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In Florida, oil, gas, and mineral rights can be as valuable to their owners as they are in Texas and the other significant oil-producing states. However, mineral rights may have little value in Florida if the property where these rights are located is not zoned for drilling or mining, e.g., the land is zoned for residences, retailers, service providers, industry, offices, parks, or governmental uses, or if acreage has been purchased by owners who wish to own a country estate, an equestrian estate, a secluded retreat, or who wish simply to preserve the land in its natural state. For purposes of this article, we will refer to lands used for these purposes, which we consider incompatible with drilling or mining for oil, gas, and minerals as “non-mining lands.”

Not only may mineral rights have little value for non-mining lands, they may actually create title defects for those lands. These defects can be attributed to the natural conflict and friction that results when, if mineral rights are owned by a third party, the same piece of non-mining land will have different owners who own the land for totally different purposes and who are owners without the consent of each other. Normally, the ownership of land is vertically divided (think of a piece of land’s surface boundaries with fences on each boundary – the fences literally exemplify a division by vertical boundaries). Even if there is more than one “vertical owner,” usually they are partners, such as business partners or spouses. Now think of the land’s subsurface. Mineral rights ownership is the ownership of oil, gas, and minerals beneath the surface, so you have a horizontal division of the lands ownership – you have an owner of the surface of the land (and the air to a certain height above it) who may be using the surface for a residence, a store, or an office; and an owner of the subsurface mineral rights with a financial interest in making money from mining or drilling for oil, gas, and minerals, which has a great potential for disturbing the surface owner’s enjoyment of the land. Not only that, but, if a conflict arises, Florida courts have held that the rights of the mineral owner are dominant and superior to the rights of the surface owner.

A. MINERAL RIGHTS AND NON-MINING LANDS.

Therefore, for the owner of non-mining lands, because of this conflict, mineral rights can create a serious title defect if the owner of the mineral rights has the legal right to enter upon the property and explore, drill, and mine for oil, gas, and minerals (the “right of entry”), even if the land’s zoning does not allow for drilling and mining activities. The reason is that title insurance companies will not rely upon zoning that prohibits drilling and mining activities because that zoning can always be changed by the governmental zoning authorities.

Why are mineral rights that are accompanied by a right of entry considered a title defect for non-mining lands? As mentioned above, ownership of mineral rights is superior to the ownership of the land (the “surface rights”), especially if the oil, gas, and mineral rights owner (hereinafter collectively referred to as the “mineral rights owner”) has the right of entry. However, if the mineral rights owner does not have the right of entry, the land-owning surface rights owner can prevent the mineral rights owner from entering onto the property. Otherwise, the surface rights owner (the landowner) has no legal right (and no title insurance) to stop the mineral rights owner from entering onto the surface rights owner’s land; exploring and testing for oil, gas, and minerals; drilling wells throughout his or her property; digging mines everywhere on his or her property; and even “strip mining” (where the mining company comes in and removes all trees, plants, grass, and even the topsoil to lay bare the underground mineral layer being mined).

A homebuyer may decide that, even though the property the buyer is purchasing has oil, gas, and mineral rights owned by a third party who has a right of entry, the buyer will consummate the purchase of the home in question, relying on the zoning not being changed and accepting a title insurance policy with an exception for the oil, gas, and mineral rights with the right of entry. After all, the buyer may be purchasing a home on a lot in a large subdivision. Would such a decision have any drawbacks if the zoning is not changed in the future? Should a Realtor® recommend that course of action in the fact situation? Maybe, but other problems may arise. What if the buyer later tries to refinance? Our experience is that, if the mortgage lender notices the oil, gas, and mineral rights and right of entry exception in the title policy, the lender will not lend because the lender will deem the exception a title defect. Also, when the buyer goes to sell this property, the oil, gas, and mineral rights (with right of entry) exception must be disclosed to the new buyer, the new buyer will have to weigh the risk and decide to go forward, and, even more importantly, the new buyer’s mortgage lender, if it reads its title commitment and discovers the issue, must be convinced to lend despite it, which is very unlikely. Even if the new buyer is paying cash, the new buyer may use this issue to negotiate a reduction of the price of the property below its otherwise fair market value.

