage based upon fair rental value of the land. Oceana Oil Producers v. Portland Sils Co., 229 Ind. 656, 100 N.E.2d 895 (1951).

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The title to the casing upon abandonment of the wellsite is unclear. However, one court held that upon abandonment by the lessee, the title would not vest in the landowner. Pearson v. Black, 120 S.W.2d 1075 (Tex. 1939). Common practice in Nebraska is to consider casing as personal property which may be removed. However, the reality is that currently casing has no value.

Potential Remedies Against and Liabilities of Lessor/Landowner

Interference. The lessor/landowner or surface lessee may be responsible for

unreasonable interference with the access rights of the dominant mineral lease.

In discussing the rights of the agricultural lessee vs. the mineral lessee,

a court stated that the lessee of the mineral rights would rely upon being able to make reasonable adjustments with the former agricultural lessee, and the mineral lessee could not be wholly deprived of the right to extract the minerals by unreasonable demands of the former agricultural lessee. Briggs v. Neville, 103 Neb. 1, 170 N.W. 188 (1918).

An oil and gas lease was awarded damages measured by the increased day work rates for drilling occurring during the period access was prevented. Bill v. Dellard, 602 S.W.2d 521 (Tex. 1980).

A landowner paid damages to an oil company based upon down-time for heavy equipment sitting idle when the landowner prevented the oil company’s construction crew from clearing the drill site. Reno Livestock Corp. v. Sun Oil Co., 638 P.2d 147 (Wyo. 1981).

A surface owner who interfered with lessor’s use of the surface was held liable in damages for the stand-by time of a contractor. Martens v. Prairie Producing Co., 668 S.W.2d 899 (Tex. Ct. App. 1984).

A court awarded damages for improperly denying use of a disposal well based upon the loss in market value of an operator’s oil reserves occasioned by the delay in production. Short v. Wise, 239 Kan. 171, 718 P.2d 604 (1986).

Injunctive Relief. Substantial authority gives mineral developers the right to enjoin surface owners from interfering with or prohibiting operations.

Kinney-Coastal Oil Co. v. Kieffer, 277 U.S. 488 (1928) (surface owner

whose residential development interfered with mineral operations).

Harris v. Charles Pfizer & Co., 385 F.2d 766 (8th Cir. 1967) (upheld

permanent injunction against the surface owner desiring to construct commercial buildings and subdivide the land for residential development.

Reno Livestock Corp. v. Sun Oil Co., 638 P.2d 147 (Wyo. 1981) (allowed permanent injunction to prevent rancher from interfering with drill site construction).

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Eternal Cemetery Corp. v. Tammen, 324 S.W.2d 562 (Tex. Civ. App. 1959) (enjoining further use of the surface as a cemetery).

Reality is that if the oil company is able to obtain a temporary injunction, the applicable drilling operations or seismic operations may have already been completed before the final hearing, with the remaining issue being damages. Although we have filed many injunctive actions, we have never had one proceed to an actual order or hearing. Usually it is in the interest of the landowner to negotiate sufficient damages than to contest the operations which are likely permissible under the lease.

Destruction of Property. A lessee could recover damages for wrongful intrusion and destruction of the prospect well the lessee had drilled. Alphonza E. Bill Corp. v. Listle, 74 Cal. App. 2d 638, 169 P.2d 462 (1946).

Injunctions Against Lessee

Authority granting to the surface owner a right to injunctive relief against the mineral developer is difficult to find. Courts generally deny injunctive relief to the landowner because damages and injury are usually compensable and because the mineral estate is recognized as the dominant estate. However, a court may recognize injunctive relief against mineral development when irreparable surface injury occurs, i.e., injury occurs for which adequate monetary compensation cannot be made. Powell Briscoe v. Peters, 269 P.2d 787 (Okla. 1954); Ter Harr v. Kettleman N. Dome Ass’n., 34 F. Supp. 823 (S.D. Cal. 1940); Gulf Oil Corp. vs. Walton, 317 S.W.2d 260 (Tex. Civ. App. 1958).

A different reason for an injunction existed where an oil and gas lessee was enjoined from trespassing or drilling oil and gas wells in an Addition to the City of Kimball, Nebraska. Restrictive covenants had been executed and recorded prior to the lease by all parties owning an interest in the mineral estate and surface estate, which restrictive covenants provided that the property could only be used for “residential purposes.” Reed v. Williamson, 164 Neb. 99, 82 N.W.2d 18 (1957).

Accommodation Doctrine

Although not having been ruled upon or specifically adopted in the State of Nebraska, a number of states have accepted the “accommodation doctrine.” The doctrine provides that where an already established surface use would be precluded or impaired, and where established oil industry alternatives are available to the lessee to accommodate the surface use, then reasonable use requires adoption of the alternative. When unreasonable conflicts exist, the servient surface estate must yield to the dominant mineral estate. However, the burden of proof of an alternative rests on the landowner.

