Julie Baird, National Underwriting Counsel for First American Title Insurance Company, National Commercial Services,
and Basil (“Bill”) Shiber, Shareholder, Miller Starr Regalia, Walnut Creek, California.s
Any analysis of the feasibility of a large solar energy project requires that consideration be given to subsurface mineral rights as well as related surface entry rights. Land considered for these projects often includes areas in which oil, gas and mineral deposits exist, and in some cases, where exploration has or is occurring. Solar projects, as opposed to other alternative energy projects, are somewhat unique because they involve extensive coverage of the surface of the ground with photovoltaic panels or other array technology and, given the significant cost of that equipment, it is crucial that developers secure the ability to use the maximum amount of the surface area without interference. This requires the limitation, restriction and/or removal of third-party surface rights to ensure that the technology placed on the surface can operate unimpeded. This article will provide an overview of mechanisms available for that purpose in California and an analysis of the various approaches from a title insurance perspective.
I. NATURE OF MINERAL RIGHTS.
When evaluating prospective project areas for solar development, it may be important to know what types of minerals exist on the site. From a title insurance perspective, it will also be important to know what type of minerals have or have not been severed from the surface rights.
Generally speaking, the proprietor of the land owns all things below the surface of the land including the minerals. When the property is conveyed, all of those “things” beneath the surface, including mineral rights, are also conveyed if there is no specific mention in the deed. However, real property may be divided horizontally, just as it can be divided vertically. In other words, it is possible to sever the ownership of the subsurface rights from the ownership of the surface rights. Once there has been a severance, conveyance of the surface does not necessarily transfer title to the subsurface. Rather, each must be transferred separately.
II. SURFACE ENTRY RIGHTS APPURTENANT TO MINERAL RIGHTS.
Ownership of a subsurface mineral interest may include the ability to access the surface of the property in order to extract the minerals. The extent of a mineral holder’s surface rights depends on the instrument creating those rights – generally, the reservation in a deed conveying the property, or the separate grant of those rights. The language of the instrument creating the mineral rights (or absence of language regarding surface rights) generally determines the nature and extent of the surface rights created, as set forth below. The nature and extent of the rights will then determine the type of documentation necessary to extinguish or waive the right and subsequently to obtain the desired title insurance.
A. Silence Equals Reasonable Access.
First, the reservation or grant of mineral rights may be silent on the mineral holder’s surface rights. In this case, the law generally implies a reasonable right to use the surface to extract the minerals. That is, the mineral rights holder may use the surface of the property in such a manner as is reasonably required for the enjoyment and exercise of the mineral interests, even if he or she has no express right to use the surface. In practice, this generally means the mineral rights holder has the right to enter the surface of land and to extract the minerals, but the use cannot unreasonably interfere with the surface owner’s use of the surface. The extent of surface use allowed will depend on the specific situation; for example: What is the surface currently used for; what is built on the surface; how practical and feasible is access to the minerals from areas of the surface which are not developed or used; is there access to the minerals from any other property; and, what types of mining activity is customary in the area.
B. Instrument Expressly Describes Surface Rights.
Second, the reservation or grant may expressly reference the extent of surface rights conveyed to the mineral rights holder. That express reference may include a specific location on the surface from which the holder may access the minerals or the depth to which the right holder may drill or mine. On the other hand, the access may be broad and include access to any part of the surface of the property or any part of the surface on which no permanent structures exist.
C Instrument Expressly Excludes Surface Rights.
Third, mineral rights may be reserved or granted, but the reservation or grant expressly excludes any rights to access the surface to extract the minerals. In this case, the intent may be that the minerals be accessed only by “horizontal” or “slant” drilling from adjoining property or some other mechanism which does not disturb or intrude on the surface of the property. Often, such a grant will include a specification that the mineral rights granted are a certain number of feet (typically 500 feet or more) below the surface of the property.
III. IDENTIFYING MINERAL INTERESTS.
The first step in any mineral rights analysis is to perform a title review to identify any documentation creating or reserving mineral rights, especially as pertains to surface rights access. At the onset of the transaction or development project, a Preliminary Report should be obtained from a title insurance company reflecting the conditions on which the title insurance company is willing to issue title insurance and specifically, the exceptions to coverage identified by the title insurance company relative to the specific property. Typically, if there is a severance of the mineral rights, the severance would be reflected in this report.
If it is determined that a severance exists, developers can obtain a separate report specific to those mineral rights disclosing the exact nature and detailed ownership interests relating to those rights. Title companies will likely require this type of report from a reliable third party company before they will underwrite insurance based on documentation indicating a waiver or relinquishment of any surface rights. They will want assurance that all of the interests and owners have been identified and that all of the owners have agreed to the documentation limiting or extinguishing their rights.
