Oil and Gas Considerations When Buying and Selling Farmland
By J. Richard Emens and Sean Jacobs
Emens & Wolper Law Firm
With the increased development of the Utica Shale in Ohio, mineral rights are becoming a key consideration for Ohio landowners who are looking to buy or sell farmland. If the minerals have not been severed from the surface in a previous transaction, many landowners who are selling their farmland are either keeping the minerals (and selling only the surface) or selling the minerals separate from the surface. Most people (including many attorneys) do not realize the importance of the language in the instrument severing the minerals from the surface.
The Ohio Supreme Court has indicated that when oil and gas minerals are severed from the surface, the language in the instrument of severance governs the rights of the severed oil and gas mineral interest owner and severed surface owner. Therefore, it is extremely important that the language in the instrument of severance be specific and express exactly what the landowner wants to happen. However, most severance deeds include only general reservation language which can cause many problems, especially with future oil and gas leasing.
To try and avoid future problems landowners planning to buy or reserve minerals under farmland first need to consider what mineral rights the seller has. If certain mineral rights have previously been reserved under the land then the seller doesn’t own those minerals and cannot reserve or convey them.
Landowners planning to buy or reserve minerals need to consider what rights they would like to have after the purchase or reservation. For example, if a landowner wants to reserve half the oil and gas minerals under the farmland he/she is selling, does the landowner want the right to lease all of the minerals underlying that land (i.e. executory rights)? Having multiple fractional mineral interest owners (each of whom has the right to lease their fractional interest) can be problematic for leasing if not all of the mineral owners can be found or if not all of the mineral owners want to lease; often we recommend landowners consider putting severed oil and gas mineral interests in a limited liability company to avoid this potential problem. A landowner who wants to reserve mineral rights when there is an existing oil and gas lease on the farmland may want to consider limiting his or her reservation to rights under the existing lease (especially if they are having trouble finding a purchaser who will buy the surface without the minerals).
Another big consideration for landowners looking to buy or reserve minerals is what rights they will have to the surface. Under Ohio law severed mineral owners have an implied right to access the surface as is reasonably necessary to produce and remove minerals unless the severance instrument negates this right. However, a landowner planning to reserve minerals likely wants to spell out specific surface use rights he/she wants. Conversely a landowner planning to purchase the surface of farmland may want to set forth that the severed mineral owner will have no rights to access the surface (meaning all leases the severed mineral interest owner signs would need to be non-surface).
After considering what rights a landowner wants the landowner should work closely with an attorney knowledgeable and experienced in oil and gas law and conveyancing to draft the instrument of severance.
Once the conveyance has been completed a landowner who owners a severed oil and gas mineral interest (or a landowner who owns a severed surface interest) needs to be aware of the Ohio Dormant Minerals Act which allows severed mineral rights (excluding coal) to be merged back to the surface after a certain period of inactivity. Severed mineral interest owners need to make sure they are taking the steps to prevent the surface owner from having the ability to merge the severed minerals. Severed surface owners want to be aware of the rights they have (or may have in the future) to merge minerals that have been severed.
NOTE: This article has been prepared for informational purposes only and is not legal advice. This general discussion of the law should not be used to solve individual problems and no person should act upon any information contained in this article with regard to their own unique factual situation without first seeking their his/her own attorney knowledgeable about oil and gas and conveyancing.