Two years after Janice Smallwood leased ten acres with a house from the Chandlers, they signed an oil and gas lease with Chesapeake Exploration covering 60 acres, including the ten acres leased to Smallwood. After Chesapeake drilled a successful gas well on the property, the Chandlers signed two more leases to allow the installation of a pipeline, so that gas from the well could be sold.
When Chesapeake started digging to lay the pipeline, Smallwood went to court to get an injunction to stop Chesapeake, claiming that Chesapeake had trespassed on the land that she leased. Chesapeake claimed that its oil and gas lease and its pipeline leases gave it the right to cross the ten acres leased by Smallwood. With this right, Chesapeake could not have trespassed, as a matter of law. Trespass by definition is an unlawful interference with a superior right of possession.
The trial court held for Smallwood, stating that her lease gave her rights that Chesapeake could not interfere with, awarding her treble damages under the Arkansas trespass statute and a bunch of other fees. Smallwood’s lease was signed earlier than Chesapeake’s leases, so Smallwood was first in time and first in right. Chesapeake appealed.
In American real estate law, you should generally bet that the law favors development.
Here’s how the Arkansas court of appeals looked at the case, DeSoto Gathering Co. v. Smallwood.
Smallwood’s lease had a subordination clause, stating that the lease was and in the future would be “subject, subordinate, and inferior to any lien or encumbrance now or hereafter placed on the lease premises by Lessor.” Most often, these clauses apply to the liens of mortgages, so that the landlord will be able to borrow money against the leased property. The trial court ruled that this clause only applied to financial encumbrances, not physical encumbrances such as pipelines.
The court of appeals disagreed, declaring the trial court’s ruling to be clearly erroneous. After all, the subordination clause included the words “any lien or encumbrance,” which plainly contemplates burdens on property other than the liens of mortgages. People who work with land titles know that there are many other kinds of encumbrances, such as judgments, leases and easements.
The decision of the court of appeals is also supported by the principle that the mineral estate is dominant. To understand this principle, you must first understand that the surface estate and the mineral (or subsurface) estate for a piece of real estate are severed by the effect of a mineral lease such as an oil and gas lease. From that time, the rights of the owner of the mineral estate are superior to those of the owners and possessors of the surface, a policy which encourages exploitation of minerals.
Though the mineral estate is dominant, the mining company or oil and gas company is still required to be reasonable, minimizing the surface damage and restoring the surface. Oil and gas companies and property owners often don’t agree on what is reasonable and end up in court. If the oil and gas company wants the lease badly enough, the property owner may be able to negotiate for a substantial payment for surface damages or a signing bonus, in addition to “delay rentals,” which is a periodic payment made until the well is producing or the lease is abandoned.