IV. MECHANISMS FOR LIMITATION OR REMOVAL OF SURFACE RIGHTS.
If a solar project developer discovers that a potential project site has a mineral severance, it will want assurance that any existing mineral rights will not be exercised in a manner that would damage the existing improvements or any future improvements that the surface owner wants to construct. There are several mechanisms to limit or remove surface access rights which can be used to protect a proposed solar energy project from interference.
The first mechanism is an old fashioned one – negotiation with the holder of the rights to limit or eliminate any surface access. One of the biggest challenges with respect to the negotiation option is locating the holder of the mineral rights. It may be that there are numerous holders of the rights because the interests have been fractionalized. Sometimes the original holders have died so it is necessary to locate the heirs of those original holders. And often the heirs are unaware that they own a mineral interest. If a mineral rights holder becomes aware that his or her ownership may impede a project, he or she may attempt to use that leverage to obtain a negotiating advantage. If the mineral rights holder is willing to negotiate, the cheapest and most expedient action for a developer is often to purchase the surface entry rights. If the surface entry rights are acquired, the developer can generally proceed, even if subsurface mineral rights remain, with appropriate title insurance coverage.
Typically, the more fractionalized mineral rights are, the less valuable they are for any particular holder because an aggregation of those rights is required in order to make any exploration worthwhile. Often, an aggregation is required not only of the rights on one parcel, but of mineral rights on several parcels, in order to make extraction feasible.
To properly prepare for negotiations with a mineral rights holder, it is helpful to obtain an appraisal of the mineral rights to determine their fair market value. Usually a mineral rights appraiser will compare the cost of extraction of the minerals with the market value of the minerals to determine their value. As mentioned, interests will often need to be aggregated in order to make extraction economically feasible. The main drawback to the negotiation strategy is the cost and time involved in such negotiation, although the alternatives also have cost and time components associated with them.
If all of the owners of the mineral rights are willing, a quitclaim of the surface entry rights to the surface owner will help a title insurer underwrite the risk of insuring against surface access damage. Alternatively, the owners can negotiate certain areas to remain open for exploration and drilling. A title insurer can provide tailored insurance coverage drafted around these specifically created “drilling islands”. It is important to remember that these types of arrangements usually also involve easement rights for access (and perhaps utilities and pipelines) across the surface.
B. Termination of Dormant Interests.
The next approach to limit surface rights is to determine if the mineral interest is dormant and subject to termination, pursuant to statute. Cal. Civ. Code § 883.210 provides a mechanism for the termination of dormant mineral rights. The purpose of the statute is to avoid a situation where old mineral rights cloud title and prevent a productive use of the property.
A mineral right is considered dormant if all of the following conditions are satisfied for a period of twenty years preceding commencement of the action to terminate the mineral right:
- There is no production, mining, or other development of the mineral rights.
- No separate property tax assessment is made of the mineral right or, if an assessment is made, no taxes are paid on the assessment.
- “No instrument creating, reserving, transferring, or otherwise evidencing the mineral right is recorded.”
Satisfaction of the first condition, relating to no production or mining of the mineral, can be verified by an inspection of the real property and review of historical records. Often a mining consultant is hired to inspect the property and mining records and, if needed, to testify that no production or exploration has occurred in the last twenty years.
Satisfaction of the second condition can be verified through a review of the property tax records in the county in which the property is located.
Satisfaction of the final condition can be verified through a review of the public record maintained by the County Recorder and can be more challenging. Often, the instrument “creating, reserving, transferring” the mineral right is more than twenty years old, but within the last twenty years a property description – which may be attached to a deed or a deed of trust – has been recorded which itself reflects the reserved mineral rights. Thus, even though there has been no separate conveyance of the rights, if an instrument has been recorded referencing the rights by, for example, using the original language of reservation, an argument can be made that that instrument “evidences” the mineral rights, and – if the instrument was recorded within the last twenty years – the twenty -year period requirement is not met.
If the conditions of the statute are satisfied, a complaint can be filed in the Superior Court of the county in which the property is located to obtain a determination that the mineral rights have in fact been abandoned. If the current mineral rights holders cannot be located or are unknown, they can be served by publication in a local newspaper. It is not uncommon for known holders of the mineral rights, upon being served with a complaint, to simply disclaim any interest or to not oppose the request for termination. If no one responds to the summons and complaint, request for entry of default can be filed and a default judgment entered.
If a holder of a mineral right does object to the determination of abandonment, he or she has the right to file a “Notice of Intent to Preserve Mineral Right” but as a condition, must pay litigation expenses incurred through the date of that filing. This is often a disincentive to claiming the mineral rights, especially if the mineral right is not particularly valuable or if the cost of exploitation is particularly high.
