INHERITING THE WIND: A BRIEF GUIDE TO RESOLVING SPLIT ESTATE ISSUES WHEN DEVELOPING RENEWABLE PROJECTS

Transcription

1 INHERITING THE WIND: A BRIEF GUIDE TO RESOLVING SPLIT ESTATE ISSUES WHEN DEVELOPING RENEWABLE PROJECTS By Will Russ Attorney, Vinson & Elkins Dallas, Texas Paper 5

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3 INHERITING THE WIND: A BRIEF GUIDE TO RESOLVING SPLIT ESTATE ISSUES WHEN DEVELOPING RENEWABLE PROJECTS Will Russ Vinson & Elkins LLP Dallas, Texas He that troubleth his own house shall inherit the wind. Proverbs 11:29 But I don t just swear for the hell of it.... I figure language is a poor enough means of communication as it is. So we ought to use all the words we ve got. Besides, there are damned few words that everybody understands. Henry Drummond, in Inherit the Wind I. INTRODUCTION What could these two proverbs one ancient, the other more recent possibly have to do with the problems posed to renewable project developers 1 by split estates and related laws governing the rights among parties owning conflicting interests in those estates? This paper aims to answer that question. Consider the following hypothetical: A wind project developer let s call her Becky has located an ideal site for a wind farm and is delighted to discover that a single landowner let s call him Sandy owns all of the land needed for her project. 2 Since Sandy is using the land exclusively for grazing cattle, Becky is confident that she ll have sufficient flexibility to design a wind farm that takes full advantage of the area s attractive wind features. So Becky approaches Sandy to discuss entering into a series of ground leases to secure access to the portions of the land on which she plans to build, operate and maintain her wind turbines. 3 Sandy is enthusiastic about the proposal, but mentions to Becky that a previous owner long ago severed the mineral estate from the surface estate. Being a diligent sort, Becky asks Sandy whether any mineral production is ongoing. Sandy says no, but informs her that a drilling company has an existing lease covering the entire property, although it 1 Although this paper primarily addresses issues faced by wind developers, many of the basic issues discussed herein are relevant to other types of renewable energy development, as well. See also infra n I m indebted to Becky Diffen, a colleague at Vinson & Elkins and a co-author of TEXAS WIND LAW (LexisNexis, Matthew Bender, 2013), for her input and advice on the practical and legal issues faced by renewable project developers. I m equally indebted to Sandy Weiner, Of Counsel at Vinson & Elkins, for sharing his deep experience in real estate law and providing encouragement along the way. I also wish to thank Jeremy B. Pettit and Courtney E. Hammond, who provided significant research assistance in preparing this paper. 3 See generally, Kathleen J. Doll & Karen E. Jones, Wind Energy Land Agreements, in THE LAW OF WIND: A GUIDE TO BUSINESS AND LEGAL ISSUES (4 th Ed., Stoel Rives LLP, 2008). 5-1

4 hasn t yet started any drilling activities. Moreover, Sandy tells Becky that when he bought the property a few years back, the prior owner (on advice of counsel) severed the wind rights from the surface estate and subsequently conveyed those wind rights to a trust set up in hopes of funding his granddaughter s law school education. 4 Growing more concerned, Becky asks Sandy if there s anything else she needs to know before investing in her wind farm. Well, come to think of it, Sandy replies, The prior owner granted some pipeline rights-of-way, and there are a couple of pipelines in the ground... I can plan around those, Becky starts to say, but is quickly interrupted by Sandy... and I did recently grant pipeline rights-of-way to a couple of other pipeline operators, although they haven t started construction yet. What is someone like Becky to do, faced with so many third-party interests that could interfere with her wind farm development? If she proceeds without due regard for the rights of those third parties, she could invest millions in capital, with little or nothing to show for her efforts as the ancient proverb might have it, she would inherit the wind (not in a good way). If we assume that Becky knows better than to go down that road, what are her options? As the more recent proverb suggests, she could be forgiven for swearing (and then finding a different development opportunity). But is there another way for her to pursue development of the wind farm, without exposing herself to third-party risks that could undermine the economic and operational viability of her project? This paper argues that there is another way a better way for developers like Becky to reduce the risks posed by split estates. To paraphrase Henry Drummond, she could use all the words she s got, in the form of contracts, to actively engage with third-party interest owners in order to mitigate known risks. This approach will require extra due diligence up front, and may involve extra expense during the early planning stages, but by negotiating with mineral rights owners, surface rights owners and wind rights owners, Becky can more strongly establish her rights to own and operate her wind farm, while giving the other interest owners comfort that her project will not unduly interfere with their rights. After all, if there are damned few words that everybody understands, isn t it better for the parties to agree ahead of time on the words they do understand, rather than leaving it to a court or arbitrator to sort out what they understand after the fact? With that context in mind, this paper has three basic goals. First, it discusses the traditional law governing the relationship between owners of the surface, mineral and other estates. 5 Most of this law was developed to address disputes between the owner of the mineral 4 I ll relegate a (bad) joke to this footnote: So his granddaughter will inherit the wind?, Becky asks. That about sums it up, Sandy replies. 5 For the sake of simplicity, this paper focuses generally on the law as it has developed in the Western United States, where most of the nation s wind farms are located. More specifically, it emphasizes Texas law, since that is the law with which the author has the most experience. 5-2