For the preceding reasons, the Florida Realtors® have inserted in their CRSP-13, Contract for Residential Sale and Purchase, in Paragraph 10(a), a requirement that the title insurance commitment state that the seller has marketable title, subject to a few standard exceptions, one of which is “oil, gas and mineral rights of record if there is no right of entry [for the mineral rights owner].” [Emphasis added.] Similarly, the Florida Realtors® and the Florida Bar have inserted in their joint Residential Contract for Sale and Purchase, in both their regular and As Is versions, in Paragraph 18.A.(i)(c), a requirement that the title insurance commitment state that the seller has marketable title, also subject to a few standard exceptions, one of which is “outstanding oil, gas and mineral rights of record without [the mineral rights owner having a] right of entry.” [Emphasis added.] Therefore, the Florida Realtors® and Florida Bar created in both of their CRSP-13 and FR/BAR contract forms a kind of compromise between seller and buyer of residential properties regarding oil, gas, and mineral rights. The existence of oil, gas, and mineral rights owned by a third party is not a title defect and the property’s title is marketable, unless the mineral rights owner has the right of entry, i.e., the right to enter, explore, drill, and mine for oil, gas, and minerals on the property. One result of this language is that the buyer cannot object to the ownership of oil, gas, and mineral rights by a third party regarding the property the buyer is purchasing if there is no right of entry. In other words, in such a situation, the buyer must purchase the property subject to the oil, gas, and mineral rights, or the buyer will be in breach of the contract. If the mineral rights owner has a right of entry, however, the property’s title is not marketable and this title defect must be corrected by the seller according to Paragraph 18A(ii) of the FR/BAR contract forms and Paragraph 10(b) of the CRSP-13 contract form.

Practice Tip 1: As mentioned above, we characterized stores, offices, and industrial sites as non-mining lands. These properties are normally sold and purchased not with the above-referenced contract forms, but rather with the FR Commercial Contract. Please be aware that Paragraph 6 of this Contract, when it defines marketable title to the property, makes no exception for oil, gas, and mineral rights without the mineral rights owner having the right of entry. Therefore, the buyer can object to the property’s title if a third party owns oil, gas, or mineral rights without regard to whether the third party also has the right of entry. Since third party ownership of oil, gas, and mineral rights without the right of entry is compatible with store, office, and industrial uses, not requiring a buyer to purchase property where the mineral rights owner has no right to enter upon the property gives a buyer an unfair right to terminate the Contract if the buyer develops buyers’ remorse after signing the Contract and the termination of the Due Diligence Period. Such an objection could jeopardize the closing, since purchasing oil, gas, and mineral rights can be very expensive and may be impossible. Finally, if the mineral rights cannot be repurchased, the buyer would be entitled to a return of the Contract deposit pursuant to the terms of the Contract dealing with un-remedied title defects. Therefore, we recommend inserting the words “oil, gas, and mineral rights, without the right of entry” in the second blank of the Contract’s Paragraph 6 when the property is used for store, office, or industrial purposes.

B. OIL, GAS, AND MINERAL RIGHTS AND MINING LANDS.

A moment should be taken at this point, however, to consider the perspective of a buyer who wishes to purchase land for drilling and mining purposes or purposes that are potentially compatible with drilling and mining purposes, such as farming and ranching uses, and therefore desires to own all of the oil, gas, and mineral rights. You may be unaware, but the latest production figures from November 2014 provided by the Florida Department of Environmental Protection show that oil wells in Florida produced 182,665 barrels of oil, and natural gas wells in Florida produced 1,620,588 cubic feet of natural gas, all in one month alone! Further, in 2011 (the latest figures available), Florida reportedly produced 18,460,000 metric tons of phosphate! Thus, if a Realtor® is representing a buyer who desires to own oil, gas, and mineral rights, because they are in the business of mining or drilling or their business purposes are compatible with mining or drilling, the Realtor® ignores the ownership of oil, gas, and mineral rights at potentially great financial peril to himself or herself!

