The interpretation and application of the regulatory takings principle have evolved over time, but the fact remains: the government cannot take private property for public use without providing just compensation to the owner.

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What is a Regulatory Taking?

Regulatory taking is a concept in law where a government regulation limits the use of private property to such an extent that it essentially cannot be used by the owner. The Fifth Amendment of the U.S. Constitution states that such taking of private property for public use cannot occur without just compensation. It falls upon the Supreme Court to decide what constitutes a regulatory taking and to determine the amount of compensation required.

The principle comes from the Fifth Amendment, which states, “nor shall private property be taken for public use, without just compensation.” This underscores the balance the government must maintain between promoting public interest and respecting private property rights.

Throughout history, the Supreme Court has dealt with various cases that touch on this principle. The Court has sought to distinguish between government actions that fall under two distinct categories.  The first falls under the umbrella of eminent domain – where the government moves to take possession of property because of its need for public use.  The second category are those that involve regulation of property to prevent its use in a manner detrimental to the public interest. The Court has also dealt with cases involving zoning and land use controls, environmental regulations, and other forms of governmental regulation of property.

Eminent domain – is a phrase commonly used to denote “[t]he inherent power of a governmental entity to take privately owned property … and convert it to public use.” Under the power of eminent domain, the government may take private property for public use by paying just compensation. (Congressional Research Service)

Even though eminent domain is allowed, the government doesn’t have free reign to just take what they need.  For example, before exercising eminent domain to acquire rights-of-way for the interstate highway system, certain steps must be followed in accordance with federal regulations and statutes for a given public use to be served by taking the property interest.

The second category of government takings again typically involves placing restrictions on property to protect the public interest.  This is sometimes called an “inverse condemnation” in which a private property owner initiates an action against the government, claiming that a property interest has been “taken” without just compensation in violation of the Takings Clause of the Fifth Amendment. Again, these two types of takings raise distinct legal issues.  This is the type of regulatory taking that usually results from land use controls or regulations that place restrictions on land use which impacts property value.  This type of taking is especially relevant and impactful for mineral owners dealing with ever-increasing regulations which seek to limit the ability to develop oil & gas reserves.

The Tucker Act

For regulatory takings that do not fall under formal eminent domain proceedings, the constitution still requires that just compensation be paid.  There is an important act that allows for claims for compensation against the federal government called the Tucker Act.

According to the Cornell Law School, “Although the government is immune to lawsuits as a general rule, the Tucker Act exposes the government to liability for certain claims. Specifically, the Act extended the original Court of Claims’ jurisdiction to include claims for liquidated or unliquidated damages arising from the Constitution (including takings claims under the Fifth Amendment), a federal statute or regulation, and claims in cases not arising in tort.”

Mining/Drilling Regulations as Takings

For several decades following the explicit recognition of the federal government’s eminent domain authority, the Supreme Court held that regulations designed to secure the common welfare, particularly those in the area of health and safety, were not considered a “taking.” This started to change with its 1922 decision in Pennsylvania Coal Co. v. Mahon.

In the Mahon case, the Court examined a challenge brought by holders of subsurface mining rights against a state statute that prohibited subsurface mining for coal in areas where it might trigger subsidence, which refers to the sinking of the surface due to removal of material underground in this case due to mining.  This was a concern due to houses and other structures below the coal seam.  

The Court determined that the statute, by making it “commercially impracticable to mine certain coal,” had essentially the same constitutional effect as “appropriating or destroying” the subsurface estate.

The Court concluded that “while property may be regulated to a certain extent, if regulation goes too far, it will be recognized as a taking.” They found that a taking had occurred in this case, where the government action rendered the subsurface property interest largely valueless. 

Restrictions on land use can impact property value in many ways and they often generate regulatory takings claims. The Court has held that such controls constitute a “per se” regulatory taking if they deny a property owner any “economically viable use of his land.” Just like a physical taking, a regulatory taking mandates compensation under the Fifth Amendment. This applies regardless of the value of the property taken or the government interest promoted by taking it.

This rule, which the Court first articulated in Agins v. City of Tiburon and later confirmed in Lucas v. South Carolina Coastal Council, dictates that when the landowner “has been called upon to sacrifice all economically beneficial uses in the name of the common good, that is, to leave his property economically idle, he has suffered a taking.”

