If you own land in the United States, you also may own the rights to the minerals in the ground beneath the surface. Unlike most countries, most real estate in the U.S. is transferred as a fee simple estate, meaning the purchaser has complete ownership of the land both above and below the surface. If valuable minerals – including oil and natural gas – are found or believed to exist on your property, you can sell or lease those mineral rights to an energy company while retaining your surface rights.
Gather documents related to your property.
If you’re considering selling or leasing your mineral rights, you’ll need all documents that show your ownership of the property, including your deed and any active mortgages, leases, or easements.
Since mineral rights can be severed from surface rights, it’s possible that although you own the surface rights to your property, someone else owns the mineral rights because they’ve already been sold separately by a previous owner.
The best way to determine whether you have mineral rights in your property is to get a binding mineral title opinion. If you’ve already been contacted by a landman working for an oil or gas company, he or she has already researched land records to figure out who owns the mineral rights in your property.
Before you enter into negotiations to sell or lease your mineral rights, you should take time to review these documents so you have a better understanding of your ownership and are more prepared to negotiate. If there are other family members who own a stake in the property, make sure you’ve talked to them and you’re all on the same page regarding the sell or lease of the mineral rights.
Research state and local laws regarding mineral extraction.
Most states and many cities and counties have laws that control where and how minerals can be extracted and regulate mining and drilling activity.
The laws that govern your property, including local zoning restrictions, could affect the value of your mineral rights.
Although laws in most states are similar, small variations can make a tremendous difference when applied to your particular case.
Most states also have laws governing a mining or drilling company’s actions during extraction, and requiring a minimum amount of restoration to the surface once extraction is completed. However, keep in mind that those minimums may not be consistent with your intended use of the surface of the land.
Evaluate how extraction could affect your usage.
The disruption to the surface may affect whether and how you plan to continue to use your property.
For example, if you rely on a water well to supply water to your home or farm on the surface, you will need to explore how drilling or mining could effect or interrupt the aquifer tapped by the well. In some cases, extraction of minerals can cause a temporary or even permanent loss of water.
Decide whether to sell or lease your rights.
There are advantages and disadvantages either to selling or leasing mineral rights that you should evaluate to decide which path is best for you to pursue.
Essentially, the decision boils down to whether you would prefer to get a known amount of money now, or an unknown potential amount of money in the future – which may end up being significantly more than the money you’re offered to sell, but also could be considerably less.
When you sell your rights outright, you get cash upfront and don’t incur any risk if the company isn’t able to extract the minerals or doesn’t even drill at all.
However, you potentially can make more money in royalties if you lease mineral rights for a specific period of time rather than selling them outright.
Future tax rates on royalties are another factor to consider when deciding whether to sell or lease.
Determine the other party’s role in the process.
Before you begin negotiating, find out if the person with whom you’re negotiating directly represents the energy company that plans to extract the minerals, or is a broker or a middleman.
Some buyers have no interest in producing or extracting the minerals, but are merely buying the rights as an investment in the hope that they can sell to a mining or drilling company sometime in the future.
Typically you will get the best deal if you sell your rights directly to a company who plans on extracting the minerals and producing an energy commodity, rather than a speculator or middleman who will be trying to buy your rights at the lowest price he possibly can so he can make a profit later.
Landsmen either work directly for an oil and gas company or for a land brokerage company, usually under contract. Before you negotiate with a landman, it’s important for you to find out who he or she is working for and make sure there’s no conflict of interest involved.
Read the documents provided by the landman.
Typically the broker or company representative has a form lease already prepared.
The lease may include any and all minerals that might be found and extracted from the ground beneath the surface, or may be limited to a specific mineral commodity.
The lease gives the company the right to come onto your property and conduct tests to determine if significant mineral deposits are there that can be extracted. If mineral deposits are found, the company will proceed with mining or drilling. Typically leases provide that if the company doesn’t begin production before the end of the lease, it loses its rights to the minerals there.
If you don’t agree with any of the terms, you can and should negotiate to have the term removed or modified. In most cases the contract the landman has given you is a standard form contract he uses all the time, and it’s designed to protect his interests – not yours. Many companies are willing to accept significant revisions to the contract if it doesn’t tremendously limit their ability to extract the minerals in your land.
Consider consulting an attorney.
If you don’t understand terms of the lease or have other questions, you might want to talk to an experienced mineral rights attorney.
An attorney with experience in mineral property typically won’t cost you very much out of pocket relative to the amount of money you stand to gain from leasing your mineral rights. However, the expertise can ensure that you get the most you can out of the transaction as well as enjoying continued use of your property.
