The El Paso Court of Appeals addressed an interesting and important issue recently in Lyle v. Midway Solar.  How does Texas law apply when there is a potential conflict between the operation of a large scale solar facility and the ability of the mineral owner to extract oil or gas?

Background

This dispute involves a 315-acre tract of land in Pecos County.

The Lyles own 27.5% of the mineral rights to this land by virtue of a 1948 deed.  There is no current mineral lease on the property, and the Lyles have no current plans to lease their mineral interest or otherwise develop the minerals currently.  They have not commissioned any geological studies, and they have not entered into any drilling contracts for mineral extraction.  In the past 5 years, the Lyles have not received any offers to lease their mineral interest.

Mr. Drgac owns 100% of the surface estate to the land and has no mineral ownership.  In October 2015, Mr. Drgac entered into a solar lease with Midway Solar, LLC, which includes the land at issue.  The term of solar lease, when considering the options to renew, is 55 years.  The lease gives Midway “free and unobstructed use and development of solar energy resources,” and the right to place necessary transmission lines, electrical lines, and cable lines anywhere on the property, subject to Mr. Drgac’s consent.  The solar lease notes that Mr. Drgac does not own any mineral interest in the property and the mineral owners constitute a title encumbrance.  Mr. Drgac agreed to cooperate with Midway to obtain surface waivers from each mineral interest owner.

The lease was then amended to identify “designated drill site tracts” on the leased property for the benefit of “any present or future operator” exploring for oil and gas.  Specifically, the lease identified an 80-acre tract at the north end of the property and a 17-acre strip at the south end.

Midway built its solar field, which covers approximately 215 acres of the property, approximately 70% of the surface. When building the facility, Midway left open the two drilling sites identified in the amended lease.  A photo of the solar facility is below.

During 2016, Midway obtained surface waivers from 20 individuals who owned mineral interest in adjoining properties.  Although some of these waivers indicated the individuals had mineral rights in the property at issue, they actually did not.  None of the 20 surface waivers that were obtained and recorded involved mineral owners of the property at issue.  The Lyles complained about these waivers, 13 of which were amended to exclude reference to this property.  Although Midway amended the content of the waivers, they did not have them re-signed or re-filed in the records.  Additionally, Midway filed a “Disclaimer of Interest,” stating that they disclaim any suggestion or implication that the waivers give Midway the right to develop the mineral estate on the property at issue.

Litigation

The Lyles sued Mr. Drgac, Midway, and the twenty people who signed the surface waivers.  They sought the following relief: (1) A declaration quieting title in their mineral estate because the waivers created a cloud on their title; (2) Midway and Mr. Drgac breached the 1948 lease by denying the Lyles reasonable access to their mineral by covering 70% of the property with the solar facilities; and (3) All defendants trespassed on the Lyles’ mineral estate.  They requested both monetary damages and a permanent injunction ordering the removal of the solar facilities.  The Lyles settled with 13 of the surface waiver defendants.  The remaining 7 of the surface waiver defendants did not enter an appearance on appeal or otherwise participate.

Multiple summary judgment motions were filed.  The trial court granted Midway and Mr. Drgac’s motion seeking an order stating that the disclaimer of interest filed in the deed records removed any purported cloud of title and requiring a certified copy of the court’s order to be filed in the county records.  The trial court granted Midway and Mr. Drgac’s motion seeking a ruling that the accommodation doctrine applies to the interpretations of the 1948 deed.  Finally, the court granted Midway and Mr. Drgac’s motion that Midway owed no duty to the Lyles to accommodate their right to use the surface because the Lyles had not developed their mineral estate and had no plans to do so.  Additionally, the court dismissed claims against the 7 remaining waiver defendants, despite them filing no summary judgment motion seeking such relief.

The Lyles filed an appeal arguing that the trial court erred in granting summary judgment.

