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DON’T LOOK FOR THE GOLD, LOOK FOR THE GRAVEL

Posted on: March 9th, 2016
by David Ganje

In the natural resources, mining and geological fields, the ‘experts’ are reluctant to call gravel a mineral.  It matters not whether they are a lawyer, judge or geologist.  But I set aside this ridiculous game of semantics.  I deal with reality.  My clients deal with reality.  So we start with the wisdom of my grandfather who was a farmer.  He said, “Don’t look for the gold, look for the gravel.”  What mineral has an immediate, practical and economic benefit regardless of where used, how used, or where located?  Gravel.

Gravel is everywhere – in South Dakota alone, there are more than 1,800 permits for gravel mining on file with the Department of Mining and Natural Resources. States have inconsistent histories with regard to whether or not gravel should be considered a ‘mineral’ requiring mining permits. As a result, the term ‘mineral’ will sometimes be construed so as to include gravel, and other times to exclude gravel. For this reason, those interested in gravel in South Dakota should be aware of the inconsistent legal nature of the commodity.

On private land, gravel rights are managed by the state. The SD legislature has passed statutes defining the term ‘mineral’ broadly when dealing with situations such as damages from mining, oil, and gas development, mineral exploration (but not mining), and abandoned mineral interests. In these statutes, gravel is included within the term ‘mineral’ – in fact, often ‘mineral’ is defined as expansively as “any substance with economic value, whether organic or inorganic, that can be extracted from the earth, including oil and gas, but excluding water” and in some cases, uranium. In these situations, then, there is no question that gravel is included. For example, like oil and gas, mineral interests in gravel are only abandoned if left unused for a period of twenty-three years, unless a statement of claim is made according to SD law.

Unfortunately, the South Dakota Supreme Court has implied that these definitions only fit the situations that their respective statutes dictate and, cannot always help define ‘mineral’ at other times. It would be easy if rights holders could look at these statutory definitions of the term ‘mineral’ universally. In South Dakota no statute provides a definition for ‘mineral’ or ‘mineral interest’ with the purpose of explaining existing mineral interests or leases. For example, North Dakota law states that “conveyances of mineral rights…in real property in this state…shall not be construed to grant or convey to the grantee any interest in any gravel…unless specifically included by name in the deed, grant, or conveyance.” South Dakota has nothing so specific, so the matter must fall to the courts.

As a result, the SD Supreme Court has instead chosen to handle the matter on a case-by-case basis. Those wishing to claim that gravel is included under their mineral interest or mineral right must show the court that gravel’s inclusion in a warranty deed was intended by all parties at the time the interest or right was created; if not, taking gravel from land on which you have mineral rights may well be prohibited, as the interest in the gravel remains with the surface estate. The SD Supreme Court has expressed concern about possible damage to the surface estate by removing subsurface or surface objects that the grantor did not intend to be removed – like gravel. When surface damage is likely to occur from deeding to the grantee an interest in gravel, courts will demand even a stringent showing of the grantor’s “intent.”

On federal land, where the federal government has reserved mineral interests, the analysis is similarly convoluted. The Supreme Court of the United States has held gravel to be included in a federal reservation of “all the coal and other minerals in the lands so entered” under the Stock-Raising Homestead Act of 1916, but more recently held gravel to not be included with the federal reservation of “all the coal and other valuable minerals” under the Pittman Act of 1918. Lest we feel comfortable that all federal reservations of regular minerals will include gravel, and all federal reservations of valuable minerals will exclude gravel, a two-justice concurrence in the Pittman Act case disparaged the “faulty reasoning” of the SRHA case, and implied that they might consider overturning that holding at some point in the future. This may indicate that whether or not a specific federal mineral reservation includes gravel can depend heavily on the composition of the court at the time of the case.

