Property owners and developers have the legal right to enter into many different types of agreements concerning the way a piece property can or cannot be used. This is particularly true when it comes to natural resource extraction. One of the primary forms of currency an oil and gas developer, for example, has is the ability to “dedicate” acreage to a service provider such as an oil pipeline company, gas processing company or water disposal company. If constructed correctly, this dedication will “run with the land” and bind any future purchasers of such acreage. At Newburn Law, we have extensive experience creating enforceable covenants running with the land in Colorado, North Dakota, Oklahoma, Texas and Wyoming.
Understanding Covenants Generally
Covenants are contracts or agreements between two or more parties that dictate what those individuals are required to do or must refrain from doing under the law. An individual who makes this type of agreement is called the covenanter and those to whom the agreement is made are referred to as the covenantee. Covenants are contractual obligations that are legally enforceable. Under most state laws, contractual covenant obligations are divided into two categories: personal covenants and covenants that run with the land.
Personal covenants are contractual obligations that bind only those parties who sign the contract. Personal covenants concerning what can be done with the land or obligations for what must be done to the land do not apply to subsequent property purchasers or to any successors or assigns.
Covenant Running With The Land
In order to enforce contractual obligations upon subsequent property purchasers, successors, or assigns beyond those who sign the contract, the contracting parties must create a covenant running with the land. Consider the following examples:
Property for Specific Purposes
In some cases, individuals or parties can agree that land will only be used for specific purposes.
For example: If two parties agree that an individual parcel of property can only be used for church purposes, any subsequent successors, assigns, or purchasers of that property are held to that same restriction.
Natural Resource Extraction
In the case of natural resource extraction, if a covenant runs with the land and stipulates a specific property will be used for mineral extractions, or the minerals extracted therefrom must be transported or processed by a particular company or set of assets, subsequent property purchasers must adhere to that obligation.
For example: If the owner of a piece of property discovers an oil deposit, they can grant drilling rights to a local oil company. If they sell their land in the future, the drilling rights given to the oil company would remain in effect or “run with the land”.
Or, if an oil and gas production company “dedicates” all of the gas produced from a given set of acreage to a midstream gas company for transportation, compression and processing, that dedication will “run with the land” and continue to bind and future purchasers of that acreage.
The legality of “covenant running with the land” falls under Colorado Energy Law. Specifically, CO Rev Stat § 38-30-121 states there are 4 requirements necessary to validate such an agreement:
- Touch and Concern
- Binding on Assigns
Privity of the contract is a principle rooted in common law and it stipulates that a contract cannot impose obligations or confer rights to someone who is not a party to the agreement. As a result, only the parties involved in the contract and any direct successors can sue down the line to enforce their legal rights.
There are situations where one owner has two adjacent pieces of property and chooses to sell one parcel. The original owner might create a covenant running with the land, an agreement with the second owner as to how that property may be used in the future. This is referred to as horizontal privity. Situations where property is passed down to a new owner or inherited are referred to as vertical privity.
Touch and Concern
To touch and concern means the agreement must concern the land and benefit or burden the land. This aspect of the agreement confirms that the covenant is not personal.
Intent is one of the most important elements of these types of legally binding agreements. CO Rev Stat § 38-35-108 requires all parties involved in the contract must clearly express their intent for their agreement to run with the land, to effectively bind any subsequent purchasers to the agreement. This has to be written in the agreement and recorded with the local county recorder or it may not be enforceable.
Binding on Assigns
Another important element is binding on assigns. This component serves to differentiate between personal contacts that do not run with the land, and those agreements that do run with the land. Binding on assigns means that the contract binds upon the parties signing the contract as well as any successors or permitted assigns.
Recommendations for Covenants
When entering into any business transaction that pertains to real property, restrictive covenants must be explicitly stated in the agreement. Minor errors can result in contracts being voided when the property is bequeathed to a successor or sold to a new owner. Rights to natural resources, dedications or drilling rights are best protected when covenants follow these recommendations:
- To ensure the legality of a covenant that runs with the land all parties involved must clearly state their intent.
- The agreement must include language that binds “successors and assigns”. For example, the contract might use phrases like “all parties intend for this covenant to run with the land”.
- Restrictive covenants must be included on the deed, filed with the county recorder, and included with any other instrument used to transfer the property.
- All subsequent property purchasers must be notified of the restrictions placed on the use of the property.
Contact an Experienced Energy Attorney
A covenant running with the land must be worded properly with the four key elements in order for it to be valid. Taking the time to visit with an experienced attorney can ensure your interests are protected down the line. Even a minor mistake in a covenant running with the land can invalidate the agreement and results in a contract that doesn't bind future successors or property owners.
If you are in a situation where you need to review a contract or create a covenant, consider contacting an experienced energy attorney to guide you through your agreement. Our attorneys can help you prepare a covenant from scratch or review existing covenants to protect your interests. Contact Newburn Law for your free consultation today.