The Accommodation Doctrine

Under Texas law, when mineral and surface ownership is severed, the mineral estate is deemed the dominant estate.  This gives the mineral owner the implied right to use as much of the surface as is reasonably necessary to produce the mineral.  This right, however, is limited by the “accommodation doctrine.”  This doctrine essentially holds that when certain facts exist, the dominant mineral estate must accommodate an existing surface use.  In order for the accommodation doctrine to apply, a surface owner must prove: (1) the mineral owner’s use of the surface completely or substantially impairs the surface owner’s existing surface use; (2) there is no reasonable alternative method available to the surface owner by which the existing use can be continued; and (3) there are “alternative, reasonable, customary, and industry-accepted methods available to the mineral owner which will allow the recovery of minerals and also allow the surface owner to continue the existing surface use.”  If the surface owner meets this burden of proof, the accommodation doctrine may require the mineral owner to utilize the reasonably alternative production method to allow the existing surface use to continue without being substantially impaired.  The accommodation doctrine does not apply if the express terms of the parties’ deed or contract determines the parties’ rights with regard to surface uses. If a deed or contract is silent or ambiguous, the accommodation doctrine could potentially apply.  [To read more about the accommodation doctrine, click here.]

Appellate Court Opinion

The El Paso Court of Appeals sided with Midway, finding that the accommodation doctrine applies, but that until the Lyles attempted to develop the minerals, there was no valid legal claim.  [View Opinion here.]  The deadline to seek review from the Texas Supreme Court has not yet passed, so there could be a petition filed in this case after the date of this blog post.

Trespass and breach of contract claims

First, the court addressed the trespass and breach of contract claims.

Is the accommodation doctrine applicable? 

The court agreed with Midway, holding that the accommodation doctrine applies in this case.

The Lyles argue the 1948 mineral deed made the accommodation doctrine inapplicable because it specifically addresses the rights of the mineral lessee. They point to deed language that says, “Grantors further reserve unto themselves, their heirs and assigns, the right to such use of the surface estate in the lands above described as may be usual, necessary, or convenient in the use and enjoyment of the oil, gas, and general mineral estate hereinabove reserved.”   Courts have previously found the language “convenient” and “necessary” to be imprecise and unclear, allowing the accommodation doctrine to apply.  Here, however, the lease also includes the term “usual,” the Lyles seek to draw a distinction.  They argue that, in 1948 when the deed was signed, vertical drilling was the usual method of extracting minerals, and it is the right to vertically drill that was reserved by the deed.  Thus, they claim, it would be improper to allow the accommodation doctrine to limit their right to vertically drill because they can now use directional or horizontal drilling.

The court disagreed.  The lease did not use the term “usual” in particular reference to drilling methods, and did not expressly grant the right to use any specific drilling method.  Instead, “usual” was used in the more general sense, leaving room for disagreement as to what the term meant and the application of the accommodation doctrine.

The Lyles also relied on a elimination-of-liability provision, which provided:  “And neither the Grantors herein nor their heirs, assigns, successors in title, nor any persons holding or claiming under them shall ever be liable to Grantees herein, their heirs, assigns, and successors in title for any damage or injury to the surface estate by reason of such use or for any damage or injury resulting from or claimed to have resulted from the exercise of the rights and privileges hereinabove reserved in connection with the reservation of the oil, gas, and general mineral estate.”  The Lyles read this to mean they could destroy any surface obstruction without liability, negating the basis for applying the accommodation doctrine.

Again, the court disagreed.  The court held this clause only to address what would occur in the event that the mineral owner damaged the surface, but not addressing the claim here, that the surface owner damaged the surface.

Thus, the deed does not preclude the application of the accommodating doctrine.

Is attempt to develop minerals required?

The court held that under the accommodation doctrine, an attempt to develop the minerals is required for legal remedy.

Midway claims that the Lyles must be currently using or planning to use the surface estate for mineral development in order to maintain the claims they have asserted. The Lyles characterize Midway’s argument as a ripeness challenge, and respond that they have suffered damage as a result of Midway’s construction of the solar field on 70% of the property.  They also argue they could not reasonably pursue mineral development due to the solar field.

The court held:  “Midway has the right to use the surface.  The Lyles also have the right to use the surface, but only as an adjunct to their mineral estate.  If the Lyles exercise their right as part of developing the minerals, Midway must yield to the degree mandated by the application of the accommodation doctrine. But if the Lyles are not exercising their right, there is nothing to be accommodated. Stated otherwise, until the Lyles seek to develop their minerals, Midway owes no duty to the Lyles respecting the surface usage.”