For those who are interested not in interpretation of current mineral interests, but rather the creation of future mineral interests, the key is clear and careful writing. When mineral reservations and interests are written so as to explicitly include gravel as a mineral, or there is some compelling evidence that the grantor intended to include gravel within the grant, then courts will uphold the granting deed as including gravel. Sadly, the issue can become a grantee interpretation versus grantor interpretation, with the grantor likely to win. This is largely because SD law states that “a reservation in any grant. . . is to be interpreted in favor of the grantor.” This road is a little rocky.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in New York. The website is Lexenergy.net

Is the Trump Option Available In SD For Condemnation?

Posted on: February 13th, 2016
by David Ganje

Is the Trump Option Available In SD For Condemnation?

Eminent domain is one of the toughest and most controversial legal powers available to a government, but the South Dakota legislature has so far failed to manage it properly. Eminent domain allows a governmental body to convert privately owned land to another use, often over the objections of the current landowner. The Donald Trump Option is the right of a private party to use eminent domain.  This is done by developers, pipeline companies and hotel builders alike. This process is commonly known as a ‘taking’ or ‘condemning the land.’ There are rules, of course. A landowner must be paid “just compensation” for the condemnation of his land. Further, the land that is to be taken may only be taken to further a beneficial public use.

The ability to exercise eminent domain is so powerful that it almost always remains the final legal option. The use of eminent domain is not solely limited to governments. Private parties as well as corporations may exercise the immense power of eminent domain. For example, South Dakota law states that “Any person may exercise the right of eminent domain…to acquire as a public use any property or other rights necessary for application of water to beneficial uses.” Private parties as well as corporations may exercise the immense power of eminent domain.

The law allows a private party to manage water rights by a taking. The statute states, “except as otherwise provided…no person may appropriate the waters of this state for any purpose without first obtaining a permit to do so.” The power of eminent domain may used if the taker puts water to a beneficial use. For this reason, a party may not successfully exercise eminent domain without first having a water permit.

This right to take comes into play when a party seeks access to land he doesn’t own in order to access water. What is a beneficial use? South Dakota law is intentionally vague on this subject. It says beneficial use is the use of water “that is reasonable and useful and beneficial to the appropriator, and at the same time is consistent with the interests of the public.” For courts, this is a balancing test, as opposed to a concrete definition. The question in eminent domain cases, then, is whether or not a proposed use of water fits this vague legislative definition of ‘beneficial use.’ The Supreme Court has implied that it can. As a result, eminent domain cases involving water can span an enormous berth of cases, with those claiming eminent domain seeking water for everything from irrigation to oil extraction.

There is irony in too much of what the South Dakota legislature does. Counties and municipalities are forbidden from using eminent domain for the benefit of a private party. Yet the field is wide open for private parties to use eminent domain for a private party’s benefit.

Whether it is a taking to obtain water rights or land for a pipeline, the matter of ‘just compensation’ to be given to the landowner is paramount. I have advocated in prior blog articles the need to revisit the matter of just compensation. This issue applies to a government or private taking.  The ‘valuation process’ should be changed.  The SD Supreme Court has stated that the state legislature has the authority to create the method of compensation in a condemnation proceeding.  The State Constitution is interestingly stronger from a landowner’s perspective than is the US Constitution on the issue of eminent domain.

State Senator Monroe, or his speechwriter, state that that my argument (and that of 5 states and counting as of 2012) is wrongheaded. He has stated, “We have well established legal mechanisms to compensate property owners and treat them fairly.”  Good negotiations by a landowner may result in more favorable compensation. But the playing field should be level between the land taker, who has the power of the law to take, and the landowner.  Senator Monroe’s refusal to look at the issue is a belittlement of efforts to protect property rights.

I do not know whether the Senator has had a pipeline run through his property under an eminent domain proceeding. A taking is not a normal market transaction because the landowner has no choice.  A landowner can’t walk away from the table. The legal process of taking private property is just as important as the right to free speech, freedom of religion and the protection against unreasonable search and seizures.