If a Realtor® is representing such a buyer, the Realtor® should ensure that any real estate contract to purchase such property does not have a clause that requires the buyer to purchase the property despite the lack of all or a part of the oil, gas, and mineral rights as long as there is no right of entry. In such a case, the fact that the mineral rights owner has no right of entry is not the issue for the buyer, the issue for the buyer is that someone else owns all or part of the oil, gas, and mineral rights. Further, when representing such a buyer, the Realtor® should ensure that the contract contains an inspection or due diligence period in which the buyer can determine how the property is zoned and, if the buyer wishes immediately to drill or mine, whether the current zoning allows such activity and, if not, the likelihood of obtaining a change or variance of the prohibitive zoning. Better still, the Realtor® and buyer may wish to negotiate a provision that provides the buyer with time to obtain the re-zoning or variance and makes the buyer’s obligation to purchase the property contingent and conditioned upon obtaining such a re-zoning or variance.

Further, we recommend that a Realtor® who is representing a buyer who is a farmer or rancher recommend to the farmer or rancher that the contract contains the clauses referenced above even if initially such a buyer plans to only farm or ranch. Oil and gas production in particular can be compatible with ranching and farming, and the protection of these clauses can always be waived. Otherwise, if you are their Realtor,® you must be concerned about the following scenario. A farmer or rancher buys land pursuant to a contract that requires the farmer or rancher to take the land subject to oil, gas, and mineral rights. Then such oil, gas, and mineral rights and the right of entry are found to be owned by a third party. Even worse, valuable oil, gas, and minerals are actually found to exist. That farmer, every time she walks out onto her field, or that rancher, every time he rides onto his pasture, will be extremely upset to see those wells pumping out all of that oil or gas, worth thousands of dollars every day, day after day, for which he or she is receiving no consideration. (In addition, oil, gas, and mining company employees, vehicles, and equipment will be present frequently, if not daily, disturbing the farmer, the rancher, livestock, and wildlife.) Our concern is that the rancher or farmer might start thinking about why his or her Realtor® did not protect their client and ensure that the rancher and farmer received some of those profits as royalties, especially considering the inevitable disturbances they will endure.

Practice Tip 2: Often, the FR Vacant Land Contract is used to purchase mining, ranch, and farm lands. Like the FR Commercial Contract, when this Contract defines marketable title to the property, it makes no exception for oil, gas, and mineral rights without the mineral rights owner having the right of entry. When representing a mining company, or a rancher or farmer who feels that oil, gas, and mineral extraction would be compatible with their ranching or farming, make sure that oil, gas, and mineral rights are not listed as rights that can be excepted from the property’s title. If this Contract is otherwise being used to purchase vacant lands whose intended uses do not include, or are not compatible with, drilling and mining activities, ensure that the language “oil, gas, and mineral rights without the right of entry” is inserted in the second blank of Paragraph 7 of said Contract for the reasons discussed in Practice Tip 1 above.

C. SOLVING A TITLE DEFECT CREATED BY OIL, GAS, AND MINERAL RIGHTS.

Now let’s go back to the most common situation involving the sale and purchase of non-mining land – the purchase and sale of residential property using a CRSP-13 or FR/BAR contract. What if the seller’s title insurance policy reveals, or the title search finds, that oil, gas, and mineral rights are owned by a third party and that the mineral rights owner has the right of entry, which creates a title defect that the seller has to remedy according to the contract?

Doesn’t happen here you say? By 2013, “fracking” (the fracturing of underground shale rock by the injection of high pressure fluid into it to release the oil or natural gas embedded in it) had become well known as a method for reaching oil and gas that was plentiful in many states, but had previously been unreachable. In October of that year, the Reuters news service revealed that, acting on this knowledge, four large, nationally known homebuilders – D.R. Horton, the Ryland Group, Inc., the Pulte Group, Inc., and Beazer Homes USA – were retaining the oil, gas, and mineral rights under all the homes they were building! D.R. Horton alone had retained the oil, gas, and mineral rights under more than 10,000 home lots in Florida! How were these builders able to do that?

