Properly Conveying Mineral Rights
How do you properly convey mineral rights from one person to another?
In recent years, mineral rights have become a focal point for landowners across the country and a continued frontier for property investors. With Oklahoma and Texas having strong oil and gas reserves and Arkansas emerging as a potential source of lithium deposits, understanding how to properly convey mineral rights, including lithium, has become more crucial than ever before. This process requires careful attention to legal details to avoid disputes and potential financial loss.
What are mineral rights and why are they important?
Before diving into the specifics of conveying mineral rights, it is important to first understand what these rights entail. Mineral rights refer to the legal ownership of the minerals that exist beneath the surface of a piece of land, like lithium or oil or natural gas. This is different from surface rights, which deals with the legal ownership of the property above-ground and all things on it, like your home.
In southern Arkansas, there has been growing interest and movement towards lithium exploration, as the state is home to potentially valuable lithium reserves in the Smackover Formation. This means negotiation and conveyance of these rights a high-stakes endeavor.
How are mineral rights conveyed?
Conveying rights to minerals generally requires the execution of a notarized and recorded mineral deed or lease agreement with clear language, which may need to be approved by a title company or other party in addition to the grantor and grantee. However, due to the potential economic growth of lithium mining, there are several particular factors that should be considered throughout that standard process.
Step One: Ensure Clear Language in the Deed or Lease
rights,” it may be unclear as to whether rights to specific minerals, like lithium, are included, especially if other minerals like oil, gas, or coal are explicitly mentioned. Deeds should specify that it includes lithium bearing minerals, or “lithium rights” to avoid further disputes or confusion amongst the negotiating parties.
Step Two: Execute a Mineral Deed or Mineral Lease Agreement
The most common method of conveyance of mineral, oil, or gas rights is through a mineral deed. This deed transfers ownership of the mineral rights by assigning them from one party to another. In some cases, a mineral lease can be used if the landowner wishes to retain ownership of the rights but wants to allow another party to conduct mining activities. A mineral lease is typically granted for specific terms, with the lessee paying royalties or rental payments to the landowner.
A proper deed or lease should be clear and detailed, identifying the specific mineral rights being conveyed, the exact location of the minerals on the property, and the terms of the transfer of the lease. It is important that the document includes the legal description of the property and explicitly mentions that it pertains exclusively to the relevant minerals at issue.
Note, an implied easement to the mineral rights holder will also need to be granted within the deed in order to allow the extracting entity reasonable surface access, including exact access points and any other limitations.
Step Three: Notarize and Record the Documents
Once the transaction documents have been signed by the participating parties, the deed document must be notarized and filed in order to become legally binding. The notarized deed should be recorded with the county clerk’s office in the county where the land at issue is located. This clear public record ensures that the conveyance is officially recognized and there are no questions about who has rights and access.
Common Pitfalls in Conveying Mineral Rights
While the process for conveying mineral rights is fairly straightforward, there are several common pitfalls that can derail entire transactions. These errors can lead to lengthy legal disputes, financial loss, or even the invalidation of the conveyance. The errors might not be found until years after the transaction is formally closed and payment exchanges hands. Beware of:
Ambiguity in Deed Language
The most common method of conveyance of mineral, oil, or gas rights is through a mineral deed. This deed transfers ownership of the mineral rights by assigning them from one party to another. In some cases, a mineral lease can be used if the landowner wishes to retain ownership of the rights but wants to allow another party to conduct mining activities. A mineral lease is typically granted for specific terms, with the lessee paying royalties or rental payments to the landowner.
A proper deed or lease should be clear and detailed, identifying the specific mineral rights being conveyed, the exact location of the minerals on the property, and the terms of the transfer of any pre-existing mineral leases. It is important that the document includes the legal description of the property (with scope of access boundaries) and explicitly mentions that it pertains exclusively to the relevant minerals at issue.
Note, an implied easement to the mineral rights holder will also need to be granted within the deed in order to allow the extracting entity reasonable surface access, including exact access points and any other limitations.
Lack of Accounting for Future Demand
In areas like southern Arkansas, where lithium resources are looking to be tapped well into the future, it is important to account for the long-term value and demand of these minerals. Landowners who sell or lease their lithium rights for face value could end up regretting their decision if or when the lithium market booms.