There are several problems with South Dakotan condemnation law. The law should be revised to include written disclosures following the requirements of Wyoming law. Wyoming law provides new rights for landowners in all condemnation proceedings, whether initiated by the government or private parties. SD law should require that the taker show the details of the proposed project plan and the written basis behind any compensation offer. An additional provision that should be changed is the legal taking procedure. Currently the procedure does not allow the landowner the recovery of all of his court costs, appraisal costs, expert witness fees and attorney’s fees even in the event he should prevail in the case. This forces landowners to fear spending money defending their own land, something that a citizen should never have to do. SD law should provide that a landowner is entitled to an award of all court costs, appraisal costs, expert witness fees and attorney’s fees if the taker failed to negotiate in good faith, or if the compensation awarded by the court or jury exceeds the amount of money offered by the taker to the landowner. Until then, the playing field will remain skewed in favor of takers.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. The website is Lexenergy.net

Disclosure of Mineral Interests in North Dakota

Posted on: October 2nd, 2014
by David Ganje

Full property disclosure laws are needed in North Dakota.  Current law does not require that the seller disclose information regarding mineral rights ownership at the time of a closing when selling real property.

Mineral rights affect the sale of real estate and affect its value.  These often go unaddressed when selling property.  The consequences of a failure to address these rights are not pretty. Surprises when doing a real estate deal should not occur.  The era of “let the buyer beware” is long gone. I suggest that putting everything material on the table when doing a real estate sale is the best policy.

The need to protect purchasers through honest and full disclosure of mineral rights has also been borne out in the experiences of other states.  Four years ago, Wyoming adopted a statute which requires sellers of property to disclose whether any mineral rights have been severed prior to a sale.  The reason for the new law, according to the President of the Wyoming Realtor’s Association, was to avoid the unpleasant surprise encountered by people who bought property thinking that they owned the rights to minerals only to find that a third party would appear on their land, and start digging on the property.  By making the buyer aware of the severance of mineral rights, Wyoming’s new disclosure law allows a prospective purchaser to make a more informed decision when purchasing. Recently in Florida a large home builder announced that it will stop severing mineral rights when selling property – after a local newspaper wrote a series of articles investigating the practice of selling property to people who learned of the practice only at the closing table where they felt pressured to consent.

Mineral rights can be severed from surface property rights on the same piece of property in North Dakota and do not automatically pass with title to the land in a sale. A third party can own the mineral rights to land. Title insurance is not the answer to this issue. Title insurance does not insure mineral rights on a property, nor does title insurance cover such things as water permit rights. When doing a real estate deal a purchaser should not assume that the title insurance policy will offer coverage.

            “Full disclosure,” makes for a complete sale in a real estate deal.   Full disclosure is the act of a seller of providing all the facts which the other party should know before the other party decides to buy. Full disclosure is not something I would always do on a first date when I was a young man – but that is another matter.  Full disclosure is akin to the term used by contemporary politicians and pundits known as “transparency.” North Dakota’s property disclosure law should require a seller to disclose mineral associated with a piece of property. 

 

Contracts for Deed in the Sale of Real Property & Mineral Interests

Posted on: February 27th, 2014
by David Ganje

USE OF INSTALLMENT SALE CONTRACTS KNOWN AS CONTRACTS FOR DEED IN THE SALE OF REAL PROPERTY AND MINERAL INTERESTS

 

Real property is frequently transferred via contracts which allow for the payment of the purchase price to be executed in a series of installments. These types of contracts are called installment contracts or contracts for deed. Often, the vendor maintains legal title until the entirety of the purchase price has been satisfied, although it need not be created in this manner. Installment contracts usually contain forfeiture clauses that enable the vendor to terminate the contract, recover the property, and retain all installments paid when the purchaser defaults.  This process may be used for real property and mineral interests.

