An ancestor owned oil and gas rights - how do I get title to them?

We are seeing a lot of situations where our clients have learned that they own mineral rights that were earlier reserved by an ancestor.  They typically learn of this through an oil and gas company who has researched title on a parcel they are interested in leasing (or sometimes on a parcel that has already been drilled).  The company discloses who reserved the minerals and describes its efforts in establishing a family tree for that person.Based upon the company’s research (using Probate records, Ancestry.com and other tools) it determines those persons presently living who would have ownership of the minerals and the percentage of the minerals each such person owns.  Oil and gas leases are then prepared for those persons and recorded.   The parties signing the leases are paid a signing bonus based upon the “net” acreage they owned.  For example, if Grandpa Jones reserved one half the minerals under 100 acres, and he has two living grandchildren, each would own:  50% x 100 / 2 = 25 net acres.Most companies seem to be satisfied with the above process as far as getting leases in place, even though they are obtained from persons who do not hold “record” title.  That is, there is no chain of title at the courthouse from Grandpa Jones to his 2 grandchildren.Some companies, when it pertains to payment of royalties generated by production of oil and gas, want greater comfort that they are paying the proper persons.  They sometimes require mineral owners to firm up their title to the minerals.  This seems  even more likely when the party who signed the lease has passed away; they want the next generation to get something on record at the courthouse establishing their ownership of the minerals.So, exactly how does an heir get Granddad’s minerals properly titled in their name?  There would seem to be two ways to skin that cat in Ohio.  The simplest way, which may or may not be acceptable to the lessee for purposes of paying out royalties, would be using Ohio Revised Code 317.22.  It allows an heir to record an affidavit about the family history, who died, and who the living heirs are.   At the same time, the heir can prepare and record a deed to the living descendants of the person who reserved the minerals .While this is a fairly simple process and causes such descendants to be the presumed owners of the mineral interests, their interest remain subject to attack from others -- for example, if the affidavit failed to include a living ancestor, he could step up later and claim a share of ownership.  Under Ohio's Marketable Title Act, if no one puts something on record to challenge the affidavit or related deed within 40 years after they were recorded, the ancestors filing same would then have clear title.The second way of transferring ownership involves the use of Probate Courts.  In the example above, a Probate estate would be opened for Grandpa Jones (or re-opened if an estate had been opened in the past).  A certificate of transfer would be issued by the court to Grandpa’s heirs, which effectively functions like a deed and which is recorded in the county where the minerals are located.  If Grandpa had a wife that survived him, her estate would also need to be opened.  Estates for her children would need to be opened and ultimately we would end up with a chain of tile from Grandpa to his 2 grandchildren.  If any of the above resided outside of Ohio, estates would need to be opened in the State of residence.  Even where all the parties reside in Ohio, they may have lived in different counties and the Probate estates would need to be opened in the various counties where the decedents resided.The Probate process described above can easily escalate depending up on the number of generations involved, the number of children in each generation and the States or counties of residence.  If the subject mineral interest covered a small tract and if the person trying to solve the problem is one of 16 grandchildren, it simply may not make sense to expend the filing, recording, and legal fees necessary to go forward with the Probate process.In effort to avoid the above problems for future generations, some clients decide to title the minerals in an entity such as a Limited Liability Company or a trust.  This avoids having to later probate the asset.

Dormant Minerals - Searching for Heirs

A previous article discusses more generally the notice requirements in Ohio's Dormant Minerals Act

Who must be notified?

Before declaring a mineral interest as abandoned, a surface owner must first provide adequate notice to the "mineral holder."  Many times, the mineral holder is deceased and has been for many years.   If that's true, the surface owner must notify the holder's heirs.

Who are a holder's heirs?

It depends on the structure of the holder's family.  It could be a surviving spouse, the holder's children, grandchildren, great-grandchildren, or even aunts and uncles depending largely on how long ago the mineral holder died.

How do I locate a mineral holder's heirs?

Unless you personally know the mineral holder (or their family), chances are you don't know the mineral holder's family tree.  Online tools such as Ancestry.com can help.  And publicly available court records might help, as well.  Consider looking through deed records as well as probate records to see who inherited the mineral holder's assets.

What if I can't find a mineral holder's heirs?