To avoid regret or loss of income, landowners may want to consider negotiating these lease agreements with favorable terms, such as long term royalty payments that account for future market values, or retain partial ownership of the mineral rights. This allows landowners to benefit from the growing demand for lithium while still retaining some control over the property.
Failure to Perform a Proper Title Search
A proper title search is crucial before transferring either surface or mineral rights to land. If there are existing encumbrances, like liens, easements, or previous leases affecting the mineral rights, these must be disclosed and properly managed in the conveyance. Failure to do so can result in legal disputes and complicate the overall transfer process.
It is also important to ensure that the person conveying the rights actually has clear title, meaning there are are no claims from third parties and the “seller” is the current record title owner. If the title is clouded, then the entire transaction could be invalidated and the buyer could find themselves facing legal challenges from other parties who claim to hold rights superior to their own in the minerals or land.
Learn more about proper legal due diligence in real estate and mineral transactions here.
Inadequate Exploration Clauses
If the transaction involves leasing the lithium rights rather than selling them outright, the lease agreement must contain clear and thorough exploration and extraction clauses. These clauses should outline how exploration will occur, what happens if lithium is discovered, and the royalty payment structure. Without clear terms, the lessee may engage in exploration or extraction practices that harm the land or undervalue the mineral rights.
A lease should also specify the duration of the agreement and any extension provisions, as well as what happens if lithium or other minerals are discovered late into the terms of the lease. Without these terms, the landowner may be left with little recourse if the lessee’s actions harm the property or fail to generate the anticipated royalties.
What are the consequences of an improper mineral deed or mineral lease?
Improper conveyance of any mineral rights can have severe consequences for all parties. These consequences can be legal, financial, and reputational, and can extend far beyond the lifetime of the transaction itself. The most common consequences are:
Mineral Title Disputes and Litigation
One of the most significant risks with an improperly conveyed title is that it may result in title disputes in the future. If the deed is unclear on its conveyances or fails to transfer the rights properly, a future buyer or lessee may challenge the validity of the deed. These disputes often lead to costly litigation, which can take years to resolve.
Financial Loss and Missed Economic Opportunity
If a landowner fails to properly convey mineral or surface rights, they could lose out on substantial financial opportunities. As it relates to lithium, which is becoming a significantly valuable mineral, selling the rights too cheaply or failing to retain a portion of your rights can lead to a loss in future revenue from royalties or mineral extraction fees. In the case of a lease, the terms must be carefully negotiated to ensure the landowner receives fair compensation for the extraction of lithium. Conversely, if the conveyance is not done correctly, the buyer can also face financial losses if they later discover that the rights they thought the owned were invalid or incomplete.
Environmental Consequences
Improper conveyance of mineral rights can also have environmental consequences. If the exploration or extraction is done improperly due to unclear rights or ownership, then environmental regulations can be violated. This can lead to fines, legal action, and the suspension of entire mining operations. In the worst case for landowners, poorly managed mineral extraction can result in long-term environmental damage that harms the local communities and the surrounding ecosystem.
How Can I Protect Myself When Conveying Mineral Rights?
To avoid the pitfalls of improper conveyance, there are several key steps you can take:
- Be Specific with Your Deed or Lease. Ensure the deed clearly specifies the lithium rights being conveyed. If a lease is involved, make sure the terms regarding exploration, extraction, and royalties are clear and comprehensive.
- Negotiate Favorable Terms. Negotiating royalties tied to future market prices can help maximize future income from the mineral rights.
- Conduct a Title Search. Before conveying any kind of mineral rights, conduct a thorough title search to ensure that the rights being transferred are free of liens, encumbrances, or competing claims.
- Consult a Real Estate Attorney. Given the complexity of mineral rights transactions, working with an attorney on this matter is crucial. A qualified attorney can ensure the deed is properly drafted, request necessary title searches, and advise on how to best protect long term real estate interests.
Oil, Gas, and Mineral Attorneys
Conveying mineral rights requires careful attention to legal details. Whether you’re a landowner, investor, prospecting, exploration, or mining company, understanding the process and avoiding common pitfalls in your legal documents relating to subsurface minerals is essential for safeguarding your interests. Contact Avenue Legal Group to work with experienced real estate attorneys, avoid costly mistakes, and capitalize on your mineral rights.
Have Questions?
Contact Us