July 15, 201324 TEXAS lAWyER

by JOE T. SANDERS IIThe boom is back. Advanced drill-

ing and completion technology have unlocked unconventional oil and gas reservoirs throughout Texas, and pro-duction is surging, much to the benefit of the Lone Star State, its mineral own-ers and companies oper-ating here — and their lawyers.

But sur face owners with no mineral rights in lands where oil and gas operations occur often feel burdened by those operations. Historically, that has triggered the evo-lution of Texas law governing surface owners’ rights vis-à-vis the mineral owners and their lessees.

Texas courts have delineated those rights by crafting legal principles such as the dominance of the mineral estate

and a mineral owner’s duty to reason-ably accommodate existing surface uses. But one area of the common law remains underdeveloped: What rights and obligations do individual surface

co-tenants possess in rela-tion to other co-tenants?

As sur face estates pass down through gen-erations, they often pass to two or more grantees as co-tenants; each possess-es an undivided interest throughout the property. Important legal questions

concerning access and use remain unanswered, leaving attorneys to of fer advice in the face of uncertainty.

Options to ConsiderConsider the following hypothetical.

There are two tracts of land: Tract No. 1 and Tract No. 2. The operator leases

the mineral estate beneath Tract No. 2. In most instances, a lease or the com-mon law grants the operator the right to make reasonable use of Tract No. 2’s surface.

But what if the operator needs to use the surface of Tract No. 1? Perhaps that operator needs to build a road or pipeline across Tract No. 1 to get to Tract No. 2. Perhaps the operator would like to use water or extract cali-che from Tract No. 1. Whose permis-sion does he need to use the surface of Tract No. 1 for these purposes?

Texas law seemingly provides a straightforward answer: the surface owner of Tract No. 1. But what if there

are two surface owners (co-tenants) in Tract No. 1? What if one of them, co-tenant A, will grant permission, but the other will not? Does the operator need the permission of both, or will co-tenant A’s consent alone suffice?

The answers to these questions are less than straightforward. Generally, co-tenancy law permits one co-tenant to access and use joint property (or grant a third party the right to do so), subject to a duty to account to the other co-tenants for their respective shares of any profits from such use. That should provide comfort to the opera-tor and co-tenant A, if, for example, the operator produces water from

Unscrambling the Puzzle of Surface Co-Tenants’ Rights

EnergyLaw

One area of the common law remains underdeveloped: What rights and obligations do individual surface co-tenants possess in relation to other co-tenants?

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TEXAS lAWyER 25July 15, 2013

Tract No. 1 to use in his operations on Tract No. 2. Co-tenant A could permit the use, retain A’s share of the profits and account to A’s cotenants for their respective shares.

However, Texas law also limits co-tenant A’s authority. In 1971, the U.S. District Court for the Southern District of Texas in Galveston noted in Lee, et al. v. Phillips Petroleum Co., et al. that Texas law does not permit one co-tenant to grant a pipeline easement to a third party without joinder of the other co-tenants.

While Lee might seem to limit a co-tenant’s general right to use the joint property (or grant use to a third party), commentators have observed that the line of cases Lee cites rested on the fact that an easement is a conveyance of real property. There can be little doubt that one co-tenant cannot convey the property interest of other co-tenants.

But at least one Texas court has held that a surface co-tenant could grant an easement-like permission for a directional well without the joinder of other cotenants. In the seminal case of Lake, et al. v. Reid, et al. (1952), the 6th Court of Appeals in Texarkana ruled that the other co-tenants were not entitled to an accounting for a surface location. The 6th Court appar-ently based its decision on the fact that Lake’s surface lease only covered “the undivided interest” of the lessors and there was no allegation that Lake or his lessors attempted to deprive the other co-tenants of any right of possession.

So what should the operator in our hypothetical do if he cannot find or secure the cooperation of all sur-face co-tenants? Here are some ways the lawyers representing the operator and co-tenant A can manage the risks posed by unclear law to limit potential liability.

1. Stop short of obtaining an exclusive interest in real property. An easement is a possessory interest (and burden) in

real property. A better approach would be to obtain a nonexclusive, nonposses-sory surface use agreement that does not deprive other co-tenants of their interests in the property.

2. Contract with co-tenant A only as to A’s undivided interest. The contract between the operator and co-tenant A should state expressly that their agree-ment is for co-tenant A’s interest only and is not to the exclusion of the other co-tenants in the surface tract.

3. Proportionately reduce any pay-ments from the operator to co-tenant A. The operator and co-tenant A should determine the gross market rate for the surface use and reduce the payment to A in proportion to A’s interest. For

example, if the gross market rate for a road is $5,000 and A owns a 50% undi-vided interest, the operator might pay A only $2,500. That reduced payment should minimize the operator’s risk of having to pay twice the market rate, as well as the risk that A’s co-tenants can seek an accounting from A’s proceeds.

In short, the law is slow to keep pace with the drill bit. As it catches up, operators and surface owners risk liability from claims of nonconsenting surface co-tenants.

Avoiding that risk entirely means either not conducting the operations at all (to the detriment of the operator, his mineral lessor and consenting surface owners) or waiting until all surface

owners consent. If those are not practi-cal options, the developing parties are left to manage risk and await guidance from Texas courts.

Joe T. Sanders II is

a partner in Scott,

Douglass & McConnico

in Austin. His practice

principally is devoted

to oil and gas litigation

and regulatory matters. He is the chairman

of the Austin Bar Association’s Oil, Gas &

Mineral Law Section.

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A better approach would be to obtain a nonexclusive, nonpossessory surface use agreement that does not deprive other co-tenants of their interests in the property.