5 estate (or third parties, such as oil and gas drillers, with derivative rights to the mineral estate) and the owner of the surface estate (or third parties, such as pipeline operators, with derivative rights to the surface estate). But this paper also considers more recent developments in the law surrounding wind estates. Second, this paper discusses the non-contractual protections afforded users of the surface estate. While these protections, including common law, statutory and regulatory protections, vary greatly by jurisdiction, and may only provide limited protections to a developer, it is important for developers to understand what rights and obligations they have under the law, especially where they are unable to enter into contracts with conflicting interest owners. Third, this paper discusses how developers can use contracts with other interest owners to clarify each party s rights to use the surface to a renewable project site. Whatever form such contracts take, the goal is to minimize the practical and legal risks of developing renewable projects on land subject to split estates, to clarify each party s rights and obligations with respect to the surface, mineral and wind estates, and to maximize the potential for all parties to utilize the land and its resources in a cooperative and mutually beneficial manner. II. THE TRADITIONAL AND DEVELOPING LAW OF SPLIT ESTATES A. Traditional Law Regarding Split Estates In general, an owner of real property can sever the mineral estate from the surface estate that is, the owner can split ownership of the surface estate from ownership of the mineral estate. 6 This typically occurs when a landowner conveys title to the surface estate, but reserves for itself ownership of the mineral estate. The mineral estate owner may then enter into leases or other agreements permitting one or more third parties to produce the minerals it owns (e.g., by drilling an oil well) from all or a portion of the surface. Indeed, much of the law related to split estates has evolved in response to disputes where a surface owner s use of the surface estate for above-ground development has come into conflict with a mineral right owner s use of the surface to explore for and develop the minerals lying beneath the surface. And as population growth has accelerated in the Western United States, together with a growing demand for sustainable and clean sources of energy, developers of renewable energy projects often find themselves in the middle of such disputes, negotiating with the surface owner to secure sufficient rights to the surface, on the one hand, and with mineral owners to limit the impact of any mineral development, on the other. At common law, the mineral estate is traditionally recognized as dominant over the surface estate. In practice, this means that the surface estate is subject to an implied easement 6 See, e.g., Moser v. U.S. Steel Corp., 676 SW.2d 99, 101 (Tex. 1984) ( In Texas, the mineral estate may be severed from the surface estate by grant of the minerals in a deed or lease, or by reservation in a conveyance ). 5-3

6 for the benefit of the mineral estate so that the mineral owner may utilize that portion of the surface estate as is reasonable and necessary to extract minerals. 7 As a result, [b]ecause rights of surface access for the mineral owner are in the nature of an easement, they are considered dominant, and, in the event of irreconcilable conflict, [t]he rights of surface access of the mineral owner will actually be superior to those of the surface owner. 8 In other words, at common law, if there s a dispute between the surface owner and mineral owner, the mineral owner (or its lessee) usually wins. This preference in favor of mineral owners has roots extending back to medieval times. 9 More recently, this doctrine has been confirmed by courts throughout the Western United States, where [t]he concept [of the dominance of the mineral estate]... was built into the federal surface entry acts. 10 In at least one case, the U.S. Supreme Court has also upheld the dominance of the mineral estate. 11 But this preference in favor of mineral owners is also supported on economic grounds, since the mineral estate could be rendered worthless if the mineral estate owner were unable to use the surface to access the minerals. 12 This economic basis, for example, was part of the reason that the common law rule regarding dominance of the mineral estate was selected as the basis for the Model Surface Use and Mineral Development Accommodation Act of It also informs the various permutations of the so-called accommodation doctrine, discussed below. All of that said, the general common law doctrine favoring the dominance of the mineral estate means that any party with a valid interest in the mineral estate (including, e.g., a drilling company to whom the mineral owner has leased the right to produce the mineral) would, all else being equal, have the right to use all or any portion of the surface to conduct mineral extraction. As we shall see, this default rule has been revised to take fuller account of the interests of surface owners and operators, but it is worthwhile to understand just how strong a presumption the common law holds in favor of the owners (and derivative owners) of the mineral estate. 7 Randall J. Feuerstein, Surface Use for Mineral Development in the New West: Finding Good Ground, 2007 No. 1 RMMLF-Inst Paper No. 14 (2008). 8 J. Michael Morgan & Glen Droegemueller, Accommodation Between Surface Development and Oil and Gas Drilling, COLO. LAW., , at See generally Drake D. Hill & P. Jaye Rippley, The Split Estate: Communication and Education Versus Legislation, 4 WYO. L. REV. 585, 589 (2004). 10 John F. Wellborn, New Rights of Surface Owners: Changes in the Dominant/Servient Relationship Between the Mineral and Surface Estates, 40 RMMLF-Inst (1994). Cf. Kinney-Coastal Oil Co. v. Kieffer, 277 U.S. 488, 504 (1927) ( Any person who has acquired from the United States the title to or the right to mine and remove the reserved deposits, should the United States dispose of the mineral deposits in lands, may re-enter and occupy so much of the surface thereof as may be required for all purposes reasonably incident to the mining and removal of the minerals therefrom. ). 11 See Kinney-Coastal, 277 U.S. at See, e.g., Moser, supra note 6; Magness v. Gerrity, 946 P.2d 913 (Colo. 1997). 13 Wellborn, supra note 10, at 22.03[4]. 5-4

