New Property Purchase: Are the mineral rights Included?

I am purchasing a new property. Are the mineral rights included?

The specific language in a property’s prior conveyances, known as the chain of title, dictates whether the rights to the minerals are included in the purchase. As clearly disclaimed in the Colorado Contract to Buy and Sell Real Property, buying a property does not guarantee ownership of the minerals found below the surface.

A buyer using the Contract to Buy and Sell Real Estate, approved by the Colorado Real Estate Commission, will notice an ALL CAPS disclaimer pertaining to mineral ownership and oil and gas activity.[1] The Contract warns buyers that the surface of a property may be owned separately from the minerals found below. This could mean that a third party might have a right to access the property to develop the mineral rights. It further warns that a surface use agreement could be recorded against a property and that oil and gas activity may occur on or adjacent to the property. The contract disclaimer concludes by advising the buyer to seek additional information regarding oil and gas activity on the property, but where exactly should a buyer go to get answers to the uncertainty surrounding oil and gas activity?

Useful Resources to Uncover Property’s Mineral Ownership

With the counsel of an experienced attorney, a buyer should review the title commitment of the property, potentially obtain an independent abstract of title, and examine the proposed deed from the seller to the buyer, known as the “Vesting Deed.” A Buyer’s review of the resources below can help determine if a prior owner previously sold the property’s minerals, referred to as a “Severed Mineral Rights Scenario” or if the current owner/seller still possesses the property’s minerals, referred to as an “Included Mineral Rights Scenario.”[2]

Title Commitment

When a buyer and seller agree to the sale of property, a title company issues a title commitment, which is used to generate the buyer’s title insurance policy. A title commitment will not provide an opinion on mineral ownership and will not insure rights to the minerals, but it is a great place to start gathering clues about mineral ownership. The title company relies on the property’s chain of title to draft a portion of the title commitment called the Schedule B-2 Exceptions. The Schedule B-2 Exceptions sets out all exceptions in the title that the title insurance policy will not insure. The exceptions could include any mineral rights reservations, oil and gas leases previously negotiated on the property, a surface use agreement, or other documents that could point toward a Severed Mineral Rights Scenario. An inquisitive buyer should review and interpret the Schedule B-2 Exceptions with an experienced attorney to classify the sale as a Severed or Included Mineral Rights Scenario. Though the title commitment is a great starting point, traditional buyers or sophisticated mineral investors, may desire a more detailed examination of title through an independent abstract.

Abstract of Title

A title specialist, known as an “Abstractor,” can draft an abstract of title that chains together all recorded title documents associated with the property and draws conclusions on mineral ownership. An abstract of title is useful for the buyer that wants supplemental information or for a mineral investor purchasing a property solely for the mineral rights. An abstract of title could reveal any problem in the chain of title, which would not necessarily be apparent from the last deed in in the chain of title. Our attorneys can assist in the order, review, and interpretation of an abstract of title through a consultation or limited report on title.

Vesting Deed

Even if the title commitment or the abstract of title concludes that a buyer is in an Included Mineral Rights Scenario, a buyer should consult an attorney for an examination of the language in the Vesting Deed prior to closing. Based on previous conversations or a ‘handshake deal’ with the seller, a buyer might think the seller will convey the mineral rights to the property, but the Vesting Deed could state otherwise. The buyer should be on the lookout for any mineral rights reservation language in the Vesting Deed that does not adhere to the buyer’s understanding of the sale.

Identifying the Mineral Status of a Property

A savvy buyer should take the research a step further to determine the ‘status’ of the mineral rights associated with a property. The property’s mineral rights status will inform the buyer on the lease-ability of minerals found on the property, the timing of potential oil and gas operations, and the existence, if any, of royalty payments from producing oil and gas wells.

Open Mineral Rights

A mineral owner can use the title commitment and/or the abstract of title to determine if any prior owner ever executed an oil and gas lease on the property. If there are no prior mineral leases on the property, or if a prior mineral lease has expired, the mineral rights are said to be ‘open.’ A mineral owner whose rights are ‘open’ is entitled to negotiate an oil and gas lease with an interested company and receive lease payments and production royalties.

Leased Mineral Rights

If mineral rights are not ‘open’ then they are said to be ‘leased.’ If the mineral rights are ‘leased’ then an oil and gas company has the right to produce or is already producing the minerals from the property. Discovering a property has a ‘leased’ status is not the end of the conversation. A buyer should consult an attorney to determine how much time is left on the lease, application of specific provisions in the lease, and whether or not the company, known as the Lessee, has drilled a well under the lease.

Practical Implications for all Buyers

Knowing the mineral ownership and status of a property is imperative to both negotiating the terms of the purchase and anticipating the future use and royalty potential.

Identifying and understanding the ownership and status of the property’s minerals is a vital step in the pre-negotiation process of any purchase. An uninformed buyer could overpay for a property if it does not include the rights to the property’s minerals, especially in areas of Colorado with robust oil and gas activity. A buyer should always know the exact parameters of the topic of negotiation before committing to a purchase of a new property.

All buyers, whether they find themselves in an Included or Severed Mineral Rights Scenario, can benefit from a better understanding of the ownership and status of a property’s mineral rights. A buyer in an Included Mineral Rights Scenario could have an opportunity to negotiate a brand new lease, renegotiate the terms of an existing one, or collect royalties from producing wells. A buyer in a Severed Mineral Rights Scenario could offer to purchase the minerals from the mineral owner, provide input on a mutually-acceptable oil and gas lease, or negotiate a surface use agreement in anticipation of oil and gas activity on the property.
Our law firm routinely assists potential buyers with identifying the ownership and status of mineral rights on properties throughout Colorado. If you are considering purchasing real estate in Colorado, you should consult with an experienced oil and gas attorney before you make an offer on the property. Please contact me to discuss the specifics of your situation and get a better understanding of your property’s mineral rights potential.

_______________

[1] See Sections 8.7.1 through 8.7.4 of the CREC-approved CBS, available at https://www.colorado.gov/pacific/dora/division-real-estate-contracts-and-forms.

[2] Other scenarios exist between the Included Mineral Rights Scenario and the Severed Mineral Rights Scenario on the mineral ownership spectrum. See my prior article for more detailed information.

Zachary Grey is an attorney with Frascona, Joiner, Goodman and Greenstein, P.C. His practice areas include Real Estate and Oil & Gas. Contact Zachary Grey.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

ZACHARY A. GREY