Sometimes, public record searches lead to dead-ends, even to the most skilled abstractor.  If no heirs can be identified, or if there whereabouts are unknown such that "service of notice [via certified mail] cannot be completed," the Dormant Minerals Act authorizes notice by publication.

Can I skip the heir search and simply publish notice?

Probably not. The statute defines “holder” broadly to likely include heirs of the original party who created  the mineral interest  The statute also requires an effort to serve holders via certified mail.  However, the act does not describe how big or exhaustive of an effort must be made before publishing becomes appropriate.

How hard do I have to search for heirs before publishing becomes OK?

The Dormant Minerals Act does not answer this question.   However, Ohio courts have begun to shed some light on this question.  A recent case from the Jefferson County Court of Common Pleas (Sharp v. Miller, 15-CV-108) found that a diligent but fruitless search through publicly available records in that county was sufficient to allow serving notice by publication.  That court pointed out that the statute, in regard to other issues, focused upon the county where the minerals were located.  The newspaper notice is to be published only in such county.  Moreover, any party wishing to preserve their mineral interests must record a claim in the county where the minerals are located. Accordingly, the court established a rule that, unless a landowner has actual knowledge of a holder’s name and location, it is sufficient to limit a search for holders to public records in the county where the minerals are located.Thanks for reading.-Eric

Pipeline Construction Issues

As a pipeline attorney, I spend a lot of time impressing upon potential clients the importance of having a rock-solid pipeline contract (this can be an Easement or Right-of-Way). The importance of a thorough, specific pipeline contract cannot be overstated. There is something else I say that often surprises landowners, and that is, “no matter how solid I make the contract, neither of us can control what happens on your property during construction.” Over the course of the last twelve years, I have seen the good, the bad and the ugly with respect to pipeline construction. I’ve seen A+ operations and F- ones. And the reality is that even the best contract in the world cannot control the physical operations. All it can do is set you up for success in dealing with problems. Let me give a few examples.This fall I was standing in knee-deep mud on a property in Eastern Ohio. Immediately in front of me was a ten-foot ditch. On the other side of the ditch was a thirty-six-inch diameter pipeline ready to be lowered into the ground. On the far side of the pipeline was my client’s “back fields” with head-high hay and waist-high beans. Oops. In this situation, we had written the contract specifically to say that the pipeline company would leave two land bridges during construction which would allow my client to take his combine and baler across the ditch to his backfields. The construction crew ignored their instructions and didn’t leave my client either land bridge. So now his crops were neglected and when he eventually got to the other side he was going to have problems getting them cut down to size without damaging his equipment. Let alone the fact that it was coming into October and he might not be able to sell the crops he was able to cut.Earlier this summer, a different pipeline company failed to close a gate behind them and let a client’s cattle out into the middle of a state route. Last year I had multiple clients who had ‘water boxes’ placed on their property outside where the pipeline company was allowed to be per the contract. I’ve seen pipeline companies fail to clean up the windrows of brush and small timber that they created during construction.  I’ve seen them block driveways where they weren’t supposed to be. I’ve seen them take trees down where they weren’t supposed to be.Despite all of the above, I’ve also seen pipeline companies go above and beyond the call of duty. I’ve seen them fill low-lying areas with extra soil to help out a landowner. I’ve seen them rise to the occasion and admit their mistake and help wrangle escaped cattle. I’ve seen them return a property to golf-course conditions.What I want to impress upon you is that no contract can prevent these “accidents.”This makes it extremely important for you, as a landowner, to work with an attorney who 1) has seen it all, 2) has an existing relationship with pipeline companies who know she means business, 3) understands the potential solutions to construction issues, and 4) doesn’t mind getting her boots dirty to come up with creative solutions.The contract is only 75% of the battle.