7 B. Recent Developments in the Severance of the Wind Estate More recently, in light of new wind farm projects across the Western United States, various state legislatures and courts have had occasion to consider whether a surface owner can also sever the wind estate meaning, broadly, ownership of the wind over and above the surface of the land from the surface estate. Under traditional theories of property law, the owner of the surface estate has a property right in the wind flowing over and above her property. 14 States have only recently begun to define the content of such wind rights, however, and no single standard has been uniformly adopted. As a result, the ability of a surface owner to sever wind rights from the surface estate varies widely by jurisdiction. While some states have expressly allowed severance of the wind estate from the surface estate and other states have expressly prohibited such severance, many states have not yet directly addressed the issue. California and New Mexico were two of the first states to respond to the wind energy boom with positive law regarding whether wind rights could be severed from the surface estate, and both (at least so far) have answered in the affirmative. California courts have recognized the right of a surface owner to sever the wind estate from the surface estate. 15 Although it is unclear whether or not the wind estate is dominant over the surface estate in California, 16 wind developers should at least be aware that California recognizes a separate wind estate. New Mexico courts have also recognized the right to sever wind rights from the surface estate. 17 Unlike the California courts, however, New Mexico courts have analogized the severance of wind rights not to the severance of mineral rights, but rather to the law of capture, noting that [w]ind is never embedded in the real estate; rather, it is more like water or wild animals which traverse the surface and which do not belong to the [surface] owner until reduced to possession. 18 For a wind developer operating in New Mexico or any other state that follows 14 See, e.g., Troy A. Rule, Wind Rights Under Property Law: Answers Still Blowing in the Wind, 26-DEC PROB. & PROP. 56, 57 (2012). See also, generally, Alan J. Alexander, Note, The Texas Wind Estate: Wind as a Natural Resource and a Severable Property Interest, 44 U. MICH. J.L. REFORM 429, (2011) (discussing analogous theories of the ownership of wind rights, including the law of wild animals, groundwater law, and surface water law). 15 See, e.g., Contra Costa v. Vaquero Farms, 58 Cal. App. 4th 883, 893 (Ct. App. 1997) ( [O]ne may have a right to use wind power rights without owning any interest in the land. ) 16 The Contra Costa court analogized severance of the wind estate to severance of the mineral estate, granting to the wind owner such surface rights of possession as are necessary and convenient to exercise the right to exploit the particular profit, estate or interest reserved, id. at 895. Continuing the analogy, this reading suggests that the wind estate would be dominant over the surface estate. However, under the common law regarding conflicts between the mineral estate and the surface estate, when reservation language is used rather than exception language, the mineral estate is a limited right, rather than the dominant estate. See, 53A AM. JUR. 2D 309 (citing Paragon Jewel Coal Co. v. C.I.R., 380 U.S. 624 (1965). The Contra Costa court s invocation of reservation language may create an opening for a future California court to find that the wind estate is subservient to the surface estate. 17 See generally Romero v. Bernell, 603 F. Supp. 2d 1333 (D. N.M. 2009). See also Alexander, supra n. 14, at (citing Romero for the proposition that New Mexico courts appear to recognize the ability to sever wind rights) 18 Romero, supra n. 17, at

8 the law of capture approach this may be a distinction without a difference, since the New Mexico courts seem ready to recognize a severance of the wind estate once the wind energy has been reduced to actual wind power. 19 Partially in response to the California and New Mexico decisions, some commentators have expressed concerns about the wisdom of allowing wind rights to be severed from the surface estate. 20 In part, such commentators are concerned that permitting such severance could unduly limit a surface owner s ability to use the surface for anything but wind development, but there are also concerns about the ways in which permitting such severance could hamper development of wind projects by increasing the costs of and the legal uncertainty surrounding such projects. Responding to such concerns, several states have prohibited the severance of wind rights, 21 preferring instead to define by statute that the surface owner has only a limited right in the wind. In these states, the surface owner may lease its wind rights, but such leases must generally be limited in duration, run with the surface estate, and revert back to the surface estate at the earlier of the contract termination or the statutory duration. 22 Perhaps the most interesting example is Colorado. In 2010, a bill was proposed in the Colorado legislature that would have allowed landowners to sever wind rights from the surface estate. 23 Following public outcry, however, the bill did not pass, and in 2012 the legislature instead enacted legislation positively prohibiting the severance of wind rights. 24 With the passage of this statute, Colorado joined North Dakota, South Dakota, 25 Nebraska, and Kansas in banning the severance of wind rights. That said, while Colorado has chosen to prohibit the severance of wind rights, its statute grandfathers any severances that may have occurred prior to the 2012 legislation. 26 And 19 Id.; see also Alexander, supra n. 14, at See, e.g., K. K. DuVivier, Animal, Vegetable, Mineral Wind? The Severed Wind Power Rights Conundrum, 49 WASHBURN L.J. 69, 86 (2009) (expressing concern that surface owners that have severed and transferred their wind rights are effectively removed from the negotiating table when a wind farm is developed on their properties). 21 See, e.g., MONT. CODE ANN (1); N.D. CENT. CODE (2009) ( [A]n interest in a resource located on a tract of land and associated with the production of energy for wind power on the tract of land may not be severed from the surface estate. ); S.D. CODIFIED LAWS (2004) ( No interest in any resource located on a tract of land and associated with the production or potential production of energy from wind power on the tract of land may be severed from the surface estate. ); WYO. STAT. ANN (West). 22 Many of these state-specific contractual requirements are discussed in more detail below, infra Section IV. 23 H.R , 67th Gen. Assemb., 2d Reg. Sess. (Colo. 2010). 24 COLO. REV. STAT et seq. (2012) 25 Like North Dakota and South Dakota, Colorado now recognizes a property interest in wind, which belongs to the owner of the surface estate. See COLO. REV. STAT (2). However, unlike North Dakota and South Dakota, Colorado has not created statutory limits on the length of the lease, and only requires that the lease be recorded. 26 COLO. REV. STAT (4) ( Nothing in this article alters, amends, diminishes, or invalidates wind energy agreements or conveyances made or entered into prior to July 1, 2012, so long as... notice evidencing the acquisition, conveyance, or reservation of the wind energy rights is recorded. ). 5-6

