A seller may wish to transfer ownership to a piece of land but retain the rights to future oil and gas development on that land. Sloppy language in transaction documents can result in frustrating consequences for all concerned.

Example 1: What rights do I own?

Consider the situation of a landowner with a producing shallow well that provides a modest royalty. The seller wishes to retain the steady flow of royalty income while transferring the land to a buyer.

Unfortunately, some home-made agreements developed years ago included language in deeds that retained “the royalty rights” to the seller. A new generation of oil and gas companies now wants to develop the deep rights. Whom do they negotiate with over the terms of a new lease?   Disputes have now arisen over who is entitled to negotiate the terms of the new lease among people forced to abide by the language of poorly crafted documents. That's because it's unclear who owns the mineral rights.

“Royalty rights, mineral rights,” the seller asks, “Aren't they the same?”

No, they are not.

Mineral rights include not only the right to royalty payments but also the right to receive bonus payments and the right to negotiate lease terms regarding well location, water testing and other environmental issues. When only one or two items are removed from this bundle of mineral rights, problems can occur.

Example 2: Conflicting interests

Consider the owner of unleased land who may wish to sell his Ohio property but retain the mineral rights and move to Florida. There is no oil and gas development taking place now on the land, but the seller remains hopeful that the oil companies will return.

Buyer beware. Once the seller moves to Florida, he or she may wish to maximize royalty payments but with little incentive to negotiate favorable environmental language in a new lease. The drilling rig could be plopped into the front yard for all he or she cares.

On the flip side, a person holding only the royalty rights (but not the right to negotiate new lease terms) may be at the mercy of someone with little concern about insisting on “gross” vs. “net” royalty calculations in the lease.

Example 3: Pipelines

Pipeline companies are increasingly facing situations in which the owner of a piece of land is not necessarily the person who has the right to negotiate the location of a pipeline.

The situation is even more frustrating for the landowner who has little or no say in the placement and type of pipeline across his valuable farmland.

It seems hard to justify any circumstance that would sever the right to negotiate pipelines from the ownership of the land. But we are increasingly finding situations where that valuable right has been conveyed away, perhaps inadvertently.

Items to keep in mind

Caution should always be exercised when unbundling the package of mineral rights.

Landowners who may be considering such a separation should consider some of the following issues:

Do you wish to sever only a portion of the mineral rights? Then your reservation document should be limited. For example: “Seller reserves the rights to future royalties that are payable under the well currently known as API 111111.”

Does it make sense to place a time limit on the reservation? Parties to the sale of unleased land may wish to negotiate a time limit on the seller's right to enjoy the benefits of a future lease.

Potential buyers dealing with a seller who wishes to reserve mineral rights should be very wary of the consequences. An experienced attorney may provide some valuable counsel before the documents are signed.

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Thomas G. Carey is a lawyer with Harrington, Hoppe & Mitchell, Ltd. He can be reached at tcarey@hhmlaw.com or at (330) 392-1541.