Pipeline Easement and Right-of-Way Agreements:
A Landowner’s List of Terms to Negotiate
Eric C. Camp
Decker Jones, PC
Burnett Plaza, Suite 2000
801 Cherry Street, Unit #46
Fort Worth, Texas 76102
This article is not intended as legal advice and should not be relied upon as such. If you need legal advice, seek independent legal counsel. These comments are the author’s own. The author is an attorney licensed in Texas and North Dakota only. The author intends this article to be a general guide and checklist of points a Landowner should consider when negotiating and preparing Pipeline Easement and Right-of-Way Agreements. All terms in these agreements are subject to negotiation based on each specific fact situation.
The following are terms a landowner should consider when negotiating a Pipeline Easement or Right-of-Way Agreement (collectively called “Easement Agreement”). This list is not exhaustive; each situation is different, as are the laws of each state. This list is not legal advice. When negotiating an Easement Agreement, a Landowner should seek independent legal advice at the outset of negotiations, not just before signing the Easement Agreement or condemnation proceedings.
In this list, the terms “easement” and “right-of-way” are interchangeable. Also, the Grantee is called the “Pipeline Company” and the Grantor is called the “Landowner.”
1. Compensation to the Landowner
Pipeline Companies usually offer to compensate the Landowner for the Easement Agreement by a payment per linear foot (or rod) the easement covers. But what does that include? And is the Landowner entitled to additional compensation? As for the first question, the per linear foot (or rod) price usually just includes the value of the land covered by the easement. Often the Right-of-Way Agent will refer to this as the “going rate” in the area. But is that all of the damage the Landowner incurs or all the compensation the Landowner should receive for the Easement Agreement and the pipeline’s permanent presence on its land? Usually not.
Depending on the situation, the Landowner may be entitled to additional consideration – if the Landowner is savvy enough to negotiate for it. Some factors that sometimes merit additional consideration to the Landowner above and beyond the per acre value of the land covered by the easement, include, but are not limited to:
Often in rural areas the price offered is per linear rod, not linear foot. When calculating, note that one (1) linear rod equals sixteen and a half feet (16.5’). An appraiser is often necessary to determine the land’s value prior to and after the easement.
2. The Nature, Location, and Number of any Surface Facilities
Like oil and gas wells, pipelines require certain surface facilities. Unless the Easement Agreement provides differently, the Pipeline Company can put whatever it deems necessary on the easement – without additional compensation to the Landowner. Landowners should try to restrict all surface facilities. If the Landowner cannot get that, try to agree on what will be on the surface and seek additional compensation for surface facilities. The more burdensome the surface facilities, the larger the payment the Landowner can demand.
3. Pipeline Depth Below the Surface
Most Easement Agreements require the Pipeline Company to bury the pipeline at least thirty-six inches (36”) underground. To maximize a Landowner’s future development options, the Landowner should ask the Pipeline Company to bury the pipeline at least forty eight inches (48”) underground. This will satisfy certain local, state, and federal development regulations.
4. Payments Apportioned for the Actual Easement and Damages for Tax Purposes
When a Landowner signs an Easement Agreement, the Landowner is selling an interest in the property and also being compensated for damage to the property by the pipeline’s presence. Unless otherwise agreed, the Pipeline Company will usually send the Landowner one check for the Easement and not state what amounts it allotted to the sale and what amounts to the damages.
The Federal Income Tax Code treats proceeds received for granting the easement (the sale of an interest in the property) as long-term capital gains if the Landowner owned the property for more than one (1) year before granting the easement. These proceeds are subject to Federal income tax in the year received. But, proceeds received as compensation for the damage done to the property by the pipeline’s presence lower the Landowner’s basis in the property (the amount the Landowner paid for the property). Federal income taxes are not due on the damages portion of the proceeds until the Landowner sells the property. Thus, by apportioning the payment between the grant and the damages, the Landowner may be able to delay paying Federal income taxes on the damages portion until the Landowner sells the property. See IRS Publication 544 for detailed information about the taxation of pipeline easements (referred to as involuntary conversions) (http://www.irs.gov/publications/p544/).
Such an allocation does not require two checks. The Easement Agreement or an itemized statement from the Pipeline Company, however, can state how the parties apportioned the compensation (for example, 50% of compensation was for the grant and the other 50% was for the damages).
5. Widths of the Permanent Easement & Temporary Construction Easement
Often a Pipeline Company will seek a fifty foot (50’) or wider permanent easement and an additional twenty to thirty feet (20’ – 30’) of additional workspace for construction activities. The Pipeline Company, however, usually only needs about twenty to thirty feet (20’ – 30’) of permanent easement once the pipeline is installed. The Temporary Construction Easement should terminate at construction’s end or a later specified time. The Permanent Easement will last until abandoned or released by the Pipeline Company. Often Landowners can negotiate smaller Permanent Easements in exchange for larger Temporary Construction Easements.
6. Written Timetable for Construction and Installation
The Landowner should seek a written timetable of the pipeline’s construction and installation. This ties into the Temporary Construction Easement discussion above and lets the Landowner know when operations will commence and end. Usually the Pipeline Companies have a schedule in mind so why not include it in the Easement Agreement?