9 Colorado is not alone in this approach. 27 For wind developers, such grandfathering could pose real issues, primarily by complicat[ing] title matters for their underlying parcels well into the future. 28 Further complicating matters perhaps to the benefit of wind developers it appears that, in Colorado and other states, wind rights are likely subservient to both the mineral estate and the surface estate. 29 The relative newness of these legal developments, however, when combined with a wind developer s practical need to anticipate potential risks to any given project and plan around them, only adds to their frustrations. Unfortunately, the confusion doesn t end there, since there are a number of states where the law on severance of the wind estate remains undeveloped or uncertain. For example, probably due to limited wind production in the state, Arizona s law regarding the severability of wind rights is largely non-existent. 30 Idaho similarly lacks current statutory or case law regarding wind severability. 31 And in Texas, which has seen numerous wind development projects over the last decade and continues to see new development activity, it is common for landowners to sever the wind estate from the surface estate in wind leases and yet the law regarding the validity of such severances remains remarkably unsettled. 32 III. NON-CONTRACTUAL METHODS OF PROTECTING THE RIGHTS OF RENEWABLE PROJECT DEVELOPERS As populations have grown in the Western United States, so have investments in both mineral development and surface development, including the construction of ever more energy production projects, including renewable energy projects. Perhaps inevitably, the rights of surface estate owners have increasingly come into conflict with the rights of mineral estate owners. 33 Both the common law and the statutory law have evolved in response, 34 leading 27 Rule, supra n. 14, at 59. ( Many... new state statutes [rejecting severability of wind rights] contain clauses that acknowledge the validity of any conveyances of severed wind estates occurring before the statutes become effective. ). 28 Id. 29 See COLO. REV. STAT. ANN (West) ( Estates, rights, and interests in areas above the surface of the ground, whether or not contiguous thereto, may be validly created in persons or corporations other than the owners of the land below such areas and shall be deemed to be estates, rights, and interests in lands. ). 30 See Albert H. Acken and Matthew G. Bingham, Sustainable Energy in Arizona, 43 ARIZ. ST. L.J. 669, 681 (2011) (noting that, as of 2011, there was only one operating commercial wind farm in the state and another scheduled to begin commercial operation in 2012, for a combined 162 MW). 31 For each of the last several years, a bill has been introduced in the Idaho legislature proposing a moratorium on wind farms and wind turbines pending the completion of an easement study. See, e.g., 2012 Bill Text ID H.B. 527; 2011 Bill Text ID H.B See, e.g., Alexander, supra n. 14, at 433 ( Despite a lack of legislative and judicial guidance on this question, wind leases in Texas are typically written as if wind rights are severable. Yet it is unknown whether Texas courts will recognize the severability of a wind estate. ); see also TEXAS WIND RIGHTS, supra n. 2, at See generally, Randall J. Feuerstein, Surface Use for Mineral Development in the New West: Finding Good Ground, 2007 No. 1 RMMLF-Inst Paper No. (2008). See also Hill & Rippley, supra note 9, at 592 (noting the impact of technological changes on conflicts between the surface and mineral estate owners). 5-7

10 especially to the development of the so-called accommodation doctrine, 35 as well as other statutory and regulatory schemes designed to protect surface owners from unreasonable use of the surface by mineral owners. A. The Accommodation Doctrine In one common formulation, the accommodation doctrine holds that where there is an existing use by the surface owner which would otherwise be precluded or impaired, and where under the established practices in the industry there are alternatives available to the [mineral owner] whereby the minerals can be recovered, the rules of reasonable usage of the surface may require the adoption of an alternative by the [mineral owner]. 36 At the most basic level, the accommodation doctrine is a balancing test, weighing the rights of a mineral owner to extract its minerals against the potential disruption to the surface owner s use of the surface. But we shall see that, even where the balancing test theoretically favors surface owners, the accommodation doctrine also creates uncertainty. Importantly, in the above formulation of the accommodation doctrine, the alternative that a mineral owner may be required to adopt need not be the least expensive or technically challenging alternative, 37 a qualification made all the more relevant by recent advances in directional drilling technology and so-called fracking techniques. Equally importantly, however, the surface owner still bears the burden of proving both that the mineral owner has an alternative means of producing the minerals and that the mineral owner s proposed use of the surface is not reasonably necessary because a reasonable alternative is available. 38 Two other caveats are worth noting: first, the accommodation doctrine generally protects existing, rather than prospective, surface uses; and second, courts appear readier to protect surface uses that further important public policy goals, such as protecting public health or safety Note, however, that the common law has always placed some limitations on dominant estate doctrine, such as that the mineral estate owner s use of the surface must be reasonable and necessary and that the surface estate owner had the right to subjacent support. See, Hill & Rippley, supra note 9, at Norman D. Ewart, State Surface Access and Compensation Statutes, 54 RMMLF-INST [3] (2008). The accommodation doctrine is also known as the doctrine of due regard or the alternative means doctrine. Christopher M. Alspach, Surface Use by the Mineral Owner: How Much Accommodation is Required Under Current Oil and Gas Law?, 55 OKLA. L. REV. 89, 92 (2002). 36 Getty Oil Co. v. Jones, 470 S.W.2d 618, 622 (Tex. 1971); Texas Genco, LP v. Valence Operating Co., 187 S.W.3d 118, 122 (Tex. App. Waco, 2006, pet. denied). 37 See, e.g., Ewart, supra note 35, at 4.01[3] ( Under the accommodation doctrine, the surface owner bears the burden of establishing that (1) the mineral owner has an alternative access and location for drilling which will not interfere with the surface owner s existing use; (2) the alternative access and location are reasonable, and (3) any alternative uses of the surface by the surface owner are impracticable and unreasonable under all the circumstances. ). 38 See Texas Genco, supra n. 36, at See generally Jamie Robertson and Becky Ogg, The Accommodation (or Alternative Means) Doctrine in Texas Case Law (The Houston Real Estate Lawyers Council, August 8, 2006). 5-8

