Huguet: Buying or Selling Minerals

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A discussion of the “Sale of Mineral Rights by Mail Solicitation Act”

As a lawyer practicing over 15 years in the area of oil and gas, I have fielded numerous inquiries concerning buying and selling minerals or royalty, including negotiation, title, due diligence, and drafting pertinent contracts. With that in mind, this article will provide a very limited window into buying and selling minerals and the relatively new “Sale of Mineral Rights by Mail Solicitation Act.”

Although there are many nuances, briefly and very broadly, mineral rights include the right to explore for and produce minerals, which includes entering onto the land for drilling and incidental purposes and the right to grant and receive the bonus, rent and royalty payments under a mineral lease.  Whereas royalty (called “mineral royalty” in the Louisiana Mineral Code) is a passive right to receive a share of production and does not include the right to grant and receive the bonus and rental payments under a mineral lease, but does cover all or a portion of the royalty payments under a mineral lease.  Unless specified, both are subject to fairly similar prescriptive (or termination) periods of 10 years non-use, with only the mineral servitude being interrupted by the drilling of a good faith dry hole.

As a general proviso, selling minerals or royalty should be approached prudently (caveat emptor), as such rights could be severed from and burden property for generations and reduce its value and marketability. Typically a buyer will have superior information and not take large risks in purchasing minerals or royalty.  So, it may not be in a landowner’s best interest to sell mineral or royalty rights. Further, due to the potentially large future impact and relatively low cost, it is advised that a seller should seek out counsel with respect to the negotiation of the terms and form of any sale of minerals or royalty.

Based on the legislative history of the “Sale of Mineral Rights by Mail Solicitation Act,” there was apparent concern about the exploitation of landowners due to buyers mailing unsolicited checks – the cashing of which would divest the owner of mineral or royalty rights at prices well below market value.  The undersigned has reviewed several such solicitations which were made valid simply by cashing a check and granted broad power of attorney rights to the buyer (included payment transfer instructions to the operator), and purported to cover all lands owned by the seller within a Parish or Township. The Act was made effective May 19, 2016, and covers: (i) mail or common carrier solicitation; (ii) creating, transferring, or granting an option or contractual right with respect to a mineral servitude or mineral royalty; which is (iii) accompanied by a form of payment. It does not apply to a sale of mineral or royalty rights “contracted subsequent to a prior personal contact that included a meaningful exchange between the transferor and the transferee.”  Although fairly subjective and open to debate, this would not appear to require in-person communication, but mass mailings and automated phone calls would likely not constitute a “meaningful exchange.”

If an instrument is covered by this Act, it must include a 60 day “Seller’s Right to Cancel” and lengthy, special disclosures in conspicuous and large 14 font type (as referenced in the Act), and other related provisions concerning rescission. If an instrument violates the Act, the sale could be rescinded and the buyer subject to a claim for attorney’s fees, court costs, royalty restoration, and damages of up to twice the royalties received by the purchaser. If you are a potential seller, caveat emptor applies regardless of the Act, although the requirements of the Act should provide some protection from abuse.

As outlined above, violation of the Act triggers potentially harsh results. So if a buyer’s actions fit under the Act, it should fully comply with it.  If a buyer wants to avoid the Act, it should not include payment, and should make an initial introduction followed up by letters or communication, preferably something more personal like phone or email, before making the purchase. The buyer should also establish a procedure and keep good records.

A final note for third party purchasers of previously severed mineral or royalty rights, the Act does not apply to any mineral servitudes or mineral royalty created on or before May 19, 2016. However, if created after that date, third party purchasers will be subject to the Mail Solicitation Act, including an action for rescission.

Will Huguet is a Partner for Kean Miller LLC in Shreveport