Buyers and their Realtors® were obviously not reading the “fine print” of those long builder contracts or the often equally long title insurance commitments being handed out late at the closing by the builder’s title insurance agent. Even before the Reuters story broke, we had found such a oil, gas, and mineral rights retention, also with a retained right of entry, in a title insurance policy issued to the buyer of a D.R. Horton home in Manatee County. The buyer was then trying to re-sell the home and had no idea that the oil, gas, and mineral rights with the right of entry were owned by D.R. Horton. (Fortunately for the seller in that case, after demand was made, D.R. Horton conveyed back the oil, gas, and mineral rights.) Later, Reuters reported that Florida’s Attorney General became involved, met with representatives of D.R. Horton, and D.R. Horton then decided to offer to return all the oil, gas, and mineral rights to the affected homeowners.

Now back to the original question. What if the seller’s title insurance policy for the seller’s home reveals, or a title search finds, that oil, gas, and mineral rights are owned by a third party and that the mineral rights owner has the right of entry? What tools are available to assist Realtors® to close the sale and purchase?

The following eight (8) tools are available: (1) the Marketable Record Title Act, (2) the “less than 10-acre exception” for oil, gas, and mineral rights reserved by the State of Florida, (3) the “less than 20-acre exception” contained in Florida Statutes Sec. 270.11(2) for oil, gas, and mineral rights reserved by the State of Florida, (4) finding a termination clause in a oil, gas, and mineral rights lease, (5) purchase of either the oil, gas, and mineral rights or a release of the right of entry, (6) the effects of certain tax deeds, (7) purchase and foreclosure of judgments against the mineral rights owner, and (8) a partition lawsuit. There are other fact-specific remedies or title insurance company policies to eliminate at least the right of entry that are also available on a case-by-case basis, but which are outside the scope of this article.

1. The Marketable Record Title Act.

The Marketable Record Title Act (“MRTA”), which is Chapter 712 of the Florida Statutes, eliminates all ownership, interests, rights, and title defects in real property that were recorded in the land records before a title transaction (usually a deed that is not a quit claim deed), which was recorded at least 30 years before the current date (the “root of title”), with certain exceptions. Those exceptions include oil, gas, and mineral rights, but not the right of entry to explore, drill, and mine for oil, gas, and minerals.

MRTA will eliminate and bar the right of entry of the mineral rights owner if: (i) there has been no recording of any documents or instruments associated with the oil, gas, and mineral rights since the recording of the deed, reservation, or lease that is the root of title for the oil, gas, and mineral rights to the current time; (ii) a review of the county property appraiser’s tax roll finds that the oil, gas, and mineral rights are not being taxed (which they should be, if they are in existence); and (iii) the surface owner signs an affidavit that no one is currently or has been exploring, mining, or drilling for oil, gas, and minerals on the property in question. In Florida only one oil well (if drilled 7,000 feet or deeper) can be drilled for each quarter section of a square mile and only one natural gas well can be drilled in each section, or square mile. Therefore, unfortunately, the surface rights owner must be able to swear in the affidavit that no oil wells are closer than a half mile from the property and no gas well is within a mile of the property. Otherwise, a well within one of those distances could be using the surface owner’s oil, gas, and mineral rights even though the well is not located on the surface owner’s property, and, in such a case, the right of entry cannot be barred.

As you recall, both the FR/BAR real estate contracts and the CRSP-13 real estate contract for residential sales and purchases state that mineral rights ownership by a third party without the right of entry is not a title defect, and, therefore, the buyer may not object to the rights. Thus, when faced with the problem of mineral rights with a right of entry, the mineral rights search referenced above can be ordered back to the root of title of the mineral rights to try to eliminate the right of entry in this manner, if the oil, gas, and minerals are not being taxed, explored for, or mined.

2. The “less than 10-acre exception” for mineral rights reserved by the State of Florida.

Florida law used to require that the State of Florida reserve back to itself one-half of all oil rights and three-quarters of all other mineral rights, together with the right of entry, any time the State conveyed State lands to private individuals or firms. However, usually these deeds prefaced these reservations with the qualifying words, “As to lands in tracts or composite tracts aggregating ten (10) acres or more:.” This language means that if any tract is less than ten (10) acres, neither mineral rights nor the right of entry were kept by the State of Florida.

Therefore, when faced with such a mineral rights reservation by the State of Florida for a parcel of land that is less than ten (10) acres (and obviously most subdivision lots are less than ten acres), the deed containing the original mineral rights reservation should be found and examined to determine if the above-referenced qualifying language is contained in the deed. If so, any reference to either the mineral rights or the right of entry can be deleted.