11 Some variation of the accommodation doctrine has been embraced in a number of states, other states seem poised to embrace it, 40 and yet other states have yet to clearly adopt it. In North Dakota, for example, a court is expressly required to balance the mineral owner s available alternatives with the inconveniences to the surface owner. 41 And in Colorado, the doctrine is accompanied by a shifting burden of proof, where if the surface owner has met its initial burden of proving that alternative means of production are available, the mineral owner must then prove that its means of production is reasonable. 42 Note, however, that the precise content of the accommodation doctrine remains unclear in some states. 43 B. Statutory and Regulatory Protections In addition to the accommodation doctrine developed by the courts, state legislatures have reacted to split estate conflicts by passing statutes designed to temper the traditional dominance of the mineral estate and give surface owners greater protection against mineral development activities. 44 The most common of these are notice requirements, surface damage statutes, and mineral dormancy acts. At least four states require that the mineral estate owner provide notice of plans to enter or begin operations on a split estate. 45 Notice requirements generally come in two basic flavors: the mineral owner must either notify the surface owner prior to commencement of entry onto the surface 46 or notify a state regulator. 47 While most states do not proscribe the mineral owner s right to entry beyond a notice requirement, California has also statutorily limited the mineral owner s right to entry in certain jurisdictions In particular, Wyoming appears close to embracing the accommodation doctrine. See, e.g., Mingo Oil Producers v. Kamp Cattle Co., 776 P.2d 736, 742 (Wyo. 1989). But see Alspach, supra note 35, at 104 ( It is unclear if Wyoming has explicitly adopted the accommodation doctrine. ). 41 See Hunt Oil Co. v. Kerbaugh, 823 N.W.2d 131, 137 (N.D. 1979). This approach also appears to have been followed in a New Mexico case. See XTO Energy, Inc. v. Armenta, 185 P.3d 383 (N.M. App. 2008). But see Ewart, supra note 35, at 4.01[3] n.32 (arguing that XTO Energy incorrectly applied New Mexico law). 42 See Gerrity Oil & Gas Corp. v. Magness, 946 P.2d 913, 933 (Colo. 1997). 43 For example, in adopting the accommodation doctrine, Utah did not make clear whether or not the doctrine is a balancing test. See Flying Diamond Corp. v. Rust, 551 P.2d 509 (Utah 1976). Flying Diamond, together with a subsequent case, have also left it unclear which party bears the burden of proving that the mineral owner s use is reasonable or unreasonable. See Michael W. Brown, Coalbed Methane in Utah: Designing a Successful Approach, 26 J. LAND RESOURCES & ENVTL. L. 357, (2006). 44 See, e.g., N.D. CENT. CODE ANN (West) (specifying that the North Dakota legislature intends to provide the maximum amount of constitutionally permissible protection to surface owners from the undesirable effects of development, without their consent, of minerals underlying their surface ). 45 See CAL. CIV. CODE 848 (1993) (requiring notice to surface owners); MONT. CODE ANN (same); COGCC Rule 304(l) (Colorado) (requiring regulatory notice); N.M. Oil Conservation Division Rule 102 (same). 46 See, e.g., CAL. CIV. CODE 848 (1993) (requiring notice to surface owners). 47 See, e.g., COGCC Rule 304(l) (Colorado) (requiring regulatory notice). Colorado, however, also imposes notice requirements on the surface estate owner to provide notice to any identified mineral estate owner. COLO. REV. STAT et seq. 48 CAL. CIV. CODE TO -060 (1993). 5-9

12 Many states also have surface use or surface damage laws. Typically, these statutes require that a mineral estate owner execute a surface use agreement or, in lieu of a surface use agreement, post a bond for any damage it causes to the surface estate. 49 Some statutes also impose strict liability on the mineral estate owner for any damage it causes to the surface estate. 50 And in the case of Colorado, this strict liability is accompanied by a private right of action in favor of the surface estate owner. 51 In addition to the notice and surface damage laws discussed above, some state legislatures have enacted mineral dormancy acts. Mineral dormancy acts provide that the severed mineral estate will revert to the surface estate if it is abandoned for a statutory period of time. In North Dakota, for example, the mineral dormancy act provides that the surface estate owner must post notice by publication. 52 Following the appropriate notice, if the mineral estate is unused for a period of twenty years the mineral estate is deemed to be abandoned, and title to the abandoned mineral interest vests in the owner or owners of the surface estate. 53 Montana has even established a dormant mineral owners trust, for the protection of the unidentified owners of a severed mineral estate. 54 Finally, some state and local jurisdictions have passed regulations designed to restrict mineral production more broadly. Such regulations often take the form of zoning ordinances that prohibit drilling in certain areas or otherwise place significant restrictions on mineral extraction within the jurisdictional limits of the regulatory authority. 55 A more broadly applicable example is the Texas legislature s creation of a statutory procedure whereby certain surface owners can restrict the mineral owner s development activities to small drill sites of 2 acres or more designated by the surface owner. 56 Neither approach, however, is likely to be available in the areas where most wind development takes place, since they are typically restricted to densely populated areas. C. The Limits of the Law What should be apparent from the discussion above is that rules like the accommodation doctrine, and even statutory provisions specifically designed to favor surface owners, provide only limited protection to renewable project developers hoping to construct their projects on 49 See, e.g., N.M. STAT. ANN (A) and (B) (requiring surface use agreement or posting of a bond for damage to the surface); WYO. STAT (same). As with the notice requirement, Colorado has reversed the rule, requiring that surface developers execute a surface use agreement or post a bond. COLO. REV. STAT See, e.g., MONT. CODE ANN (1)(a); N.M. STAT. ANN ; 51 See Gerrity Oil, 946 P.2d at 926 (interpreting COLO. REV. STAT. ANN ). 52 See N.D. CENT. CODE ANN (West). 53 N.D. CENT. CODE ANN (West). 54 See MONT. CODE ANN to -306 (1993). 55 See Jack E. Fields, Resolving Conflicts Between Surface and Mineral Development, 11 (Andrews Kurth LLP, March 14, 2006). 56 Id.; see generally, id. at

