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As commercial real estate developers continue to extend their reach into suburban areas to keep pace with the increasing population of Texas cities, developers are likely to run into another form of development historically protected in Texas: mineral development.

The ownership of the mineral estate includes an implied right to use the surface estate as reasonably necessary to explore, develop, drill, produce, market, transport and store materials from the land. While Texas recognizes The Accommodation Doctrine (which requires that owners of mineral estates reasonably accommodate the existing use of the surface estate), such common law doctrine only offers protections to a surface owner’s existing use, subject to certain conditions. Aside from The Accommodation Doctrine, developers have other options at their disposal to move forward with the development of the surface estate, such as having a mineral owner execute a surface use waiver or entering into an accommodation agreement, where the mineral owner and surface owner both agree to certain respective rights to use the surface of the land and restrict the other from interfering with each party’s respective rights to use the surface. But what if a mineral owner refuses to waive any or all of its rights to the surface estate or the parties cannot successfully negotiate the terms of an accommodation agreement?

Developers may use an underutilized statute set forth in Chapter 92 of the Texas Natural Resources Code and in §3.76 of the Texas Administrative Code, which provides a mechanism for surface owners to limit mineral owners’ access to a surface estate by creating a “qualified subdivision.” A qualified subdivision designates “operation” sites for a mineral owner to use on the subject land. Under §92.002 of the Tex. Nat. Res. Code, a qualified subdivision must be a tract of land of not more than 640 acres: (1) that is located in a county having a population in excess of 400,000 or in a county having a population in excess of 140,000 that borders a county having a population in excess of 400,000, or is located on a barrier island and (2) has been subdivided in accordance with applicable law by the surface owners for residential, commercial or industrial use. Additionally, the tract must reserve at least two acres of every eighty acres in the qualified subdivision for operation sites.

To create a qualified subdivision, an application accompanied by a plat of the subdivision showing the applicant’s proposed location of operation sites and necessary road and pipeline easements must be filed with the Railroad Commission[1]. Upon notice to the applicant and mineral owners, the Railroad Commission holds a hearing to determine the adequacy of the number and location of operations sites and road and pipeline easements.[2] The applicant carries the burden of proof to show that the application satisfies the requirements for a qualified subdivision[3]. The applicant and mineral owners have the right to appeal the order of the Railroad Commission.

Once a qualified subdivision is created, mineral owners within the qualified subdivision can only use the designated operation sites in the subdivision for exploration, drilling, development, and production, although mineral owners can engage in lateral drilling underneath the subdivision so long as such lateral drilling does not unreasonably interfere with the surface use. Surface owners can lose their qualified subdivision status if, by the third anniversary of the Railroad Commission’s order, (i) the surface owner fails to commence actual construction of roads or utilities within the qualified subdivision and (ii) a lot within the qualified subdivision has not been sold to a third party. Surface owners should also keep in mind that §92.007 of the Tex. Nat. Res. Code expressly provides that Chapter 92 does not affect the authority of a municipality or the authority of a home-rule city to regulate the exploration and development of mineral interest within its boundaries. Thus, surface owners should be familiar with the local authority’s regulation of mineral development.

Although Chapter 92 of the Texas Natural Resources Code has been rarely used since the Texas Legislature added the chapter in 1983, the statute provides surface owners another mechanism to pursue development in larger counties and smaller counties adjacent to such large populous counties. Furthermore, the existence of Chapter 92 of the Texas Natural Resources Code can create an incentive for both surface and mineral owners to negotiate a private agreement rather than proceed with a public hearing. The Texas Legislature adopted Chapter 92 of the Texas Natural Resources Code in an attempt to balance the full development of minerals in the state and the ever-growing demand for commercial real estate development.

CONTACT:

Genesis Larin I  713.650.2440  I  glarin@winstead.com

Genesis Larin is a member of Winstead’s Real Estate Development & Investments Practice Group. Genesis’ practice focuses on a variety of real estate transactions, including representing landlords in commercial leases, institutional lenders in loan deals, and sellers in commercial property sales.

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[1] Chapter 92 Tex. Nat. Res. Code §92.004

[2] 13 Tex. Admin. Code §3.76(d)

[3] Id.