3. The statutory “less than 20-acre exception” for mineral rights reserved by the State of Florida.

Regarding mineral rights reserved from the ownership of a property by the State of Florida, there is yet another tool, which is Florida Statutes Sec. 270.11(2), which releases the right of entry for mineral rights owned by the State “as to any parcel or property that is, or has ever been, a contiguous tract of less than 20 acres in the aggregate under the same ownership.” Unlike the less than 10-acre exception discussed above which eliminates both the mineral rights and the right of entry, this less than 20-acre exception only eliminates the right of entry, not the mineral rights ownership of the State. However, as you have read above, release of the right of entry alone makes title to the property good and marketable.

4. Finding a termination clause in a mineral rights lease.

In addition to mineral rights being reserved or held back by a prior owner of the surface and/or mineral rights when property is sold to a buyer, mineral rights can be sold and conveyed by a separate deed. However, mineral rights can also be leased to a drilling or mining company and a portion of the profits paid back to the mineral rights owner/lessor as royalties, using a mineral lease. As with most leases, a mineral lease has a period of time during which it is effective, called the “term.” Unlike other leases, in a mineral lease, this period of time is called the “primary term,” and the term of the mineral lease will be extended indefinitely if oil, gas, or minerals are being actively extracted from the land at the end of the primary term. In such a case, the term of the lease will continue until oil, gas, or minerals are no longer being extracted.

If the mineral rights owned by a third party consist of a mineral lease, the lease should be examined to determine when the primary term ended, and then to determine if oil, gas, and minerals are actively being extracted from the subject property. If the primary term has ended and no oil, gas, or minerals are being extracted, the mineral lease and its rights no longer exist, and title to the property is marketable.

5. Purchase of mineral rights or purchase of a release of the right of entry.

When non-mining lands are being sold and purchased, and they are subject to oil, gas, and mineral rights with the mineral rights owner having the right of entry, if the seller is willing to purchase the outstanding mineral rights themselves, this is the best solution for the buyer, since it removes these rights totally as an issue. However, the FR/BAR and CRSP-13 real estate contracts require only that the right of entry of the mineral rights owner be terminated, not their mineral rights, and purchasing a release of the right of entry from the mineral rights owner is usually easier. First, valuing mineral rights themselves is typically beyond the capability of those not involved in the oil, gas, mineral industry. Second, mineral rights are more expensive to purchase than a release of the right of entry. Third, purchasing a release of the right of entry does not require the mineral rights owner to sell any portion of the mineral rights, which the owner often believes are valuable. Thus, persuading a mineral rights owner to sell a release of the right of entry is usually easier, cheaper, and faster to accomplish. At the same time, it also protects the surface rights owner because, if the surface rights owner (the landowner) obtains the right of entry back from the mineral rights owner, that will prevent anyone from exploring, drilling, or mining on the property without the landowner’s consent.

Further, the lack of mineral rights does not necessarily preclude the landowner from benefiting from the extraction of the oil, gas, and minerals. Even if gold is discovered under the surface of a property, the landowner without mineral rights can still benefit from the mining of the gold. Why? Even if the zoning is changed to allow the mining, the mineral rights owner still cannot mine without the landowner’s consent because the landowner controls the right of entry. Thus, the landowner can allow the mining in exchange for a portion of the mineral rights or a part of the profits therefrom, payments for the latter being royalties.

6. Tax Deeds.

Under Florida Statutes Section 193.481(1), the ownership of mineral rights is taxable by each county as an ad valorem or property tax, and under subsection (5) of that statute, tax certificates and tax deeds can be issued if the taxes are not paid on the mineral rights. Under Florida Statutes Section 197.343(2), the surface rights owner (landowner) has the first right to purchase a tax certificate for any delinquent taxes on the mineral rights relating to the landowner’s property. Given the title problems that mineral rights cause for non-mining land and the value they may have for mining lands, a surface owner should jump at the opportunity to purchase such a tax certificate and, if the taxes are not paid within two years thereafter, to apply for and purchase a tax deed for the mineral rights.