13 lands affected where the mineral and surface estates have been split. Especially where mineral production is already occurring, courts are very unlikely to require mineral owners to alter their existing means of production, or relocate their operations, solely to accommodate a new surface use. And even where the surface use pre-dates the commencement of mineral production, a project developer will still bear the burden of showing that the mineral owner s proposed means of production or the location of its operations would represent an unreasonable interference with the existing surface use. In light of these legal hurdles, the next section discusses how renewable project developers can use contracts to mitigate this legal uncertainty by working with conflicting mineral and surface rights owners to clarify each party s rights and obligations with respect to the use of the surface. IV. USING CONTRACTS TO PROTECT THE RIGHTS OF RENEWABLE PROJECT DEVELOPERS Having discussed the fundamental legal issues posed by split estates, as well as the practical limitations inherent in the most common non-contractual remedies, let s return to Becky. Put simply, what else could Becky do to protect her wind farm? As the title of this section suggests, Becky could approach the competing mineral and surface rights owners and negotiate agreements with each of them, delineating their respective rights and obligations with respect to using the surface of Sandy s land. To that end, this section presents a brief guide to several types of contracts Becky should consider. Please note that this list of contracts is not meant to be exhaustive, but rather illustrative. Before discussing specific examples, however, it is worth taking a few moments to examine some general principles that Becky (and developers like her) should consider when negotiating contracts with other rights owners. A. General Principles First, Becky should hire a lawyer with both expertise in the applicable state and local law and experience drafting and negotiating these kinds of contracts. 57 To paraphrase the old saying, bad cases make bad law, and bad cases most often arise when the parties fail to draft contracts that clearly establish the terms of their agreement (whether through poor drafting, the omission of material provisions, or otherwise) or fail to comply with the formalities required by local law (for example, by failing to put the contract in proper recordable form). A good lawyer is essential to avoiding such mistakes, both common and arcane. Second, Becky should conduct appropriate due diligence of the proposed project land. Such due diligence might include a physical inspection of the property, to determine, for example, whether there is evidence of any existing mineral development or pipeline operations. 57 See, e.g., the discussion on wind leases, infra, which references a number of state statutes that require wind leases to conform to certain basic requirements. To take one example, North Dakota has created, by statute, a contract called a wind option agreement, which is a contract in which the owner of property gives another the right to produce energy from wind power on that property at a fixed price within a time period not to exceed five years on agreed terms. N.D. CENT. CODE (2009). 5-11

14 Most importantly, Becky should review the real property records, whether by ordering a current title commitment or by engaging an experienced landman; in either case, the goal is to identify all third parties with a valid (or potentially valid) interest in the surface, mineral or wind estates. 58 Without knowing who owns what interests in the proposed project area, Becky will be unable to identify the parties with whom she may wish to negotiate. At the same time, since the nature and scope of an interest owner s rights are determined by the instrument whereby it obtained those rights, Becky s review of title will inform the nature and scope of any agreements she enters into with each interest owner. Depending on what her title review reveals, Becky may also wish to have a survey of the project area prepared. Since licensed surveyors can show the locations of existing third-party rights like rights-of-way and mineral leases, a survey can be a crucial planning tool; for example, if an existing pipeline right-of-way crosses a portion of the land where Becky wishes to construct a turbine, Becky can approach the right-of-way owner about relocating the right-of-way to a different location. Third, Becky should agree, in writing, to the basic economic and legal terms of any contract, before drafting begins in earnest. Many surface and mineral owners, even very sophisticated ones, can quickly get bogged down in the legalese that can pervade even welldrafted contracts. By establishing the basic terms up front, the parties can avoid unnecessary, and often costly, renegotiation and redrafting, while providing their lawyers with a roadmap that can enable more efficient drafting of the final contract. Obviously, the terms of any given contract will vary greatly based on the nature of the underlying business arrangement, so in most cases, the advice of experienced counsel should also be sought at this stage. Finally, once any contracts have been signed, Becky should ensure that they are promptly recorded in the applicable real property records. Recordation is critical to perfecting any real estate interests created by the new agreement, since the recorded agreement puts third parties on notice of the rights and obligations of the parties contained therein. This can be especially important where a mineral lessee, for example, has agreed to waive rights under an existing recorded lease (e.g., by agreeing to designate specific drilling areas, rather than having blanket access to the surface). While an unrecorded agreement is still effective as between the parties to the agreement, if the agreement is not recorded, a subsequent purchaser of the mineral estate, for example, might not be subject to any surface use restrictions to which the previous mineral estate owner agreed. It should be noted that the entire agreement need not be recorded; if the underlying agreement includes sensitive economic or other terms that the parties wish not to disclose in the public record, they can instead record a memorandum containing only such information as is sufficient to put third parties on notice of its existence As a general matter, Becky would not be subject to any third party rights that have not been recorded in the real property records. See infra. 59 In general, a memorandum need only include the names of the parties, the title, effective date and term of the underlying agreement, and contact information where a third party can request additional information. These requirements can vary by jurisdiction, however, and the parties may wish to include additional information, such as the existence of option rights. In addition, the memorandum will have to be in proper recordable form. Experienced counsel should therefore be consulted before the memorandum is recorded. 5-12