Things Land Agents Say - Part Two

This is a second post in a series describing common promises or other statements land agents make to entice landowners to signing leases, easements, or other agreements relating to oil and gas or pipeline transactions.  Click here to view part one.  “The crops will grow right over it, you won’t even know it’s there!” While the first part of this statement may be true, the second part is a loaded gun. True, most pipeline contracts allow farmers to plant crops on top of the easement. But trust me, the farmers will know that it’s there. Under the best case scenario circumstances a farmer will suffer yield loses in the first four years. Year one is construction. Year two is reclamation (for farm ground this should include fertilization and disc’ing, aeration, etc. to prevent compaction). Even if these methods are implemented correctly, I still usually see up to two years significant yield loss. With the worst case scenario you could see issues with compaction, erosion, snow melt, poor fertilization, and any other number of problems for years to come. Most of these issues can be addressed in your contract. Any pipeline contract worth its salt deals with specific methods for reclamation and particular fertilization methods [by the way, the same is true for non-crop lands!]. An exceptional pipeline contract will also deal with what happens when the pipeline company doesn’t follow the contract, or a perfect storm of weather circumstances causes severe compaction or erosion. Trust me, you’ll know it’s there. Please speak with an experienced pipeline attorney to plan for the worst-case scenario.“Pipelines are safe.” Pipelines are widely considered to be the safest method of transporting petroleum, natural gas and their constituents. But this is largely because a pipeline’s only competition is rail, truck and barge, which also come with fairly severe safety considerations of their own. The debate rages on inside and outside of the industry as to what ‘safe’ really means. As a landowner, what you care about is the two measures of distance: how far away from your home/business/buildings the pipeline will be, and how deep in the ground it will be. The larger these distances, the more you have set yourself up for success in the event that a catastrophe happens. Sometimes you can control (or at least have input in) where the pipeline goes across your property—sometimes you can’t. This depends on what type of pipeline is being installed. Typically, a landowner can have input into how deep the line is buried, although most pipeline companies act like you can’t. Getting good legal representation is key to understanding both these issues on your specific property.“We can’t do that because of our regulations.” This phrase is most often used when you’ve asked a pipeline company to do something that they don’t want to do because it will be expensive for them. I hear it a lot when a landowner asks for extra depth of cover. On a FERC (federally regulated) pipeline, it’s true that the company will have to follow regulations, what they don’t tell you is that often they are allowed to raise the bar above FERC regulations. For example, FERC may require three feet of cover on top of the pipeline, but there is nothing stopping the pipeline company from agreeing to five feet of cover over the line. There are innumerable examples here. Also note that non-FERC pipelines have very few regulations at all.An experienced pipeline attorney can help you translate the above statements to fit your needs.

Things Land Agents Say

Things that Land Agents Say - Part One

Part Two can be viewed here. Today I thought I would write some of the things that I’ve heard land agents say to entice landowners to sign oil and gas documents. Part One will cover things that are not specific to a particular type of oil and gas contract, meaning that you could hear these phrases in lease, well-pad, pipeline, or other oil and gas negotiations.“Don’t worry, we will just call most of your payment ‘damages’ so that you don’t have to pay taxes.” When I hear this phrase, it makes me want to scream. First, please don’t ever take tax advice from a land agent. Call an accountant—preferably a seasoned accountant who understands oil and gas contracts. Second, most damages are taxable per the I.R.S.! Third, for those non-taxable damages (a rare occurrence to begin with), they are generally limited in scope so that they can only be used one time. For those folks that live in oil and gas country it would be common to have multiple leases, pipeline rights of way and possibly even a well pad agreement. If you’ve used up your damages in some of your early transactions, you may not have any more to use! Crop and timber damages (of any kind) are generally taxable at ordinary income levels no matter what you do. Lease bonus money is also taxable at ordinary income levels because it is considered rent by the I.R.S. Sales of mineral rights can be capital gains (lower tax rate) in the right circumstances. Pipeline and well-pad damages can sometimes be considered damages to the residue of your property, which could mean not paying taxes, but can only be used one time. I have seen too many people take tax advice from land agents and they end up almost losing the farm by the time April 15 rolls around. Please call a knowledgeable accountant and oil and gas attorney to help minimize your tax burden.“Hurry up and sign today, I can only give you this price through today.” This phrase comes in a bunch of different flavors, so you can use your imagination here. The point is the land agent is trying to entice you to hurry up and sign before you ask too many questions. I call these ‘used car salesman tactics.’ Now just like car salesmen, there are good and honest land agents—this is not intended to disparage either profession—but at the end of the day, they are in a sales job where numbers matter. I encourage landowners to remember that at the end of the day their agent has to report into his boss how many signatures he collected from landowners. No land agent wants to finish the day empty. Prices in this industry fluctuate, that’s just the way it goes. Have an attorney review your paperwork and your offer. Make your deal with the information you have in front of you at the time and don’t let yourself feel buyer’s remorse after the fact. Above all else, please don’t fall victim to land agent sales tactics. Take your time and do it right. Even if you do lose a couple dollars, you’ll still come out ahead in the end.