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Cases using the accommodation doctrine follow:

A lessee was required to recess wells in cellar or use lower clearance hydraulic pumps to avoid interference with sprinkler irrigation equipment. Texas-Getty Oil Co. v. Jones, 470 S.W.2d 618 (Tex. 1971).

A “least destructive alternative” concept in allowing damages to the

landowner for the location of an access road to a well site. Utah-Flying Diamond Corp. v. Rust, 551 P.2d 509 (Utah 1976).

A landowner received damages for the lessee’s location of a well for a 640 acre gas unit in an especially valuable five acre tract, based upon a finding that as a matter of reasonable accommodation the well could have been drilled in a less valuable 80 acre portion. Arkansas-Diamond Shamrock Corp. v. Phillips, 256 Ark. 886, 511 S.W.2d 160 (1974).

A court order enjoining the surface owner from refusing entry to the mineral developer for seismic explorations adopts the accommodation doctrine. Once alternatives are shown to exist, the court applies a balancing of the mineral and surface owner’s interest. North Dakota-Hunt Oil Co. v. Kerbaugh, 283 N.W.2d 131 (N.D. 1979).

XII. Miscellaneous Clauses and Provisions Regarding Oil and Gas Leases

The Standard Producer’s 88 Lease

Although oil and gas companies may refer to the lease they present as the “Standard Producer’s 88 Lease,” no such Standard Producer’s 88 Lease exists. Rather, hundreds of variations of the basic lease are used. Therefore, an attorney representing the lessor should examine every provision of a proposed oil and gas lease.

Warranty Clause

The warranty clause should be stricken. If it is not stricken, the lessor could be required to bear the expense of curing title to the mineral estate or could potentially be liable for breach of warranty as to the mineral interest leased.

Pooling Clause

An unlimited pooling clause may be stricken, thus giving the lessee the option of negotiating a voluntary pooling or unitization agreement and affording the lessee the protection of the Nebraska Oil and Gas Conservation Act and Commission approval of forced pooling or unitization operations. If the oil company is unwilling to eliminate the pooling provision, it may be possible to negotiate a provision limiting the pooling to the spacing units as approved by the Nebraska Oil and Gas Conservation Commission, whether by Rule, Regulation or Order. Basically, in the absence of a special Order, such as for deeper horizontal wells, the spacing units are 40 acres per well. Usually

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provisions regarding pooling may not be worth ending negotiations and not executing the oil and gas lease.

Entireties Clause

The “entireties clause” typically provides as follows:

If the leased premises are now or shall hereafter be owned in severalty, or in separate tracts, the premises, nevertheless, shall be developed and operated as one lease, and all royalties hereunder shall be treated as an entirety and shall be divided among and paid to such separate owners in the proportion that the acreage owned by each such separate owner bears to the entire leased acreage. The lessee shall have no obligation to offset wells on separate tracts into which the lands covered by this lease may be hereafter divided by sale, devise, or otherwise or to furnish separate measuring or receiving tanks.

The reason for the clause is to avoid lessee’s potential obligation to drill “offset” wells. Such a clause may have the following effect: Landowner A owns tracts 1 and 2, which tracts are covered by an oil and gas lease with an entireties clause. Landowner A subsequently sells tract 1. Production is established thereafter upon his remaining tract 2. The new owner of tract 1 is entitled to a share in the production of tract 2 even though the new owner owns no minerals with regard to tract 2. Rauner v. Jones, 159 Neb. 385, 67 N.W.2d 347 (1954); Hafeman v. Gem Oil Co., 163 Neb. 438, 80 N.W.2d 139 (1956); Krone v. Lacy, 168 Neb. 792, 97 N.W.2d 528 (1959). Furthermore, if subdivision occurs, each lot owner may receive a minute share of production. For these reasons, the lessor may want to strike the “entireties clause” in full. Oil companies usually agree to changing or altering the entireties clause if language regarding the “offset” wells remains.

Pugh Clause

A number of oil and gas leases will attempt to lease numerous sections of land in one lease. Production from a well with minimal production will therefore hold all land by production. One alternative is to split the leases into quarter sections, or at most, sections of land. However, an alternative is to place a “Pugh clause” in the lease which basically provides that at the end of the primary term, only those lands which are within a spacing unit, once again established by the Rules, Regulations or Orders of the Nebraska Oil and Gas Conservation Commission, which is producing either oil or gas, will be held by production, with all other land to be released. Another alternative is to list separate designated tracts with similar language that “each Tract is to be considered a separate lease”.

