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No Oil Development Restrictive Covenant

The restrictive covenant on my property that says ‘no oil/gas drilling allowed’ means no one can develop the minerals under my property, right?

Not exactly. Buyers of Colorado real estate often mistakenly rest easy knowing their property is subject to a restrictive covenant disallowing oil and gas development (referred to herein as a ‘no oil covenant’). As with most oil and gas matters, it’s not that simple. The individual or entity that signed the restrictive covenant, known as the ‘Declarant,’ must have owned the mineral rights at the time of execution. Even still, a properly drafted ‘no oil covenant’ prohibits oil and gas operations on the surface of the restricted property, but most likely will not obstruct an oil and gas company that desires to drill horizontally beneath the surface of the restricted property.

My clients most often approach me with questions about a ‘no oil covenant’ in two scenarios: 1) when a seller of real estate is selling the surface with reservation of the minerals and the buyer wants assurance that her surface will not be disrupted by oil and gas development; and 2) when a buyer is purchasing a lot within a subdivided community, the entirety of which is subject to a Covenants Conditions & Restrictions Agreement (known as a ‘CC&R’).  This article focuses on the latter, discusses the circumstances under which a ‘no oil covenant’ might effectively impede oil and gas development, and advocates caution to property owners who entrust their ‘no oil covenant’ to serve as an impenetrable wall against oil and gas development.

A ‘no oil covenant’ is only enforceable if the Declarant owns the minerals at the time of its execution.

A common ‘no oil covenant’ found in a CC&R might read something like the following:

  • No oil drilling, oil development operation, oil refining, coring or mining operating of any kind shall be permitted upon or in any lot, nor shall oil wells, tanks, tunnels, mineral excavations or shafts be permitted upon or in any lot. No derrick or other structure for use in boring for oil or natural gas shall be erected, maintained or permitted upon any lot.

In a severed estate scenario[1], it is a universally-recognized concept of oil and gas law that the mineral owner has an implied easement to use the surface as reasonably necessary to extract the minerals from the property. In Colorado, an oil and gas operator must conduct its operations in a manner that reasonably accommodates the surface owner by minimizing intrusion upon and damage to the surface of the land.[2] It stands to reason that the mineral owner who possesses such a right to reasonably access the surface to extract her minerals, and only that individual, can give up such a right if she so desires. Since not just anyone can give such a right away, the Declarant that executed the CCR must have owned the minerals at the time of execution for the ‘no oil covenant’ to be effective at all. If the Declarant did not own the minerals at the time of CCR execution, then the ‘no oil and gas covenant’ is unenforceable on its face.

Assuming the Declarant actually owned the minerals at the time of execution, the ‘no oil covenant’ almost certainly restricts any oil and gas operations on the surface of the property, but what about horizontal drilling beneath the surface?

 A ‘no oil covenant’ probably cannot thwart horizontal development of the minerals underlying the surface of the restricted property.

At the time of this writing, the author is unaware of any Colorado case law that addresses the enforceability of a restrictive covenant that prohibits horizontal drilling underneath the surface of the restricted property. Even if the Declarant owned the minerals at the time of execution, a ‘no oil covenant’ probably cannot prohibit horizontal drilling beneath the surface of the restricted property for reasons discussed in more detail below.

A set of Colorado laws, known as the Colorado Oil and Gas Conservation Act (the “Act”), vests the Colorado Oil & Gas Conservation Commission (the “COGCC”) with the authority to make and enforce rules, regulations, and orders, and to regulate activities like drilling, producing, and plugging of wells and all other operations for the production of oil or gas and the spacing of wells.[3] Colorado courts have historically granted great deference to the COGCC’s ability to regulate the oil and gas industry state-wide pursuant to the powers ascribed to it in the Act. Although no Colorado court has addressed how a ‘no oil covenant’ interplays with the Act, a pair of Colorado Supreme Court cases has addressed a similar scenario where local laws prohibiting hydraulic fracturing effectively banned oil and gas drilling.[4]

In those cases, the Colorado Supreme Court determined that the local laws sufficiently conflicted with the Act so as to render the local laws unenforceable – this legal concept is known as ‘preemption.’ It’s likely that a court faced with the question of whether a ‘no oil covenant’ can forbid the drilling of horizontal wells underneath the surface of the property would apply an analysis similar to the one included in the Colorado Supreme Court cases. Like the local laws prohibiting hydraulic fracturing, the ‘no oil covenant’ effectively serves as a prohibition against oil and gas development generally, which runs afoul to the intent and purpose of the Act. Applying the analysis in the Colorado Supreme Court cases, it seems probable that the Act would preempt any ‘no oil covenant’ that effectively bans oil and gas development in the state.

How do I know if my ‘no oil covenant’ will do what it says it does?

If you’ve reached the conclusion of this article, you know that an air-tight ‘no oil covenant’ is easier said than done. Several factors determine whether or not such a covenant is entirely or partially enforceable. I regularly advise clients on matters like the one discussed here. If you are interested in learning more about how the ‘no oil covenant’ in your CCR does or does not apply to your property, then please contact me here.

 

[1] See the linked article for more information on a ‘Severed Estate Scenario.’

[2] See C.R.S. §34-60-127.

[3] C.R.S. §34-60-106(2).

[4] See City of Fort Collins v. Colorado Oil and Gas Association, 369 P.3d 586 (Colo. 2016) and City of Longmont v. Colorado Oil and Gas Association, 369 P.3d 573 (Colo. 2016).