Another important case related to natural resources is Whitney Benefits Inc. v. United States from the 1990’s.  In this case, it was found that the United States Government took a mineral estate from Whitney Benefits and Peter Kiewit Sons Company upon the enactment of the Surface Mining Control and Reclamation Act (SMCRA).  This Act limited Whitney from being able to mine on their land and as a result they were awarded the economic value of the coal that was placed off limits after the fact.  This might have been elevated to higher courts but from the U.S. Appeals Court Ruling in 1991 they were awarded $140 million for the economic loss resulting from the regulatory taking.

One of the measures that the courts use in determining if a taking may have occurred is “if the regulation does not substantially advance legitimate state interests or denies an owner economically viable use of his property” (Law Archive of Wyoming Scholarship, p10).

Oil and Gas Case Law

There don’t appear to be recent takings claims related to regulations that limit hydraulic fracturing or oil and gas drilling in general. For example, the state of New York passed regulation to ban the use of hydraulic fracturing to protect public health. It is surprising that an owner of mineral rights in New York overlying the Marcellus shale hasn’t brought a takings claim to the state for the lost economic benefit from gas drilling that likely would have occurred had the ban not been enacted.

In doing the research for this episode, there doesn’t appear to be much precedent in terms of takings claims for oil and gas mineral rights except a few claims involving condemnation of land to build a reservoir and the flooding of the land limited access to develop the minerals which resulted in a takings claim. That said, I’m not an attorney so there may be case law that I’m just not aware of at this point.

When determining the compensation owed to the property owner that suffers a regulatory taking, the traditional approach is to base the damages on the market value of the property at the time of the taking.

A big question arises in cases where the mineral rights have been severed from the surface rights in terms of how the court will view the damages.  This is because the court looks at alternative uses of the surface in determining if a takings claim is valid.  In that scenario, especially with horizontal drilling, it doesn’t really matter what the alternative uses are for the surface as you don’t necessarily need to access the surface to access the mineral rights if you were to drill the well from another tract of land.  

The value of mineral rights is dependent on the amount of oil & gas under the ground.  In certain areas this is well known and determining fair market value would be a straightforward exercise.  In other areas where there is less oil & gas development it will be less so.

Current Regulatory Climate & Its Impacts

On the regulatory front, several current and proposed rules at the federal, state, and local levels pose a significant threat to the value of mineral estates across the nation. A prime example is Colorado’s SB24-159, which mandates that the state’s energy and carbon management commission adopt regulations to cease issuing new oil and gas permits before January 1, 2030.

The intrinsic value of mineral rights is inextricably linked to the ability to generate future revenue through leasing activities and the production of oil and gas from drilled wells. By effectively prohibiting new drilling operations, this Colorado bill jeopardizes the revenue-generating potential of mineral estates within the state, culminating in what could be construed as a regulatory taking under the law.

The extent of the potential loss in value varies widely depending on location, ranging from relatively modest sums to tens of thousands of dollars per net mineral acre in prime areas. This underscores the substantial financial implications that such regulations can have on mineral rights holders.

Notably, New York has already implemented regulations that ban high-volume hydraulic fracturing, ostensibly to protect public health due to “significant questions and risks” that were unanswered at that time, according to the state’s former acting health commissioner, Dr. Howard Zucker. This precedent highlights the growing trend against oil and gas development, driven by concerns over climate change, hydraulic fracturing, and other environmental factors.

Given this regulatory climate, it is highly likely that challenges will arise if legislation is enacted that results in a regulatory taking of mineral rights’ value without due process. As history has shown, mineral rights holders are increasingly willing to assert their constitutional rights and seek just compensation when faced with regulations that effectively deprive them of the economic benefits associated with their property.

Resources Mentioned in this Episode

National Association of Royalty Owners (NARO) – NARO supports, advocates and educates with the sole purpose of empowering mineral and royalty owners.

Other Resources

• MRP 236: Mineral Rights News March 2024
• Regulatory Takings- FindLaw
• The Takings Clause of the Constitution: Overview of Supreme Court Jurisprudence on Key Topics
• COMMENTS “PUBLIC USE” AND THE JUSTIFICATION OF TAKINGS Micah Elazar
• Was That Question Really Worth 140 Million Dollars – Whitney Benefits, Inc. v. Unit
• A Fracking Mess: Just Compensation for Regulatory Takings of Oil and Gas Property Rights | Columbia Journal of Environmental Law
• Distinguishing Bundles from Sticks: Determining Denominators in Regulatory Takings Cases Involving Severed Mineral Rights

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