15 B. Ground Leases With these general principles in mind, let s consider some specific examples of contracts that Becky (and Sandy) could enter into with the various parties who own interests in the proposed project site. For many wind developers like Becky, the ground lease is the most fundamental contract they will sign, since it establishes their right to use the surface estate. Although wind farms are constructed over very large tracts of land, the actual amount of the surface required for development is relatively small, since each wind turbine has a limited footprint relative to the overall project area. And once the wind farm has been constructed and put into operation, the remainder of the land can continue being used for other purposes in Sandy s case, he could continue grazing cattle or use it for other agricultural purposes. 60 In light of these facts, ground leases are by far the most common type of contract used by wind developers to obtain surface rights from the surface estate owner. 61 They are more economical than buying the surface estate outright, and they can be drafted to carefully limit the surface owner s right to access or use the surface. Even where Becky is unable to obtain surface waivers from the mineral estate owner, for example, she can at least obtain clear rights to use the surface, and then rely on non-contractual protections, like the accommodation doctrine, to protect against future mineral production. At a minimum, Becky can use the ground leases to prohibit Sandy from entering into any new agreements, such as pipeline rights-of-way, that might interfere with her wind farm. Note, however, that ground leases are often limited in their ability to restrict surface uses on the remainder of the land that might interfere with the wind farm as a whole, as opposed to individual turbine sites. In other words, a ground lease is a good tool for preventing Sandy or his invitees from entering the turbine site; it is less effective, for example, where Sandy wishes to grant a hunting lease on the non-ground lease portions of his land. Hunting leases, to take one example, pose special liability risks for wind farm operators, 62 both owing to the nature of the activity and the presence of multiple third parties that could damage the wind facilities (or be injured by them). While it is possible to include blanket prohibitions against such uses in the ground leases, Sandy may be reluctant to forego the revenue such uses could produce. In our hypothetical, however, Sandy does not own the wind estate, so Becky may not have to rely on Sandy s good judgment to protect against hunters and other conflicting surface uses. A wind lease, discussed in more detail below, may be the better instrument for imposing blanket restrictions on surface uses that would interfere with Becky s wind farm. If we assume that the wind estate owner reserved the right to prohibit such uses (in addition to ownership of 60 But see TEXAS WIND LAW, supra n. 2, at 3-4 (discussing the safety concerns raised by hunting leases and the use of covenants prohibiting them in wind leases). 61 Although beyond the scope of this paper, it should be noted that, in addition to ground leases, wind developers will need to secure other surface rights, such as transmission line easements. For an excellent discussion of these easements, see TEXAS WIND LAW, supra n. 2, at See supra n

16 the wind itself) when conveying the land to Sandy, Becky should be able to include such prohibitions in any wind lease she negotiates with the wind estate owner. One final point on ground leases: where it is not possible for Becky to design the project layout around existing pipeline rights-of-way, she may need to require Sandy to seek relocation agreements with the pipeline companies. 63 On one hand, where pipes are already in the ground, this could involve Becky paying for the costs of physically relocating the pipes, assuming relocation is practically and economically feasible. On the other hand, where a right-of-way exists, but there is no pipe in the ground, it may be as simple as working with the pipeline company to identify a suitable alternative location on the remainder of Sandy s land. In any case, it is important to note that Sandy, not Becky, will need to enter into these relocation agreements although Becky may wish to join them as a third-party beneficiary, especially if she agrees to bear the costs of relocation. C. Surface Use Agreements Surface use agreements are another common example of a contract that Becky can use to mitigate the risks posed by conflicting, or potentially conflicting, surface rights. Surface use agreements can take a number of forms and (as we shall see) be given different names, but as a substantive matter, they all share a similar goal: to delineate the rights of each direct and derivative estate owner whether mineral, surface or wind to use the surface of the land to extract value from their interest, while preserving the rights of the other interest owners to do the same. In an ideal world, Becky might be able to draft an agreement among all of the parties in interest: the mineral owner, drilling companies operating pursuant to leases with the mineral owner, the surface owner, and pipeline companies operating pursuant to rights-of-way granted by the surface owner. In practice, she will more likely have to deal with each interest owner, or subset of interest owners, separately. For example, with respect to third parties owning the right to produce minerals underlying the surface estate, Becky could work with Sandy to seek complete or partial surface waivers. 64 As the name suggests, such waivers constitute an agreement by the mineral interest owner (generally a mineral lessee) to abstain from mineral production on all or a portion of the surface of the subject land. In Becky s case, it would probably be sufficient to obtain surface waivers with respect to the turbine sites only or the turbine sites plus some reasonable buffer area. Such surface waivers may also include language limiting any related activities, such as seismic testing, that might interfere with Becky s wind farm. Generally speaking, these surface 63 This is a prime example of where it pays to perform appropriate due diligence up front and negotiate a term sheet before drafting the contract. If both Becky and Sandy agree up front that the ground lease will be conditioned on Sandy obtaining relocation agreements, they can avoid potential confusion in the future. 64 For illustrative purposes, this paper is based on an over-simplified hypothetical involving a single mineral owner. In many cases, a developer will be operating on property where there are multiple mineral interest owners. For a Texas-specific discussion of the issues related to obtaining full or partial surface waivers from multiple mineral interest owners, see Fields, supra n. 55, at