Were this not the rule, the court reasons, a mineral owner who undertakes no effort to develop his mineral estate could complain about any surface activity that might hinder, at some point in the future, oil and gas exploration.  If the Lyles were eventually to seek to develop their mineral estate and present evidence that they were unable to successfully market al ease or otherwise develop the minerals, there could be a different result.  That type of evidence, however, simply was not present here.

Are the trespass or breach of contract claims valid?

Even without the accommodation doctrine, the court holds that the Lyles’ trespass claim would fail.  To prove trespass, a party must show the unlawful entry by the defendant onto the property owned or controlled by the plaintiff which caused injury. Here, both parties have the right to use the surface, and Midway has not encroached on the Lyle’s right to do as the Lyles have not actually attempt to exercise their rights.  With regard to the breach of contract claim, the Lyles have never sought to use the property for mineral development as allowed under the 1948 deed, meaning the terms allowing use have not been breached.  The court dismissed these claims without prejudice.

Quiet title claim

Second, the court turned to the quiet title claim.

The Lyles claim that the surface waivers obtained and filed by Midway clouded their title as they improperly referred to relinquishing surface use on the land at issue.  The Lyles want a judgement declaring the waivers invalid, and an order requiring their removal from the public record.  Midway argues the waivers do not cloud title and, even if they did, the correction instruments, disclaimer of interest, and trial court order removed any purported cloud.

Did the surface waiver agreements create a cloud on Lyles title?

A party seeking to quiet title must show: (1) it has an interest in the property; (2) title to the property is affected by a claim of the defendant; and (3) the defendant’s claim, though facially valid, is in fact invalid or unenforceable.   The court found that the agreements claiming mineral rights in the property at issue did cloud title.  On their face, it claimed a mineral interest in the land at issue when there was no such interest. The invalidity of these documents would only be known by additional research and the use of extraneous documents.  Further, for those 13 instruments in which Midway crossed out the reference to the land at issue, but did not have the signors re-sign and did not re-record the deeds as required by Texas Property Code, a cloud remained.

Did Midway’s Disclaimer of Interest solve the cloud?

The court held that Midway’s Disclaimer of Interest did not solve the problem. While the Disclaimer made clear that Midway did not have any right or interest in the mineral estate, the waivers did not purport to give Midway these rights.  The waivers involved the mineral owners–who did not sign a disclaimer–claiming rights to the minerals.  Thus, the waivers simply did not address the actual problem created by the waivers.

Did the trial court’s order clear title?

The appellate court held that trial court’s order did not solve the issue as it referred to the Amended Petition, which was not filed as part of the deed records.  Again, someone looking at the deed records would be forced to do additional research to determine whether the waivers were valid as executed.

Dismissal of Seven Surface Wavier Defendants

Lastly, the court held that the trial court improperly dismissed seven of the surface wavier defendants from the case, despite their failure to seek such dismissal. The court simply lacked the jurisdiction to do so without a motion for summary judgment being filed.

Key Takeaways 

First, this case highlights the potential conflict between a solar lessee and a mineral owner.  This has certainly been an issue of concern for solar developers, and it is why many developers require mineral ownership, control, or surface use waivers before developing property.  Although this case really does not address the balance between these two competing interests, it does heighten and define the issues that could arise.  Also, it seems likely that the case may only make solar developers more adamant about obtaining leases from those who own, control, or can obtain surface waivers for minerals.

Second, this case does make clear that where a conflict arises and the deed does not address the issue, the accommodation doctrine will apply to limit the rights of the mineral owner.  How that would play out remains a question as there had been no attempt to develop here, but we do know that the doctrine would be applicable.  It is interesting to consider how a court would factor in issues like the ability to directionally drill and the fact that the solar developer intentionally left land bare for use by the mineral owner in its accommodation doctrine analysis.  That question, however, remains for another day.

Third, although not the main issue in the case, it also illustrates the difficulty of sufficiently clearing a cloud on title and the importance of ensuring that there is precise language used that will make clear an encumbrance is removed.