Do Mineral Rights Have Value in Eminent Domain?
Posted in Valuation

When eminent domain attorneys think of just compensation in the context of an eminent domain case, we're typically thinking about the value of what we can see:  the dirt itself; and anything built on that dirt.  But every so often, a property's real value lies not in what is on the surface, but what sits below the surface.

A recent post by the Biersdorf law firm, Mineral Rights in Eminent Domain Cases, reminds us about this often overlooked issue.  The post contains a nice summary of when and how these issues can arise, and I won't repeat all of what they have to say.  The bottom line is that when a condemning agency acquires a fee interest, that interest may well include mineral rights that have cognizable value.  Indeed, even if the taking is merely an easement, it is conceivable that the easement could impair the remainder's value by, for example, making mineral extraction more costly - or even impossible.

But before property owners conclude that this is a potential gold mine (yes, silly pun intended), there are some warnings against thinking you can extract a lot of extra value (see, I did it again) from subsurface minerals.

First, in order to claim compensation for lost mineral rights, the owner has to actually lose those rights.  It might seem obvious that the property's owner is going to lose his or her mineral rights when the government condemns the property, but this is not always the case.  In fact, in many situations, the fee owner does not actually own the mineral rights.  While it often gets overlooked in the boiler plate of a typical real estate contract, sellers often reserve for themselves mineral rights below large tracts of land when they sell that land off for subdivision and development.

Second, even if the owner does own the mineral rights, there has to be something there that has real value.  This doesn't mean that you have to have an actual stream of gold running beneath the surface; any number of things can have real value in the marketplace.  (Even something as seemingly simple as clay can have huge market value under the right circumstances.)

Third, even if something of value does lurk beneath the surface, the owner still must deal with highest and best use issues.  If the minerals can be extracted without interfering with current (or planned) surface uses of the property, the owner should be able to recover both the full value of the property using conventional valuation methodologies, plus whatever added value an appraiser might quantify based on the minerals.

But in many cases, mineral extraction will either preclude other surface uses, or will simply be too costly to implement on a scale as small as a single parcel.  If this is the case, the appraiser would need to determine whether the property's value is greater if converted to a mineral extraction use than it is for any other reasonable use of the property.  This may involve examining possible assemblage to generate the economies of scale necessary to support mineral extraction, and there may be significant legal hurdles to extracting the minerals, even if the costs of doing so can be justified.  (Picture for a minute asking the city council to approve a small oil drilling rig in the front yard of a quiet suburban tract home.)

Ultimately, this is an issue that arises only rarely.  But when it does, ignoring it can prove extraordinarily costly.  For an owner who doesn't understand these issues, they may lose a huge component of the just compensation to which they are entitled.  And for the government, if they fail to catch a major mineral deposit in their initial analysis of a planned project's cost, they could face a massive claim that can blow the project's budget faster than oil shoots out of a rig that just struck a huge deposit.

Thanks to the Biersdorf firm for flagging the issue; it's certainly a good one for all eminent domain attorneys to keep in mind.

  • Rick E. Rayl
    Partner

    Rick Rayl is an experienced litigator on a broad range of complex civil litigation issues.  His practice is concentrated primarily on eminent domain, inverse condemnation, and other real-estate-valuation disputes.  His public ...

California Eminent Domain Report is a one-stop resource for everything new and noteworthy in eminent domain in California. We cover all aspects of eminent domain in California, including condemnation, inverse condemnation, and regulatory takings. We also keep track of current cases, project announcements, budget issues, legislative reform efforts, and report on all major California eminent domain conferences and seminars.

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