17 waivers would be entered into between Sandy and the mineral interest owners. However, if Becky and Sandy have already entered into a ground lease arrangement, Becky should also be a party to the surface waiver. Indeed, many mineral lessees might prefer her to be a party, since they can then limit the duration of the surface waiver to the term of her ground lease. A related, but more targeted, form of contract is a drill site designation agreement. With the recent growth in new drilling techniques and technologies, many mineral lessees are willing to designate one or more areas to which they will limit their mineral production activities. For obvious reasons, designation agreements are generally favored by surface owners and disfavored by mineral owners, but assuming Sandy s land is large enough to accommodate Becky s wind farm, his own use of the surface, and mineral production by the mineral owners, they can be a very effective tool for giving all interested parties certainty that each will be able to use the surface in a manner that maximizes the value of its investment. D. Wind Leases and Related Contracts This paper will only briefly discuss wind leases, which are a relatively new form of split estate contract (at least compared to the other contracts discussed above). 65 Much like mineral leases or surface leases, wind leases are a common way for wind rights owners to capitalize on their ownership interest. You will recall that, in our hypothetical, the previous owner of Sandy s land severed the wind estate from the surface estate. For purposes of this paper, then, it is probably enough for Becky to know that she will need to enter into a wind lease with the wind estate owner in order to use the wind that will drive her turbines. Put more simply, without ground leases, she cannot build her turbines, but without wind leases, she cannot operate them. That said, there are a couple of things worth considering in light of the various split estate issues discussed above. Given their relative newness, there is little in the way of case law addressing the enforceability or priority of wind leases, 66 especially in situations where the mineral estate has also been severed. Indeed, even experts in wind law disagree, for example, as to whether, in the absence of express legislation, the mineral estate is dominant over the wind estate or should be treated on equal footing with the wind estate. 67 Notwithstanding this general uncertainty, however, some states have addressed the issues posed by wind leases by statute. Such legislation typically takes the form of a list of formal and substantive requirements that a wind lease (or wind easement) must meet to be considered valid in that state. 68 At a minimum, 65 For an excellent general discussion of the business and legal issues posed by wind leases, see Doll & Jones, supra n. 3. For an equally excellent review of how these issues are being addressed in Texas, see TEXAS WIND LAW, supra n. 2, Chs See discussion infra, Sec. II.B. 67 See, e.g., TEXAS WIND LAW, supra n. 2, at For example, wind easements in South Dakota must include at least four provisions: (1) A description of the real property subject to the easement and a description of the real property benefiting from the wind easement; (2) A description of the vertical and horizontal angles, expressed in degrees, and distances from the site of the wind power system in which an obstruction to the wind is prohibited or limited; (3) Any terms or conditions under which the easement is granted or may be terminated; (4) Any provisions for compensation of the owner of the real property benefiting from the easement in the event of interference with the enjoyment of the easement, or compensation of the owner of the real property subject to the easement for maintaining the easement. See S.D. CODIFIED LAWS

18 any wind lease Becky signs should conform to such requirements yet another reason why she should engage experienced counsel before approaching the wind estate owner. Finally, Becky should know that wind leases can specify that any subsequent [mineral] lessee must enter into a surface accommodation agreement with the wind company. 69 Such accommodation agreements can be analogized to the surface waivers discussed above, since their principal purpose is to prohibit mineral interest owners from producing minerals in a manner that would interfere with Becky s wind farm. 70 While accommodation agreements only address future mineral development, and are therefore irrelevant to existing mineral production, Becky should consider including a surface accommodation provision in any wind lease she negotiates with the wind estate owner. As with the other contracts discussed above, an accommodation agreement can be a useful tool for getting multiple parties in this case, Becky, the wind estate owner, and future mineral lessees on the same page regarding future development of the surface. V. CONCLUSION With the recent growth of both mineral production and renewable energy investment throughout the Western United States, split estate issues have become, and will remain, a real and sometimes frustrating fact of life for renewable project developers. While the common law of split estates can be unfavorable to developers, many states have begun to pay greater attention to the ways in which severance of the mineral and wind estates from the surface estate can inhibit the development of valuable renewable projects. For now, however, renewable project developers are well-advised not to rely solely on court decisions or state legislatures when planning their projects. Instead, wherever possible, developers like Becky should engage directly with third-party interest owners to negotiate clear contracts that secure the rights they need to use the surface for renewable energy development. Properly drafted, such contracts can reduce the risk of disputes between the various interest owners, while reinforcing each party s ability to realize the value of its investments. If nothing else, such contracts provide a practical way to mitigate the uncertainties of existing law, while establishing their rights, if not to inherit the wind (in a good way), then at least to use the wind productively (1996). South Dakota wind easements are also limited in duration and are void if no development has occurred within the statutory period. Id. at TEXAS WIND LAW, supra n. 2, at See id., at (discussing the pros and cons of accommodation agreements, as well as recent Texas case law addressing certain situations in which an accommodation agreement may be unenforceable). 5-16

19 Inheriting the Wind: Siting Renewable Energy Projects on Split Estates Renewable Electric Energy: Law, Development and Investment Rocky Mountain Mineral Law Foundation November 7-8, 2013 Will Russ Vinson & Elkins LLP Dallas, Texas THE HYPOTHETICAL 2013 Vinson & Elkins LLP 5-17

20 OVERVIEW OF SPLIT ESTATES Mineral vs. Surface Estate Surface vs. Wind Estate Mineral vs. Surface vs. Wind Estate 2013 Vinson & Elkins LLP SURFACE VS. MINERAL ESTATE Traditional Dominance of Mineral Estate Surface Use Disputes Accommodation Doctrine Surface Use Agreements 2013 Vinson & Elkins LLP 5-18