ENERGY CASE LAW UPDATE: Lyle v. Midway Solar, LLC

As renewable energy production continues to grow in the state of Texas, potential conflicts with traditional energy sources, such as oil and gas, are likely to arise.  This is especially true as renewables and oil and gas operations compete for the same land.  The following decision, Lyle v. Midway Solar, LLC offers an intriguing illustration of some of the conflicts between oil and gas and renewables to come.

Background

In Lyle v. Midway Solar, LLC, the Lyles owned a portion of an undeveloped mineral estate in a 315-acre tract of land in Pecos County, Texas (“Section 14”) but did not own the surface rights.  The Lyles acquired their current ownership of the minerals in Section 14 by a 1948 Deed, in which they conveyed the surface to a third party but reserved the minerals.  In 2015, the surface owners entered into leases with Midway Solar, LLC (“Midway”) to build a large-scale solar energy facility on the south half of Section 14.  The leases allowed Midway the right “to free and unobstructed use and development of solar energy resources” for up to 55 years.  The leases also allowed Midway to place transmission lines, electrical lines, and cable lines on the property.  Later, the surface owners and Midway amended the leases to provide for “Designated Drill Site Tracts” for the benefit of present or future oil and gas operators.  Midway also obtained surface waiver agreements from individuals who purported to own mineral interests in Section 14 and adjoining properties.  The Lyles complained to Midway that the surface waiver agreements were invalid as to Section 14 because none of the individuals who signed the waivers had any interest in Section 14. 

After the solar facility was completed, the Lyles filed suit against Midway and others alleging (i) the Lyles were entitled to a declaration quieting title in their mineral estate because of the defective waiver agreements, (ii) Midway had breached the terms of the 1948 Deed, and (iii) Midway trespassed on the Lyles’ mineral estate.  At trial, Midway argued the accommodation doctrine controlled and it did not owe a duty to the Lyles to accommodate their mineral interests because the Lyles had not yet developed their mineral estate.  The trial court agreed.

On appeal, the Lyles argued the accommodation doctrine did not apply, but even if it did, the solar facility denied them access to their minerals, resulting in injury. 

The Accommodation Doctrine

Under Texas law, the mineral estate is the “dominant” estate where the mineral estate owner has the right to use as much of the surface as is reasonably necessary to extract and produce minerals.[1]  However, the mineral estate’s right to use the surface is not absolute, but tempered by the “accommodation doctrine.”[2]  To quickly summarize, the doctrine holds the mineral and surface owners must “exercise their respective rights with due regard.”[3]  To obtain relief under the accommodation doctrine, the surface owner carries the burden to show (1) the mineral owner’s surface use precludes or substantially impairs the surface owner’s existing use and (2) there are no reasonable alternatives available to the surface owner for the existing use.[4] The accommodation doctrine may not apply, however, where the express terms of a deed or agreement between the parties determines their rights. 

First, the El Paso Court of Appeals found the 1948 Deed did not prevent the application of the accommodation doctrine because provisions in the deed did not expressly address or determine the parties’ rights.  Therefore, the accommodation doctrine applied to determine the rights between Midway and the Lyles. 

At the center of the dispute lies the question of whether under the accommodation doctrine the Lyles must attempt to develop their minerals to maintain a claim against Midway.  At trial the Lyles presented no evidence that they had actively developed their minerals.  The Lyles argued they had already suffered damage as a result of the construction of the Midway solar facility because they could not reasonably develop the minerals when the solar facility covered 70% of the surface in Section 14.  Ultimately, the court decided the answer “lies in a proposition of logic, as much as one of law.”  The court noted Midway has the right to use the surface, and the Lyles have the right to use the surface but only appurtenant 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.

In other words, until the Lyles developed their minerals, Midway owed no duty regarding the use of the surface to the Lyles.  The court concluded that any trespass or breach of contract claim was premature until the Lyles actually sought to develop their minerals in Section 14.  Otherwise, a mineral owner who takes no effort to develop the minerals could claim damages from surface use that may hinder the future development of the mineral estate.  The court questioned how a mineral owner would value future damages to the mineral estate.  

This decision begs the question: What quantum of mineral development is sufficient to trigger the accommodation doctrine?  Executing an oil and gas lease would certainly do so.  But what about simply entering negotiations with a potential lessee or even surveying the property?  What about evidence of past mineral development?  The Lyle decision fails to provide definitive answers.  The court noted the Lylesdid not have plans to develop the minerals and did not provide evidence of any effort to do so.  The outcome of this case may have been different if the Lyles had provided some evidence of mineral development—even if the development was minimal.  Therefore, mineral owners looking to protect and utilize their mineral rights should actively pursue development, remain vigilant of surface use, and retain any and all evidence of mineral development.

And What About Those Surface Waiver Agreements?

The Lyles also argued Midway’s defective surface waiver agreements created a cloud on the Lyles’ title to the minerals in Section 14.  Midway contended the waivers did not cloud the Lyles’ title because of subsequent curative measures, including Midway’s filing of a Disclaimer of Interest. 

As part of its curative measures, Midway altered a number of the waivers by crossing out references to Section 14.  The court, however, found Midway did not correct the defective waivers as Midway failed to properly execute and provide the requisite disclosures pursuant to the Texas Property Code.[5]  Midway’s filed Disclaimer of Interest stated the defective waivers did not “grant, convey or transfer to Midway any right, title or interest in or to the mineral estate of Section 14.”  The court likewise held the Midway Disclaimer of Interest ineffective to cure the cloud on the Lyles’ title as the defective waivers did not purport to give Midway any right to the minerals in Section 14.  Rather, the waivers were executed by several individuals who did not own minerals in Section 14.  An effective disclaimer of interest should have been executed by those individuals—not Midway.

Conclusion

Although the Lyle v. Midway Solar, LLC decision does not fully address how a court would balance mineral development and renewable energy production under the accommodation doctrine, the decision does illustrate some of the conflicts that may occur.  The decision emphasizes the fact that mineral owners (including those buying and selling) should remain vigilant as to the use of the surface covering their minerals.  Likewise, mineral owners seeking to develop their interests should take an active, rather than “wait-and-see” approach.  It may be prudent for mineral owners to execute surface use agreements contemplating future oil and gas operations.  The decision also underscores the importance of careful land and legal work in determining surface and mineral ownership, including for renewables.  Properly prepared instruments affecting surface and mineral ownership and, when necessary, title curative instruments, could save precious time and money and avoid litigation.  

For questions or further information regarding this decision and its potential impact on your business, please contact Clark C. Reeder.

[1] See Merriman v. XTO Energy, 407 S.W.3d 245, 249 (Tex. 2013); see also Tarrant Cnty. Water Control & Improvement Dist. No. One v. Haupt, Inc., 854 S.W.2d 909, 911 (Tex. 1993).

[2] See Getty Oil Co. v. Jones, 470 S.W.2d 618, 621 (Tex. 1971).

[3] Merriman, 407 S.W.3d at 249.

[4] Id.

[5] Tex. Prop. Code Ann. § 5.028-29; see Tanya L. McCabe Tr. v. Ranger Energy LLC, 531 S. W. 3d 783, 799 (Tex. App. – Houston [1st Dist.] 2016, pet. Denied) (“revised deed that did not satisfy the correction statute was not enforceable”).

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