Oil and Gas Protection Leases - A Good Idea?

What's a Protection Lease?

Suppose there is an issue with the title to minerals under a 100 acre farm and it is clear that either Party A owns those minerals or Party B owns them.  Suppose further that this farm sits in the middle of a planned unit for a horizontal Utica shale well.  What can an oil and gas producer do to fix that situation?  More frequently, producers are using ‘protection’ leases to address this situation.In the above example, the producer would obtain leases from both Party A and Party B, paying only a nominal amount upon signing of the lease.  A side agreement is also signed where all agree that any production royalties due on the acreage will be escrowed by the producer.  It then becomes necessary for Party A or Party B to file a lawsuit to have a judge determine who owns the minerals.  After such a determination, the escrowed royalties are paid to the prevailing party; also, the prevailing party is entitled to receive a signing bonus.

What are their real consequences?

At first blush, the above arrangement seems practical.  It allows the producer to proceed with a planned well and ultimately compensates the winning mineral claimant by giving him what he would have received if he had clearly owned the minerals in the first place.  Such an arrangement allows the subject land to be placed into a production unit and avoids the producer ‘working around’ the tainted acreage by relocating the planned well.  I recall an earlier case I handled where a horizontal well had been stopped short of a large parcel where the mineral rights were disputed.  Protection leases were executed and this allowed the well to be extended under the subject lands.

What are the downsides?

There are definitely some downsides with protection leases, however.  Frequently, the lessee is allowed to escrow royalties until litigation is commenced and resolved.  Not all mineral owners (or landowners) are in a financial position to initiate such a case.  Moreover, sometimes only a small tract is involved – the attorney fees and title work related to establishing ownership of minerals underlying a small tract could well exceed the amount of royalties that would ultimately be collected.  Remember, once the producer has the protection leases and agreements in hand, it has absolutely no motivation to resolve the issue of who is entitled to the royalties – it can simply escrow them.

What if a well has already been drilled?

Another issue I have seen with protection leases is that sometimes they are requested after a well has already been drilled.  This is significant because the party requested to sign may well have a claim for mineral trespass against the producer.  That is, the producer drilled a well without having obtained a lease from the proper mineral owner.  A mineral owner in that situation would be releasing any rights held concerning the trespass if he executed a protection lease.  For that reason, it would seem that additional compensation is in order.

How do protection leases relate to Ohio's Dormant Minerals statute?

The above discussion has much interplay with Ohio’s dormant mineral statute.  In the fall of 2016, the Ohio Supreme Court made clear that landowners must follow the new version of the statute to recapture their minerals and that the 1989 version of the statute could not be used for such purpose.In an earlier article, I wrote that there were many unanswered questions about how the dormant mineral statute operates.  It seems apparent that oil and gas producers, who obtained leases from landowners claiming mineral ownership via the dormant mineral statute, have similar concerns.  This seems particularly true in light of the fact that landowners may not use the 1989 dormant mineral statute to reclaim their minerals.  If such a landowner did not properly follow the process set out under the current statute, they would not own their minerals and the producer would need to get a lease from the family that previously reserved the minerals.

Conclusion

I believe that producers are going back through their files to verify that they did obtain a lease from the proper party.  In situations where they are nervous about that issue, they are tracking down mineral owners, or their heirs, and trying to get protection leases.  Probably best to reach out to competent counsel before signing same.

Unresolved Issues with Ohio's Dormant Mineral Statute

Some of the issues discussed below have been clarified by Ohio courts.  Read more here. 

