Although all surface property owners must consent to their inclusion in a special taxing district, there is no such legal protection for mineral rights holders or lessees, the state Supreme Court decided by 4-3 on Monday.
The “oil and gas industry does not like the fact that the Special District Act subjects them to taxation by special districts without their consent to inclusion within those districts,” wrote Justice Melissa Hart for the majority. Those “policy concerns, however, are better directed to the General Assembly than to this court.”
Robert Lembke and 70 Ranch LLC own 13,000 acres in Weld County named 70 Ranch. The company owns part of the subsurface mineral rights, but other parties lease the remaining rights for oil and gas wellheads.
In 2015, Lembke and 70 Ranch LLC decided to join the South Beebe Draw Metropolitan District for access to sanitation, sewer, water and storm drainage infrastructure. The petitioners gave proper legal notice which invited opponents to make their objections known. After a public hearing, the district approved the request to join and began taxing the lessees’ extraction activity.
The plaintiffs "could have negotiated this issue in their oil and gas leases," said David C. Walker, an attorney for the district during oral arguments before the court. "People negotiate for the payment of taxes with their lessor all the time. They didn't do so."
Those entities — Bill Barrett Corporation, Bonanza Creek Energy, Inc. and Noble Energy, Inc. — took Lembke, 70 Ranch LLC and the district to court. They argued that Colorado’s Special District Act requires “the fee owner or owners of one hundred percent of any real property capable of being served” by the taxing district to assent to being included. Because mineral rights were real property, they claimed, the inclusion of 70 Ranch in the district was noncompliant.
A district court judge concluded that the law did not apply to the extraction companies because mineral estates are not real property capable of being served by the various types of infrastructure from the district. A three-member panel of the Court of Appeals agreed with that determination.
Hart, in an examination of the Special District Act, noted numerous references to land “area,” tracts or parcels of property and “square feet of land.”
“The use of these terms — territory, area, boundaries, tract, parcel, and square feet — demonstrates,” she wrote,” that the law “sets forth procedures for expanding the surface area of a special district.”
However, the court’s majority believed the lower courts had fixated incorrectly on what property is “capable of being served” by the special district. Even if the subsurface mineral estates benefitted from the special district’s infrastructure, they still could not withhold their assent to taxation, Hart explained, simply because the law does not envision their participation.
“After a special district’s boundaries are expanded...the Special District Act provides that ‘all taxable property’ within those boundaries is subject to ad valorem taxation by the district,” the majority concluded. “This includes oil and gas leaseholds.”
Writing for Justices Brian D. Boatright and Carlos A. Samour, Jr., Justice Richard L. Gabriel criticized the majority for allowing a surface property owner to in effect opt in mineral estate owners to taxation without their consent.
“I perceive nothing...that would allow a fee owner of a surface estate to petition to include a third-party’s property interest in a special district. Nor do I read that statute as addressing how and when consent must be sought from third parties,” Gabriel wrote.
The dissenting justices concluded that the Special District Act only spoke to the process for letting 70 Ranch join the district, and not collateral entities. The legality of the tax imposed was not a question on appeal, and both sides did not directly address it. During oral arguments, one of Lembke's attorneys suggested the taxation situation was similar to that of annexation, where the mineral rights are also subject to new regulations if surface land joins a municipality.
"We are pleased with the Colorado Supreme Court's well-reasoned opinion affirming that oil and gas leases by oil companies are properly included in the tax rolls of governmental public districts in which they operate," said Donald M. Ostrander, an attorney representing Lembke and 70 Ranch LLC. "As the legislature has found in earlier years, the impact of oil and gas operations are felt at the surface at the well head, and on all roads and parks in the area. The Court’s decision confirms decades of practice by fire, school and water districts that have historically relied on these income streams to provide valuable services to their citizens — services that are much needed to respond to the increasingly significant impact of oil and gas exploration."
Zachary A. Grey, an oil and gas attorney with Frascona, Joiner, Goodman and Greenstein, P.C., said he would not go so far as to label the decision taxation without representation, but he does see a "notion of unfairness when a lessee of the mineral interest is burdened by an ad valorem tax but not benefited by the services of the special district."
Grey predicted that oil and gas operators might go to the General Assembly, as Hart suggested, to ask for mineral rights holders to be subject the same consent requirement as surface property owners.
"If you open the door to this sort of taxation without consent through the process, then where does that sort of rationale end?" he said in summarizing their argument. "I see both sides and it's something that's best left for the debate floor of the legislature."
The case is Barrett Corp. v. Lembke.
This story has been updated with additional comment.