Form of Addendum/Rider

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When an additional paragraph or paragraphs are inserted, any conflicting phrase should be properly stricken. A phrase in the nature of the following should be inserted at the bottom of the page:

This oil and gas lease is subject to additional terms and conditions set forth in a Rider and Addendum dated ______, 20__, which is expressly incorporated herein and made a part hereof by reference. In the event of any conflict, the terms and provisions of the Rider shall control.

The Rider or Addendum should recite the date of the lease, the parties to the lease and should be signed for identification purposes by the lessor and possibly by the lessee.

XIII. Summary List of Oil and Gas Issues

Initial bonus consideration.

Whether an extension should be granted. If so, you may wish to consider increasing the bonus for the consideration. For example 150% of the original bonus.

Amount of royalty.

Gross vs. net proceeds.

Strike warranty clause.

Shut-in royalty clause to increase annual shut-in payment per net mineral acre per year and to limit to a certain term after the end of the primary term.

Delete entireties clause.

Alter pooling clause to restrict to spacing units as established by the Nebraska Oil and Gas Conservation Commission.

Provisions requiring restoration of the surface and removal of machinery and equipment, including limitation upon the time period in which to accomplish, deleting any reference to discretionary removal.

Restrict location of wells. For example, 500 feet from any building or structure.

Mutual agreement for access.

Elaborate on damage provision.

If irrigation is involved, restrict time period for drilling and restrict nature of operations if drilling is successful.

Require all pipelines to be below plow depth.

If interference with Conservation Reserve Program Contracts, require indemnification for any loss or penalties incurred by lessor due to drilling and production operations.

Delete any provision requiring lessor to notify lessee of a bona fide offer to lease, received during the primary term and an opportunity for the Lessee to lease on the same terms and conditions as the bona fide offer, as it is unlikely that the lessor will remember that he is subject to said notification.

XIV. Acquisition of Severed Mineral Interests by Landowner

Adverse Possession

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When the mineral estate has been severed from the surface estate, mere occupancy of the surface is insufficient to establish title to the minerals by adverse possession. Actual, public, notorious, and uninterrupted working of the minerals i.e. production, under claim of ownership for the statutory period is generally required. The mere execution, delivery, or recording of oil and gas leases or mineral deeds will not constitute adverse possession. Schaneman v. Wright, 238 Neb. 309, 470 N.W.2d 566 (1991); Williams & Meyer, Oil and Gas Law Section 224.4 at 54; and 1A Summers, Oil and Gas Section 138.

Tax Foreclosure

In 1981, the Nebraska Legislature enacted statutes providing that the owner of the surface estate from which the mineral interest has been severed or the owner of the mineral interest which has been severed may file an application with the county assessor to place such severed mineral interest on the tax list of the county. Applicants shall at their own cost provide proof of ownership of the severed mineral interest and a record of creation of the severed mineral interest in the form of an opinion of an attorney or a certificate prepared by a licensed abstractor. The result of these actions is that the severed mineral interests may be separately assessed and, if taxes are not paid with regard thereto, foreclosed upon as any other interest in real estate, Neb. Rev. Stat. § 57-235 through 57-239. An unresolved issue is whether payment of real estate taxes by itself with regard to severed mineral interests will avoid abandonment under § 57-228 hereinafter discussed.

Loss of Mineral Rights by Abandonment

For abandonment to occur, relinquishment of possession or nonuse must occur together with the intention to abandon. At common law, the legal title to land could not be lost to abandonment. See Tate v. Biggs, 89 Neb. 195, 130 N.W. 1053 (1911). In 1967, the Nebraska Legislature enacted a law which in essence provided a form of statutory abandonment. Neb. Rev. Stat. § 57-228 et. seq. The statutes basically provide that the surface owner of real estate from which a mineral interest has been severed and which has been abandoned may sue in district court to terminate and extinguish the severed mineral interest, to cancel the interest of record, and to vest title in the surface owner.

Specifically, § 57-229 provides as follows:

“A severed mineral interest shall be abandoned unless the record owner of such mineral interest has within the twenty-three years immediately prior to the filing of the action provided for in sections 57-228 to 57-231, exercised publicly the right of ownership by:

acquiring, selling, leasing, pooling, utilizing, mortgaging, encumbering, or transferring such interest or any part thereof by

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an instrument which is properly recorded in the county where the land from which such interest was severed is located; or

drilling or mining for, removing, producing, or withdrawing minerals from under the lands or using the geological formations, or spaces or cavities below the surface of the lands for any purpose consistent with the rights conveyed or reserved in the deed or other instrument which creates the severed mineral interest; or

recording a verified claim of interest in the county where the lands from which such interest is severed are located.