Keep in mind that the amount of money you stand to make leasing your mineral rights can often exceed the value of the surface rights to your property. In a year you could earn over $100,000 just in royalties from oil or natural gas production.
If you don’t have experience in transferring mineral property, or don’t understand some of the terms of the lease, you could end up giving up far more rights to the mineral company than you intended.
Discuss royalties and a payment schedule.
Mineral rights leases usually provide for the payment of a lump-sum amount up front, also known as a signing bonus, and then pay a percentage share of the profits, or royalties, at set dates for the lifetime of the lease agreement.
The customary royalty percentage in the industry is 12.5 percent. This percentage is mandated as a minimum royalty rate under the law in some states.
When negotiating mineral rights on private property, however, this rate may increase depending on the company’s expected rate of return and the number of other producers in the area.
You may want to include a provision requiring the company to provide a written itemized account that shows how profits and royalties are computed along with each royalty check.
Set a date for the first royalty check to be given, typically between 90 and 120 days after the first month of production, and argue for an interest clause in which royalty payments that are late must be paid with interest at a fixed rate.
Secure appropriate surface rights.
If you intend to continue to use your property, your negotiations should include provisions to make sure that use isn’t disrupted and is disturbed as little as possible.
Keep in mind that mineral rights don’t always include all surface rights, although the company will need certain types of surface rights so it can drill or excavate to extract the minerals in the ground.
However, in some states such as Texas, the law grants mineral rights owners complete rights to use the surface as reasonably necessary to explore and extract the minerals. If this use would interfere with your use of the surface, limitations must be included in your lease contract.
Often disagreements occur between the landowner and the mineral rights owner at the time of extraction because the landowner has not negotiated to protect his or her surface rights and finds the surface unusable during the mining or drilling process.
To secure surface rights that will enable your continued use of your property, you must know what extraction of the minerals will entail, what kinds of machines the company will bring into your property, and how long they will be there.
Depending on your use, you may want to get upfront payment to compensate for damage to the surface during the extraction process. For example, if you have a farm and will be unable to plant crops on significant portions of your land while the minerals are being extracted, you can negotiate compensation for that loss.
Additionally, you should negotiate and include in the lease actions that the company will undertake to restore the surface property once it has finished extracting the minerals.
Gain an understanding of the amount of surface land that will have to be disturbed for the company to extract the minerals. For example, drilling for natural gas typically requires several acres of land be cleared for the drill pad, runoff capture, and water treatment.
Although some basic protection of your surface rights may be provided by state law, you may need stronger protections depending on your use. For example, if you have a farm, you would want to ensure the contract included adequate protection for your crops and livestock as well as the buildings on the surface.
Review the written agreement.
Make sure you’ve carefully read and understand all the terms of the lease before you sign it.
Evaluate the proposed use of your land for exploration and extraction of the minerals, and make sure your rights to use of the surface are covered, as well as provisions to repair damage to the surface after extraction is complete.
The document should clearly explain how the surface land will be cleared, used, and restored after use.
Sign the agreement.
Both you and the company representative or landman must sign the lease before it becomes legally binding.
Because the agreement involves the transfer of real property rights, most states require the agreement to be notarized, and some states require other witnesses in addition to the notary public. Check your state’s law to make sure the document is being signed and witnessed correctly to constitute a legal transfer of your mineral rights.
For example, Texas requires land transfers to be acknowledged by a notary public and signed in the presence of two witnesses.
Check the application status for any required permits.
Although you typically aren’t responsible for obtaining permits to extract the minerals, your signature may be required on some permit applications.
For example, two permits are required to drill an oil well in California. In addition, a use permit from the local agency may be required.
Some well permits also require bonds. The type of bond required, and the amount, will depend on the state and local laws that govern your property.
Receive your signing bonus.
Once the agreement is signed and finalized, you should receive your check for the amount to which you and the company representative or landman agreed.
Depending on the amount of money involved, you might consider creating a new business entity such as an LLC to control and distribute the income. This is an especially good idea if there also are several family members involved or who have a property interest in the mineral rights.
Record the lease.
As a document that affects real property rights, your lease agreement should be recorded along with your deed.
To record the lease, you must go to the county recorder’s office in the county where your property is located. In addition to filing fees, you should expect to pay real property taxes on the transfer.
The recordation process and requirements vary from state to state, but generally the lease must be in writing, signed, and contain a full legal description of the property. Typically you can use the description of your property contained in your original deed to guide this description.