The Duty of Mining Companies to Develop Leased Property

Texas courts have long recognized that when a mining company enters into a lease that requires it to make production royalty payments to the landowner, an expectation of production exists. Based on that expectation, courts have grafted to such leases an implied duty requiring the company to act in a businesslike manner in developing the leased property, taking into consideration the interests of both parties. In other words, the mining company cannot consider its interests alone in the development of the property; it must also take into consideration the interest of the landowner in production.

The duty to balance the interests of both parties in the development of mining properties is obviously difficult but, surprisingly, it has given rise to very little litigation in Texas. The reason is not readily apparent. Perhaps one factor is that many modern mining leases directly address the issue, providing that the mining company will not be under any obligation to develop or mine the property or to continue once mining has begun. Such an express agreement between the parties completely negates any duty of development which the law would otherwise imply.

Another factor may be the requirement in many leases that the mining company make regular advance royalty payments to the landowner. These payments typically are not dependent on production from the property but are treated as advance payments of production royalty amounts that may be due the landowner in the future. Since they can only be recouped from amounts owed for future production on the property, they may provide an economic incentive for the company to begin mining as soon as possible, apart from any implied legal duty.

Advance royalty payments may also have another role in connection with the duty to develop property. Although there are relatively few reported decisions on point, the majority of courts in the United States that have considered the question have held that such payments to landowners provide an effective substitute for production royalty income, and thus eliminate the need to imply a duty to develop the property. In effect, the duty to develop does not arise. Only a handful or so of such decisions are from Texas but the results have generally been similar to the rest of the country.

It is fair to question whether these factors are the real reason there has been very little litigation over mine development in Texas. There may well be others. But one thing certain; the reason is not because mining companies always act diligently in developing mining properties from the perspective of landowners. Many mining operations must secure reserve properties well in advance of actual production and years may go by with very little, if any, development activity on the property. Given the long lives of such mining properties, that result is often inevitable.

Because the potential for disagreement regarding the pace of development is present in every mining lease that provides for production royalty payments, the issue of development should be addressed by the parties before the lease is signed. There is not a single solution that will be appropriate in every case. Mine development can be a difficult process which is dependent on a number of factors, many of which are beyond the mining company’s control. At the same time, landowners are understandably interested in the benefit they will receive in return for burdening their property with a lease, usually for many years.

In addressing the issue, the parties should consider the following factors, among others: (i) the advance royalty or other amount the landowner will receive irrespective of production from the property, (ii) the time frame within which mining and marketing material from the property will begin, (iii) the events or conditions which may extend that time frame, and (iv) the rights of the landowner if the mining company fails to begin mining and marketing material from the property as required. A discussion of these factors will go a long way in helping the parties achieve the balance of interests that courts have envisioned.