Be careful when selling or leasing mineral rights

Congratulations – there’s oil, coal, gas, salt, gemstones, or some other valuable material under your property. But how exactly do you sell someone the right to develop it? Most sales of real estate are sales “in fee simple” – which means the buyer owns the surface of the land, the earth underneath it, and the air space above it. But it’s possible to split up these rights. In particular, it’s possible to sell the earth underneath the property, and the right to extract minerals from it, while retaining control over the surface.

This often happens. A property owner will sell to a mining company the right to dig far under the surface. Often this seems like “found money” to the owner, who has no great concern about what happens a mile below the property.

The reverse can also happen, which is that an owner can sell the surface of the land and keep the earth below. For instance, if you have a home or commercial property in an area where you believe there could be mineral development, and you want to sell, you could specify that the owner will get only the surface rights, and you’ll keep the mineral rights as an investment. (Alternatively, you could specifically throw in the mineral rights as a way to sweeten the deal.)

If you’re buying a property in an area with mineral development, you should make sure that the property really is being conveyed to you in fee simple, and that a previous owner hasn’t sold off the mineral rights at some time in the past.

If you sell your mineral rights, you’ll want to make sure that the contract covers how the extraction will occur, what effects this might have on the surface of the property, and who will be responsible if there are adverse effects on the surface. Many states have laws that set minimum requirements for how a mining company must behave, but you might want to have stronger requirements in your sale contract.

Keep in mind that some surface damage can occur as a result of settlement long after the extraction is completed. Also, mining activity can result in a loss of well water. Remember, too, that if you purchase a property without the mineral rights, you’re generally stuck with whatever agreement the previous owner made with the mining company about damage to the surface, so you’ll want to examine that agreement in detail before you buy.

In addition to selling your mineral rights, you can also lease them. A typical lease has an initial term and then expires unless the lessee begins commercial production within that term. Once production begins, the property owner receives royalty payments, which are a percentage of the value of whatever is produced.

Some leases involve a “signing bonus.” Typically, a signing bonus is a trade-off for a lower royalty. The bonus is a windfall to the property owner if the mining doesn’t pan out, but it can work against the owner in the long run if the property produces a lot of value.

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