United States: Understanding Mineral Rights And The Impact On The Value Of Your Property

Last Updated: July 17 2017
Article by Van P. Hilderbrand Jr

The United States is one of a handful of countries in which private real property owners can hold and own subsurface mineral rights. In a majority of countries, only the government can own and benefit from these rights. Therefore, if you own real property, you should be aware of the legal concept of mineral rights and how these rights can impact the value of your property.

First, what are Mineral Rights?

The term "mineral rights" generally refers to the right to explore, develop, extract, and market any subsurface minerals. Minerals, in this context, commonly refer to natural gas, oil, coal, precious metals (e.g., gold, silver), non-precious or semi-precious metals (e.g., copper, iron), specialty or rare earth elements and minerals, and other solid materials such as clay, gravel, sand, and stone. However, this is not always the case. States may differ in their interpretation of the term and their treatment of minerals. For example, in Pennsylvania, "mineral rights" in leases and in deeds are treated differently than natural gas and oil rights.

Maryland recently banned the extraction practice of hydraulic fracturing (or "fracking") for natural gas. We wrote about this development earlier on the blog. This practice is not banned, however, in bordering states Virginia, West Virginia, and Pennsylvania. Still, there are other prevalent minerals in Maryland that may be extracted. In Maryland, "minerals" means "any solid material, aggregate, or substance of commercial value, whether consolidated or loose, found in natural deposits on or in the earth, including clay, diatomaceous earth, gravel, marl, metallic ores, sand, shell, soil, and stone, but does not include coal." MD. Code Ann., Environment, Title 15, Subtitle 8. This definition includes a wide-range of materials, thus, as discussed further below, it is important to define "mineral rights" precisely in any legal contract.

Second, who Owns Mineral Rights?

Most people understand that a fee simple property owner possesses the surface rights, but the surface owner also may own the subsurface mineral rights. Like other property rights, mineral rights can be bought, sold, leased, and transferred in accordance with state and federal law, either together with surface rights or separately. Because mineral rights can be severed from surface rights, it is critical to verify that the surface owner has good and marketable fee simple title to the mineral rights.

Often, drilling and mineral companies purchased the mineral rights from surface owners as far back as the 1800s. Or families would sell real property and reserve the mineral rights as part of the inheritance for their heirs. Because these transactions occurred many years ago and because land records were sometimes poorly maintained, it is often difficult to determine conclusively whether a surface owner owns the associated mineral interests. To cure this problem, Maryland, in line with other states, passed the "Dormant Mineral Interest Act" in 2010 to allow surface owners to terminate a dormant mineral interest (i.e., the mineral interest was unused for a period of 20 years). MD. Code Ann., Environment, § 15-1201 et seq. "Use" is also defined in the Act. Thus, this Act provides surface owners the ability to regain possibly valuable mineral rights, even if those rights were leased or sold many years ago. Apart from ownership, there are many other issues to consider regarding mineral rights.

Third, what are Some Issues to Consider when Buying and Selling Mineral Rights?

If you are contemplating what to do with your mineral rights or are interested in purchasing mineral rights, there are several issues to consider. Although not exhaustive, the following points serve as a primer on issues to consider and are written from the perspective of a mineral rights lease, the most common contract agreement.

  1. Compensation: A lessor often receives a rent payment for the use of the surface property. This could be a one-time, upfront payment or made annually. The lessor often receives a royalty payment paid as a percentage of minerals extracted.
  2. Definitions: It is critical that the parties define the contractual terms precisely. These terms include: (1) mineral rights (e.g.: is it "all minerals located on or under the surface and extracted;" specific minerals; or "all minerals excluding _____."); (2) a legal description of the property; (3) lease term (typically 3-5 years); (4) surface use rights and obligations (e.g.: continued and non-exclusive use of surface by lessor; set-back requirements; removal of equipment and structures by lessee when development or operations cease; return of surface to original grade and cover; use of surface by lessee for activities in connection with the extraction, processing, and sale of minerals; cooperation between the parties); (5) feasibility period (i.e.: how long will lessee have to conduct engineering studies, make surveys, and otherwise inspect the minerals; can the lease be terminated by lessee based on findings from the inspection; indemnification by lessee during the feasibility period); (6) what lessor can bring on the property (e.g., no hazardous materials, no above-ground storage tanks, no underground storage tanks, no waste disposal, no injection wells); (7) whether lessor can use pits, ponds, or other surface impoundments; (8) what Lessor pays for (e.g., gas, electricity, water, sewage, telecommunications, etc.); and (9) necessity of non-compete agreements.
  3. Lessee's Representations, Warranties, and Covenants: The parties should address the lessee's representations, warranties, and covenants, including the lessee's: (1) compliance with all applicable laws and regulations; (2) authority to contract; (3) proof of commercial general liability insurance; (4) requirement to maintain the portion of the leased property in good and workman like condition; (5) indemnification of lessor for breaches, acts, omissions, losses, and expenses; and (6) requirement not to create any liens associated with the property.
  4. Lessor's Representations, Warranties, and Covenants: The parties should address the lessor's representations, warranties, and covenants including lessor's: (1) authority to contract; (2) requirement to ensure that there are no other leases, contracts, pending or threatened action or suits, condemnation proceedings, etc. affecting all or any part of the mineral rights; (3) requirement to ensure that the property doesn't contain in hazardous materials, asbestos or asbestos containing materials, petroleum, underground storage tanks, transformers, PCBs, or any other materials that require special handling under environmental laws; and (4) indemnification of lessee for breaches, acts, omissions, losses, and expenses.
  5. Environmental Matters: Mineral extraction activities can create several environmental concerns, such as noise, air, water, and soil contamination. The parties should address a separate indemnity agreement regarding environmental matters. Potential areas to address include state laws and regulations (e.g., drilling, extraction, injection, well plugging, and abandonment) and federal laws and regulations (e.g., CERCLA, RCRA, CWA, and OPA). Other considerations are handling and disposal of chemicals, dust, erosion, sediment, damage to natural resources (e.g., surface water, ground water, and aquifers), future use of the land, and damage to adjoining properties. Lessee may want an on-site inspection and Phase I environmental site inspection conducted to identify problem areas to address in the lease agreement.
  6. Additional Considerations: The parties should address the following: (1) ability to transfer lease to a third-party and lessee's liability retention; (2) lessee's purchase options at the end of the lease agreement; (3) recordation of lease agreement and lease termination in the county land records; (4) need or requirement for title insurance; (5) requirement to provide for attorney fees and litigation costs in the event it is necessary to enforce the lease agreement terms; (6) whether the lessee is reputable and well-financed to ensure that damages for a breach of contract are recoverable; and (7) need by both parties to continuously police the agreement.

Again, this is not an exhaustive list, just an introduction to some of the issues and considerations when purchasing, selling, leasing, and transferring mineral rights. These issues can become very complicated and you should retain an attorney for assistance. If properly constructed, a mineral rights lease can be lucrative both for the landowner and the extraction entity, as well as being conducted safely and in an environmentally sensitive manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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