Background

Over the past few years, Ohio’s courts, at all levels, have dealt with a number of issues pertaining to O.R.C. 5301.56, often referred to as Ohio’s dormant mineral statute. At this point in time, several such issues are about to be ruled upon by Ohio’s Supreme Court. One issue of importance, however, has received little mention in court rulings to date. That issue concerns the notice requirements by a landowner seeking to recapture dormant minerals. More particularly, what are those requirements?Notice Requirements(E) Before a mineral interest becomes vested under division (B) of this section in the owner of the surface of the lands subject to the interest, the owner of the surface of the lands subject to the interest shall do both of the following:(1) Serve notice by certified mail, return receipt requested, to each holder or each holder's successors or assignees, at the last known address of each, of the owner's intent to declare the mineral interest abandoned. If service of notice cannot be completed to any holder, the owner shall publish notice of the owner's intent to declare the mineral interest abandoned at least once in a newspaper of general circulation in each county in which the land that is subject to the interest is located. The notice shall contain all of the information specified in division (F) of this section.

So, who must be notified?

To date, it does not appear that any Ohio cases have really fleshed out what the language above means.  A literal reading of the statute is that the holder OR the holder's successors OR assignees can be served by certified mail at the last known address -- that is, not ALL of those parties need to be served.  If all needed to be served "and" would be used in place of "or."   It is noted that mineral reservations are frequently made in a deed and never assigned, so there are no successors or assigns to serve – only holders.Some of the terms used in section (E) are defined by the statute; others are not. The “holder’s successors” is not defined. Successors, when used in a legal context, seems to typically apply to entities other than regular persons, such as corporations or trustees. It is notable that the statute uses this term and fails to include the term “heirs.”The “holder’s … assignees” is also not defined. This term seems more straightforward, and almost certainly includes a party holding a record assignment from the original holder. It would likely also include a subsequent assignee who took record title, not directly from the holder, but from the holder’s assignee. Whether the “holder’s … assignees” would include a party holding an unrecorded assignment is unclear, however.The statute does define “holder” at part (A)(1):(1) "Holder" means the record holder of a mineral interest, and any person who derives the person's rights from, or has a common source with, the record holder and whose claim does not indicate, expressly or by clear implication, that it is adverse to the interest of the record holder.The above definition is certainly broad, and would seem to include successors and assigns. That being the case, one wonders why part (E) of the statute requires certified mail to “each holder or each holder's successors or assignees.” Why not just say “each holder?”

Do heirs need to be notified?

The above definition could also include a holder’s heirs. The Seventh District Court of Appeals, in Dodd v. Croskey, took this position in dicta.  However, the Court further held: "We understand the difficulty in determining, in instances such as these, who are the heirs and assigns.  That said, we do not need to determine whether the actions taken by appellants would be enough to show an attempt at certified mail."  The court went on to explain that, because an heir did see the published notice in the paper and did file a response, it was not necessary for the court to set out what efforts were required by a landowner concerning notification of heirs.If heirs are included within the definition of “holder,” questions continue to linger -- Does any heir of the original holder have derived "rights," notwithstanding the existence of a contrary will?  Does an heir of an heir named in the will have derived "rights" when the estate was closed decades ago, without any transfer of the reserved minerals?How far must the landowner go to locate heirs?Perhaps the biggest question in this regard is - If heirs are included within the definition of “holder,” what efforts must a landowner go to as far as locating them and notifying them of their intent to recapture dormant minerals?Many have argued that the purpose of the dormant mineral statute was to encourage and streamline mineral development on lands where severed minerals have become dormant. In states which have no dormant mineral statutes, such a situation requires an oil and gas developer to track down all heirs and secure leases therefrom (or force pool those who refuse to sign leases).If Ohio’s dormant mineral statute requires that “each holder” be notified by certified mail “at the last known address of each,” and if “holder” includes heirs, then the process in Ohio is not going to be any more streamlined than in states which have no dormant mineral statute. Landowners will be compelled to do thorough research to establish a complete family tree and the locations of all living heirs. Further, probate records will need to be researched to determine situations where a particular will varied from the statutory line of inheritance. If all such persons are notified via mail, it seems likely that at least one would respond to same, and per the holding of Dodd v. Croskey such a response secures the mineral interest for all holders for another 20 years.