If, by chance, the mineral rights are very old, and, before 1957, the property under which the oil, gas, and minerals were located was sold at a tax sale because taxes on the land were not paid, that tax deed would have transferred not only the land but the mineral rights because, before 1957, landowners had to pay the taxes for both the land and the mineral rights, according to the old Florida Statutes Section 211.14, which is no longer in effect. Such a deed, however, would allow one to disregard any mineral rights that had existed prior to the deed.

7. Foreclosure of judgments against mineral rights owners.

If, fortuitously, a surface rights owner finds that an owner of their property’s mineral rights has a judgment against him or her, the surface rights owner may purchase the judgment, sometimes for less than the judgment’s amount, and then foreclose the judgment lien (in the same way a mortgage is foreclosed) against the mineral rights. Just like a mortgage holder, a judgment holder can bid the entire amount of the judgment (including interest) at the foreclosure sale on the mineral rights, and hopefully be the high bidder, thereby obtaining the mineral rights.

8. A partition lawsuit.

If a mineral rights owner also has the right of entry and will not cooperate with the surface rights owner, and none of the preceding tools will work, the surface rights owner, as long as that owner owns a share of the mineral rights, can file a partition lawsuit to force the sale of the mineral rights, which has to include, however, the share of the mineral rights owned by the surface rights owner. As pointed out by G. Thomas Smith, Esq., a respected Florida oil, gas, and mineral rights attorney in Pensacola, Florida, there are risks to this procedure. First, if the surface owner has a minority share of the mineral rights, say, 1/3 and the other mineral rights owner has a 2/3’s share, at the sale of the mineral rights the majority mineral rights owner can bid up the price of all the mineral rights, knowing that if he or she wins, he or she will only have to pay 1/3 of the price to buy all of the mineral rights, since he or she already owns the other 2/3’s of the mineral rights. On the other hand, the surface rights owner will have to pay two times the price that the mineral rights owner has to pay because the surface rights owner only has 1/3 of the mineral rights and has to pay for the other 2/3’s. Even if the 2/3’s mineral rights owner loses the bidding war, he or she will paid a handsome price for his or her 2/3’s of the mineral rights. The second risk to the surface rights owner is, if he or she loses the bidding contest, he will not only lose his or her mineral rights, but will further antagonize the mineral rights owner and still not control the all-important right of entry. Thus, since losing would worsen the surface rights owner’s position, he or she has to keep bidding, thereby worsening the first risk. The third risk is that a third party, other than the surface rights owner and the mineral rights owner, will out bid both of those parties, thereby requiring the surface rights owner, now with no mineral right’s ownership, to deal with a new mineral rights owner who has paid even more for the mineral rights and is therefore probably going to charge an even higher price to release the right of entry, if he or she is even willing to discuss its release.

D. CONCLUSION.

As you now can understand, oil, gas, and mineral rights in Florida can be very valuable, but they can also cause title defects that are both expensive and time-consuming to correct. Therefore, where oil, gas, and mineral rights are involved, real estate contracts, particularly builder contracts, and, equally importantly, title insurance commitments should be carefully reviewed. A number of title insurance companies insert an exception for mineral rights as if it were a standard exception to the title insurance coverage, even if there are no mineral rights documents recorded in the land records to support that exception. They simply pass the title insurance commitment across the table and mail the final policy, never mentioning or justifying this exception. Our Firm’s opinion is that such an exception is not permitted under Florida title insurance laws. Nevertheless, even if there are no recorded mineral rights, such an exception, as demonstrated in Section 1 of this article, creates a title defect under both the FR/BAR real estate contracts and the CRSP-13 contract, and accordingly are a basis for the buyer to object to the status of the title, thereby jeopardizing the closing. As a result, a seller’s title insurance policy should be scanned in advance for any mineral rights exception and, if one is found, its deletion should be obtained prior to closing, so that the buyer’s title insurance commitment will not include that objectionable exception. (Without supporting recorded documentation of mineral rights in the property’s chain of title, the exception can and should be removed.)

If you have any questions regarding oil, gas, and mineral rights, please do not hesitate to call at 741-8224 or e-mail us. As always, we will answer your questions at no charge. If you would like a copy of the article emailed to you, please request one from our Firm Administrator, Connie Hoff, at [email protected].