Such a claim of interest shall describe the land and the nature of the interest claimed, shall properly identify the deed or other instrument under which the interest is claimed, shall give the name and address of the person or persons claiming the interest, and shall state that such person or persons claim the interest and do not intend to abandon the same. The interest of any such owner shall be extended for a period of twenty-three years from the date of any such acts; Provided, that the provisions of this section shall not apply to mineral interests of which the State of Nebraska or any of its political subdivisions is the record owner.”

The retroactive operation of this statutory remedy was held unconstitutional by the Nebraska Supreme Court in Wheelock 7 Manning Double O Ranches, Inc. v. Heath, 201 Neb. 835, 272 N.W.2d 768 (1978). The Court held that the statute, insofar as it attempts to retroactively terminate and extinguish the severed mineral interest, violates the due process and contract clauses of the United States and the Nebraska Constitutions. But the court did not fully elaborate or explain the term “operate retroactively.” This issue has been interpreted by numerous District Courts and impliety by cases before the Nebraska Supreme Court, that the unconstitutional retroactive operation applies to the time period before 1967 and not to all documents creating a severed mineral interest before 1967.

A series of cases before the Nebraska Supreme Court have somewhat clarified several issues with regard to abandoned mineral interests and verified claims of interest.

The Court In Peterson v. Sanders, 282, Neb. 711, 806 N.W.2d 566 (2011) considered the issue as to the retroactive application of the Nebraska Statutory Provisions, and in particular, relied upon the United States Supreme Court Case of Texaco, Inc. v. Short, 454 U.S. 516, 102 S.Ct. 781, 70 L.Ed.2d 738 (1982), wherein the United States Supreme Court held that although the mineral estate was considered to be vested property interests, that performance of reasonable conditions to indicate

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a present intention to retain the interest was allowable and that the retroactive application of the Indiana Statute did not amount to a taking without just compensation under Indiana law. However, the Nebraska Supreme Court did not totally clarify that the prior reference to unconstitutional retroactive application as the parties in the cause of action executed instruments of conveyance again transferring the mineral interest after 1967 and prior to the requisite 23 year period.

In Ricks v. Vap, 280 Neb. 130, 784 N.W.2d 432 (2010), the Court held that the term “lease” relates to the time when the leases were recorded and not to the end of the term of the lease. For example, if a ten year lease is executed and recorded 25 years before the lawsuit is filed, the severed mineral interest is subject to abandonment, although the term expires within the 23 year period.

In Gibbs Cattle Co. v. Bixler, 285 Neb. 952, 831 N.W.2d 696 (2013), the Nebraska Supreme Court held that reference in the statutory provision to “record owner” was not defined in the Statutes, but was held to include not only the records in the office of the register of deeds/county clerk, but also to include “an owner identified through the probate records in the county where the interests are located”. See also WTJ Skavdahl Land, LLC v. Elliott, 285 Neb. 971, 830 N.W.2d 488 (2013).

In the above-described case of Gibbs Cattle Co. v. Bixler, one of the mineral interest owners was not initially joined as a party defendant. Before an amended complaint was filed, said defendant recorded a Verified Claim of Interest. The Court held that Neb. Rev. Stat. § 25-201.02(2) applies only to an amendment, that changes the party or the name of the party and refers to a substitution, rather than an addition of parties and that therefore, the severed mineral interest of said defendant could not be terminated.

In the case of Rice v. Bixler, 289 Neb. 194, 854 N.W.2d 565 (2014), the Nebraska Supreme Court considered the requirements of a verified claim of interest. The Court basically held that the requirements of the language set forth above with regard to the verified claim of interest must be strictly complied with, and in particular, there must be a reference to a Deed or other conveyance of record by which the severed mineral interest was claimed. Left somewhat unclear is the exact nature of the document which must be referred to, and in particular, whether it is necessary to refer to the initial Deed or estate proceedings severing the mineral interest, to the final instrument of record, or to the complete chain of title. In the instant case referenced to estate proceedings in

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another jurisdiction were insufficient. General reference to severance of the mineral interest appears to be insufficient. The safest course of proceeding with regard to a verified claim of interest is set to set forth the initial deed or estate proceeding creating the severed mineral interest, and at a minimum, the final conveyance to the defendants. Obviously, setting forth all instruments in the chain of title with regard to the severed mineral interest is recommended.

As set forth previously, there remains an issue as to whether payment of severed mineral interest real estate taxes by itself will avoid abandonment. Although there is no strict compliance with the statutory language of 57-229, we note that Neb. Rev Stat. Section 57-235 through 239 with regard to taxation of severed mineral interest was enacted in 1981, after the enactment of the abandoned mineral interest statutory provisions of Section 57-228, et. seq.

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