Conclusions, and best practices:

So what is a landowner, who desires to recapture dormant minerals, to do in light of the above issues? Certainly title needs to be searched from the date of the mineral severance to the present to see if any transfers were made. Any such transfer would be a savings event that would prohibit a landowner from proceeding with a claim for dormant minerals. Where no transfers can be found, the landowner does not have an option to send mail to the holder’s successors or assigns. In such event, a landowner could use a less stringent interpretation of the statute by sending the original holder certified mail at the last known address and then publish in the paper if service is not made by mail. Such a process will be valid only where the courts determine that “holder” does not include heirs.Alternatively, a landowner could assume that “holder” includes heirs and complete a full determination of the names and addresses of all living heirs, factoring in any probated wills, and notify all such persons via certified mail.It does not appear that any middle ground can logically be applied when interpreting the statute. If a “holder” is an heir, and if “each holder” need be notified by certified mail, a full determination of living heirs is needed with mail going out to all. If a “holder” does not include heirs, or if the particular language of part (E) of the statute is interpreted not to include heirs, but only record holders and their successors and assigns, no determination of heirs is necessary.

Obtaining Unexpected Profits from Ohio's Dormant Minerals Act

Overview

Ohio's dormant minerals act (DMA) is designed to rejuvenate abandoned oil and gas reservations by granting them to the surface owner (a more detailed explanation of the DMA can be found here).

A basic DMA process with one oil and gas holder:

In a very basic scenario, the Surface Owner notifies the oil and gas Holder that their rights will be declared abandoned in 60 days.  In order to retain their interests, the Holder must record a claim form prior to the 60th day.  A timely filed claim form shuts down the whole process: the Surface Owner cannot re-capture the Holder's interests.

A complex DMA process with several oil and gas holders:

In a more typical scenario, there are several oil and gas Holders, frequently the heirs to a very old reservation.  Here, the Surface Owner notifies all of the Holders that their rights will be declared abandoned in 60 days.  The Holders can preserve their interests by filing a claim form prior to the 60th day, just like described above.  However, not each Holder must file a claim form.  A single claim form filed by a single Holder preserves all of the rights of the other Holders. 

Unexpected Benefits to the Mineral Holder

That a single claim form preserves the rights of all Holders presents a tall hurdle for the Surface Owner faced with several Holders.  It also presents a real opportunity for an individual Holder if all other Holders don't timely file a claim form. In this situation, the individual Holder might strike a deal with the Surface Owner:  the Holder will agree to not file a claim form in exchange for a percentage of the rights Surface Owner obtains at the conclusion of the DMA process.

Example:

Surface Owner owns 100 acres of property.  The property is subject to a one-half mineral reservation (or 50 acres) made many years ago.  Surface Owner identifies 10 Holders (heirs) to the one-half reservation, with each Holder entitled to 5 acres (50 acres / 10 Holders).  Surface Owner cannot identify the mailing addresses for any of the 10 Holders (this is fairly common).  Surface Owner publishes in their local newspaper notice to all 10 Holders that their interests will be declared abandoned in 60 days (the DMA permits notice by publication).  An Individual Holder sees the notice and contacts Surface Owner.  Together, they determine that the remaining 9 Holders are unlikely to timely file a claim form.  Individual Holder then strikes a deal with Surface Owner:

• If no Holder timely files a claim form, the 50 acre reservation will vest with Surface Owner
• Individual Holder agrees to not file a claim form
• As compensation, Surface Owner will issue a deed to Individual Holder for 1/3 of the 50 acres described above

Win / Win

This is a benefit to Surface Owner and Individual Holder.  If Individual Holder files a claim form, he is only entitled to 5 acres of minerals, while Surface Owner gets nothing.  By contrast, if the deal proceeds as described, Individual Holder will receive 16.67 acres of minerals, while the Surface Owner gets 33.33 acres of minerals.  Even if one of the 9 Holders does timely file a claim form, Individual Holder hasn't lost anything: he is still entitled to his 5 acres.

Conclusion

In reality, this fact pattern arises fairly frequently.  There are often many heirs to oil and gas reservations, and it is usually no easy task to locate them.  Striking such a deal with Surface Owners is not always guaranteed: it is not a very simple concept to grasp.  Even so, our firm has handled such transactions successfully.  Contact us if you have been served with a Dormant Minerals notice and you believe the remaining Holders are unlikely to respond.