Anatomy of an Installment Land Contract

a.       Prepayment clause – permits vendee to make payments on the principal in advance of their due date (although SD 43-26-9 now appears to permit pre-payment unless there express language stating otherwise)

b.      Shift to mortgage and deed – requires vendor to convey legal title and vendee to execute mortgage after a certain percentage of the price is paid

c.       Furnishing of Abstract – requires vendor to furnish an abstract showing marketable title at some definite date early in the life of the contract

d.      Payments tied to farm income – recognizes the fluctuation of farm income, out of which the vendee might meet his contract payments; installments may be a percentage of crops and livestock sales

e.       Grace Period – grace period to pay installments after the due date without a breach of contract

f.       Boiler plate provisions of an installment contract

a.       “Time is of the essence of this contract”’ – prevents relief against a default by making time of the essence

b.      “Prompt payment of all installments on due dates is a condition precedent of the duty of the vendor to convey title”

c.       Acceleration clause – the basis of the installment vendor’s action for specific performance and strict foreclosure when the vendor is demanding the entire unpaid purchase price be paid or else vendee’s rights be foreclosed

d.      Forfeiture or liquidated damages clause

e.       In the event of default, “vendor shall have right to re-enter and take possession of the premises without hindrance or delay”

South Dakota Law and Installment Land Contracts

1.      Assignment of Installment Contract

Unless there is specific language in the land installment contract restricting or not permitting the assignment of the contract interest, either party may assign his or her interest to a third party.

2.      Forfeiture and Liquidated Damages Provisions

Whether a forfeiture provision in a contract is an enforceable liquidated damage provision or an unenforceable penalty – pursuant to SDCL 53-9-5 – is a question of law to be determined “based on consideration of the document as a whole, the situation of the parties, the subject matter of the contract, the circumstances surrounding the execution, and other factors.” Prentice v. Classen, 355 N.W.2d 352-55 (S.D. 1984).

Forfeiture provisions will be upheld if: (1) at the time the contract was made, the damages in the event of breach were incapable or very difficult of accurate estimation, (2) there was a reasonable endeavor by the parties to fix compensation, and (3) the amount stipulated bears a reasonable relation to probable damages and is not disproportionate to any damages reasonably to be anticipated. Id.

A court may decline to enforce a forfeiture clause if the defaulting vendee established by clear and convincing evidence that a substantial disparity exists between the payments made on the contract, together with the improvements made to the property, and the loss of rents and other detriment suffered by the vendors due to the loss of use and possession of the property. Id.

3.      Prepayment Privilege is Implied in Real Estate Contracts

Pursuant to SDCL 43-26-9, any contract made in this state for the purchase and sale of realty shall be interpreted as including an agreement that the vendee shall have the right to tender, and the vendor shall have the duty to accept, prepayment of the balance of the contract price with accrued interest at any time without penalty to the vendee, unless the contract expressly provides otherwise.

General Practice Tips [Powell on Real Property]

1.      Recording the contract

Because installment contract purchasers are typically poorly advised, they often fail to record their purchase contracts. They act unwisely in failing to do so, for the lack of recordation can expose a purchaser to unnecessary risks. Under state recording acts, an installment purchaser is unprotected against a subsequent taker of the property who acquires an interest without notice of the installment land contract.

Counsel for the installment purchaser should have the contract recorded in order to provide notice to third parties and so protect the purchaser’s interest in the contract and the land. In addition to protecting the purchaser’s interest against third parties, recording the installment contract may also give the purchaser protections in the event of vendor’s or purchaser’s bankruptcy.

A vendor is more likely to succeed in clearing his title if he records a quitclaim deed or release that the purchaser has signed after the contract has been executed. Under established mortgage law, a mortgagor can relinquish his redemption rights if he does so in a separate, subsequent transaction for adequate consideration. Courts will analyze these transactions closely to make sure that there has been no overreaching or other unfair conduct by the mortgagee, but the deeds are commonly employed and accepted as valid. By analogy, an installment purchaser should be able to relinquish his redemption rights or otherwise grant a valid release or quitclaim deed at a time when he is in default. The vendor might fairly and lawfully seek an executed quitclaim deed in exchange, for example, for a waiver of default or some favorable restructuring of the purchase terms. If a transaction of this type is substantively fair to the purchaser at the time it is made, the release or quitclaim deed should be valid and should serve to clear the vendor’s title. At the least, it seems likely that a court would uphold a release or quitclaim deed executed by a purchaser who had already lost his rights through abandonment or forfeiture. In such a case, the release or quitclaim deed would not cut off the purchaser’s redemption rights, since the purchaser would have lost them already.

