How to play in the sandbox: Understanding the interplay of the mineral estate and the surface estate and strategies for successful surface project development in Texas, California and elsewhere.
Texas and California lead the country in terms of solar energy generating capacity, while also maintaining major oil and gas production operations, which demonstrates that it is possible for these uses to successfully coexist, even if doing so can be complicated.
As solar energy projects cover almost the entire surface of the land that they utilize with solar panels, it is necessary to understand the rights of the mineral estate holders to utilize the surface, especially in areas with historical and current oil and gas production.. Any compatibility issues with the mineral estate holder(s) need to be addressed before a solar energy project can be constructed and financed.
Understanding the rights of the subsurface estate
When the mineral and surface estates are held separately in Texas, the subsurface owner has a right to use as much of the surface as is reasonably necessary to produce and remove the oil, gas and/or minerals below the surface. Similarly, in California, mineral estate owners are permitted to use the surface as is necessary and convenient to produce and remove the oil, gas and/or minerals below the surface. However, mineral estate owners in both states are generally not permitted to impose a greater burden on the surface estate than reasonably necessary for the mineral estate owner to fully exercise their rights. These standards have proved difficult to interpret and apply with predictability in practice, which causes uncertainty about how a surface owner’s and subsurface owner’s rights might intersect in a specific situation.
For any solar energy project, the solar developer must understand: (1) whether the mineral estate has been severed and who holds title, (2) the magnitude and nature of the risks related to possible surface use by the mineral estate and, (3) if there are risks, how to reduce those risks and/or obtain title insurance satisfactory to insure against the risk of forced removal of solar facilities.
Determining rights in the subsurface estate
Title companies will provide information and insurance for the ownership of the surface estate, but generally will not provide vesting information or insurance for the subsurface/mineral estate. Accordingly, project developers typically have to look to a “landman” to search the real property records to establish ownership of the mineral estate underlying the solar project lands.
Landmen, sometimes in conjunction with legal counsel, can help project developers obtain surface waiver agreements, surface use and/or accommodation agreements, and mineral estate purchase agreements to help procure a financeable project site with sufficiently secure surface rights.
Surface waiver and accommodation agreements
An effective surface rights waiver will prohibit the mineral interest holder, and its successors and assigns, from disturbing the surface of the solar project site. When possible, surface rights waivers should be absolute, waiving all rights of the mineral owner to use the surface of the property—including for exploration, testing, and general access—not just production. In addition, it should waive the right to use the surface to access any mineral or subsurface material, not just oil and gas. In order to fully bind sublessees, successors, and future grantees, a waiver of surface rights must also be recorded in the real property records.
When a mineral estate owner is unwilling to entirely waive its rights to the surface of the property, an alternative is to utilize an accommodation agreement that (1) sets aside certain areas on the property which are reserved for oil, gas and minerals activities, (2) includes a surface waiver from the mineral estate holder for the benefit of the surface owner on the remainder of the property, and (3) contains other agreements designed to allow the parties to share the use of the surface estate.
Alternatives to surface waivers or accommodation agreements
Ideally, a developer should obtain surface waivers or accommodation agreements from 100% of the mineral interest holders, but if this is not possible, a project developer should not despair. Many oil and gas producers are unwilling to take mineral leases or develop minerals based on a lease from only a small, fractional mineral owner. As a result, it is often sufficient to obtain surface waivers or accommodation agreements from less than 100% of the mineral interest holders. While there is no established standard agreed to by title companies and attorneys in the industry as to what percentage of the mineral interest surface waivers is required to be sufficient, it is universally agreed that sufficient does not mean 100%. In this situation, the developer may also pursue other strategies to ensure that it holds secure rights to the surface of the project site and obtain the title insurance it needs.
- Review Regulatory Restrictions. Regulatory or property/locational specific factors, like zoning restrictions, should be reviewed as they may reduce or eliminate the likelihood that mineral estate development will occur on the property.
- Drill Site Reservations. Another strategy is to proactively set aside reasonable drill site areas, along with access and utilities easement paths to serve the drills sites. The reserved “drill island” areas should be sufficient in number and size to reasonably accommodate the mineral estate holder’s ability to access and exploit the underlying mineral estate and should be designed with the help of a petroleum engineer or other oil and gas expert.
- Likelihood of Commercially Viable Mineral Production. If the location of a developer’s planned project site is in an area with little or no oil, gas or mineral production historically, the developer may also want to engage a Landman or appropriate consultant to provide a short report summarizing the absence of any commercially viable oil, gas or mineral resources and production in the planned project site area, to provide support for the title company to underwrite the forced removal risk notwithstanding a lack of surface waivers or accommodation agreements.
Title insurance related to mineral rights risk
Title insurance covering the mineral risk issue will be required in order to obtain construction financing for a project. Texas has four different types of promulgated title insurance endorsements to address mineral issues when a title insurance company issues a lender’s or owner’s title policy with an exception or exclusion for mineral estate coverage: Forms T-19, T-19.1, T-19.2 and T-19.3. In California, the ALTA Form 35 endorsements (ALTA 35, 35.1, 35.2, 35.3) are typically used to address mineral issues.
Note also that these endorsements insure against some of the losses that a solar energy project owner or lender may be exposed to related to the mineral estate, such as coverage for the value of the real estate rights and improvements lost if mineral development forces the solar project operator to relocate or remove solar facilities. However, the endorsements don’t provide coverage for the revenues and profits the project may lose as a result of the forced removal, or for project downtime or other business-related aspects of the project. Other forms of commercial insurance may be available to address such risks.
Dirk R. Mueller is a partner and Alyssa Netto is an associate with the law firm Farella Braun + Martel LLP in San Francisco. Will Russ is a partner with the law firm Barnes & Thornburg LLP in Dallas.