The process is akin to a quite title action. Once a judgment is entered in the case, it can be recorded with the County Recorder to reflect the termination of the mineral right. The judgment acts as the equivalent as a conveyance of the mineral right to the owner of the real property and, once recorded, may be insured.
C. Termination of Right of Surface Entry in Oil/Gas Leases.
The third mechanism is also statutory, and applies only to oil and gas leases on “lands within a city in any county with a population exceeding 4,000,000, or with a population of more than 700,000 and less than 710,000 as determined by the 1960 Federal Decennial Census.” These population prerequisites make this statutory process currently available in cities located in two counties, Los Angeles and Orange. Again, the purpose of the statute is to allow for the productive use of property – particularly in urban areas – where an old oil or gas lease exists. If a lease exists for the production of oil, gas or other hydrocarbons, together with a right of entry or occupation of the surface, the fee owner may obtain a judgment terminating or limiting the right of entry of the surface under the following conditions:
- The document creating the leasehold interest was executed more than 20 years prior, not including any amendments.
- There is no oil or gas well or well bore on the land.
- Termination of the right of entry or occupation of the surface that is requested by the plaintiff, or as may be conditioned by the court, “will not significantly interfere with the right of the lessee, under the lease, to continue to conduct operations for the continued production of oil . . . .” That is, some provision must be made to allow the lessee to continue to access any oil reserves which may exist below the surface.
The main drawback to this statutory provision is that it cannot be used in the less populous counties where it is most likely a solar energy project will be located.
D. Declaratory Relief Regarding Surface Rights.
The fourth mechanism is to obtain declaratory relief under Cal. Code Civ. Proc. § 1060 regarding the respective rights of the surface owners and the mineral rights owner to the surface of the property. This would be most useful in a situation where there is no express grant, reservation or exclusion of surface rights, and where the “reasonable right to use the surface” standard applies. In such a case, the project proponent can request a declaratory determination from the court, prior to a project being built, that a mineral rights holder should be limited to certain areas or “drilling islands” on the surface of the property in accessing the mineral deposits. The declaration would in essence be an early determination of the type of access that will be permitted under the applicable legal standard, and would allow plans to be made as to where improvements can be located. In order to prepare such an argument, a mining consultant will typically need to be retained to testify as to reasonable means of access to the mineral rights deposits.
In order to make the dispute a “concrete” one, capable of resolution by a court, a specific proposal for surface use and access should be made by the project proponent to the mineral rights holder. If the proposal is rejected, declaratory relief can be sought. The main drawback of this approach is the time required to obtain a final judgment, if no earlier resolution can be recorded.
Finally, certain public entities, including utilities, have the right to condemn property, including mineral interests and/or surface entry rights, and in that situation, condemnation of the mineral or surface entry interests is an option which may be considered. Such a condemnation would require a showing of public necessity, and payment of just compensation to the mineral rights holder.
V. TITLE INSURANCE.
The most common form of insurance is, generally, against loss from the exercise of any right to use the surface of the land for the extraction or development of the minerals.
This type of specific coverage can be provided in the title policy itself, as with the American Land Title Association (“ALTA”) or California Land Title Association (“CLTA”) 2010 Homeowner’s Policy or Expanded Coverage Residential Loan Policy, or on commercial transactions, through endorsements such as the ALTA 9 series of endorsements or the CLTA 100.29 endorsement.
Solar developers will most typically be working with the two endorsements. Prior to 2012, the ALTA 9 series of endorsements provide a whole host of coverages in addition to surface damage protection, including violations of covenants, conditions and restrictions, encroachments, and violations of setback lines. In May of 2012, ALTA approved a new series of endorsements called the ALTA 35 series. This series of endorsements provides varying levels of coverage against damage to improvements resulting from the exercise of rights to use the surface of the land for the extraction or development of minerals or any other subsurface substances.
The CLTA 100.29 endorsement is also specific to insuring against damage to improvements due to the use of the surface to access minerals.
The cost of these endorsements can vary depending on the project. The underwriting required to issue any endorsements will involve many of the steps outlined above, namely identifying whether a severance exists, identifying the owners of the severed rights, and obtaining the necessary documentation to establish a waiver or relinquishment of surface entry rights.
The following chart is a suggested methodology for analysis of surface rights in connection with underwriting the feasibility of solar energy projects.
Our energy climate is changing. As more resources become available and are allocated to alternative energy projects, developers of these projects are going to explore opportunities for development in more challenging areas. While a severance of mineral rights can present a challenge, the right tools can enable a solar project developer to address this challenge and move forward with the assurances it needs.