2.      Right of Possession

The purchaser and vendor are free to agree on when the purchaser shall take possession of the property. In the typical earnest money contract, possession passes at the time of closing when the purchaser has paid the full purchase price and title has transferred. In the typical installment land contract, on the other hand, possession passes when the contract is signed, although the parties are free to agree otherwise.

Because of the uncertainty in the law on the issue of possession after the installment contract is signed, a well drafted agreement should specifically memorialize the parties’ understanding on this issue. Similarly, the agreement should indicate which party is obligated to pay real estate taxes and whether the purchaser must pay interest on the installment debt.

3.      Purchasers Use of the Property

As a general rule, a purchaser who has lawful possession of property can use it as he sees fit so long as he does not adversely affect the vendor’s security interest. Stated otherwise, the purchaser can use the property subject only to an obligation to avoid waste, both permissive and affirmative.

Vendor’s counsel might include in the installment contract specific provisions barring the purchaser from destroying and damaging the property or allowing it to deteriorate, much in the way that standard mortgages do. In the event a vendor desires restraints on the purchaser’s ability to alter the property greater than those provided by the case law, vendor should put these expressly in the contract. Vendor may also specify that destruction of the property breaches the contract, enabling the vendor to assert the contract remedies.

4.      Destruction of the Property

The installment contract can resolve many of ambiguities associated with the risk of loss by specifically allocating risk of loss to a particular party and by stating how insurance proceeds are to be applied in the event of a loss, much in the way that mortgages often provide for the use of such proceeds.

5.      Purchaser’s Ability to Assign

Generally, a purchaser is free to transfer his rights under an installment land contract without the prior consent of the vendor. The transfer can be in the form of an assignment of the original purchase contract or in the form of a resale under a new purchase agreement.

Therefore, careful drafting may eliminate ambiguity as to the parties’ intent on the right to assign. However, the parties’ agreement, no matter how clear, may be trumped by a judicial decision based on public policy grounds that finds that certain restrictions on transfer are unenforceable.

6.      Pre-payment

A vendor who wants to avoid prepayment or to delay it for some specified period should insert an express clause to that effect into the contract.

7.      Forfeiture and other remedies

When specifying a right to forfeiture in a contract, vendor’s counsel should make sure that there is no implication that other remedies are unavailable, perhaps by stating that forfeiture is available in addition to other remedies at law or in equity or by expressly specifying those other remedies. Many vendors may profit from suing for contract breach, specific performance or recission instead of forfeiture.

A vendor who wants to regain property has, depending upon the jurisdiction, four remedies from which to choose: (1) forfeiture; (2) rescission; (3) strict foreclosure; and (4) contract termination followed by a suit for contract damages. A vendor who does not want to regain the property can either seek a foreclosure by sale or bring an action for specific performance or full payment of the purchase price.

When the vendor does not want to recover the property, the best remedy for the vendor may be to sue for specific performance and to ask the court, if the price is not paid within a reasonable period of time, to order the sale of the property. If the purchaser performs, the vendor receives the full amount that he is due. If the purchaser does not perform, the property is sold, and the money goes first to the vendor. To date, courts have viewed this remedy as distinctly different from a request for foreclosure. Thus, they have allowed the vendor, after the property is sold, to recover a deficiency judgment, even if a state anti-deficiency law would bar a deficiency after a mortgage foreclosure. If anti-deficiency laws are not a problem in the jurisdiction, a vendor could as easily bring an action for foreclosure by sale, particularly if formal, relatively expedited procedures are available to process foreclosure requests.