7. The Materials / Substances Allowed and Excluded from the Pipeline
A Landowner should try to limit the substances the Pipeline Company can transport to only natural gas and associated hydrocarbons and exclude undesirable substances like sewage, crude oil, or salt water.
8. The Easement Agreement is for a Single Line
In a standard Easement Agreement, the Pipeline Company can lay an unlimited number of pipelines in the easement – without paying the Landowner additional compensation. The Easement Agreement should be for a single pipeline. This way, if the Pipeline Company wants to lay another pipeline later, it must pay the Landowner for a separate Easement Agreement or amendment to the existing Easement Agreement to allow for the additional pipeline.
9. The Rights and Restrictions on the Landowner’s to Use Easement Area
The Landowner should try to retain rights to use and enjoy the easement area as much as possible. This gives the Landowner flexibility about what it can do on the easement’s surface. Some common future uses Landowners expressly reserve in the Easement Agreement are the right to build parking lots, driveways, seasonal landscaping, crossing utility lines, etc.
10. The Extent to Which the Pipeline Company or Landowner will Maintain the Easement Area
The Landowner should establish that maintaining the easement area is the Pipeline Company’s responsibility.
11. Whether and How the Surface will be Restored upon the Pipeline’s Completion
To ensure proper easement area restoration, the Landowner should ask the Pipeline Company to re-seed the area annually with the Landowner’s desired grasses until permanent. The Landowner should also require double-ditching so topsoil is returned to the surface. Ideally, these remediating measures would also apply whenever the Pipeline Company disturbs the surface.
12. Easement Area Access
In a standard Easement Agreement, the Pipelines Company’s representatives, employees, and contractors (collectively “Employees”) can enter the property at any time to conduct operations. Many Landowners want to limit when the Pipeline Company’s Employees can enter their property, such as only Monday through Friday from 8 a.m. to 6 p.m. Landowners can also ask for notice of upcoming accesses.
Unless the Easement Agreement states the permitted routes, the Employees can access the easement from anywhere. Landowners also often want to limit the specific routes of ingress and egress the Pipeline Company’s Employees may access. The Landowner should clearly identify these routes in the drawing attached to the Easement Agreement.
13. Damages Caused by Contractors
The Landowner should make the Pipeline Company strictly liable for all damages caused to and on all the property caused by the Pipeline Company’s operations and Employees.
14. Restrictions on Contractors’ Activities
The Landowner should restrict the Employees’ activities to only those necessary. Common limits include no guns, fishing poles, trash, pictures, etc.
15. Restrict or Specify Activities Outside the Easement Area
To prevent Employees from trespassing, the Landowner should restrict all activities to the easement area and require express written condition before Employees can go outside that area.
16. List Special Issues
Every property is different and has special issues - a favorite tree, boring or not boring under a specific area, etc. The Easement Agreement should address such issues.
17. Explain Environmental Responsibilities
Petroleum pipelines involve many environmental issues. The Easement Agreement should require the Pipeline Company to comply with all local, state, and federal environmental laws. The Pipeline Company should indemnify and hold harmless the Landowner from any and all environmental damages caused by the pipeline or its operation. And the Landowner should also ask the Pipeline Company to pay the costs of all environmental remediation.
18. State Whether Future Ponds, Lakes, or Tanks May Intrude on the Easement Without Permission
This provision is relevant to rural property owners with future plans to build a pond, lake, or tank. In these cases, the Landowner should try to reserve those rights in the Easement Agreement. If that’s impossible, then the Landowner should try to get the Pipeline Company to alter its route to accommodate the planned use – and should bring up this idea early in discussions with the Right-of-Way Agent.
19. List the Other Types of Easements the Landowner May Grant Across this Easement
Another company may want an easement across this pipeline easement in the future (power lines, water lines, gas lines, etc.). The Landowner should include a provision stating that it can grant all other easements across the property and easement area that do not unreasonably interfere with the Pipeline Company’s use and enjoyment of its easement.
20. Restrict the Pipeline Company’s Ability to Grant Other Easements Within the Easement Area
The Landowner should restrict the Pipeline Company’s ability to grant other easements within the easement area. Thus, if another pipeline company or utility wants to use the easement, it has to deal with and compensate the Landowner, not the Pipeline Company.
21. State the Right to Recover Damages for Disruption Due to Maintenance, Repair, Replacement, and Other Activities in the Easement Area in the Future
Without such a provision, it is unlikely the Landowner will recover damages caused by future disruptions to the property. The Easement Agreement should provide that the Pipeline Company will compensate the Landowner for future damages caused by maintenance, repair, replacement, and other activities related to the pipeline.
22. State What Constitutes Abandonment
To avoid later arguments between the Pipeline Company and Landowner about whether the Pipeline Company abandoned the easement, the Easement Agreement should define “abandonment.” Such provisions usually provide that if the Pipeline Company lays no pipeline a specific number of years, usually two years, after the easement’s grant, then it abandoned the easement and the easement terminates. Such provisions also usually provide that where a pipeline exists, if no substances have flowed through it for a specific number of years, usually two years, then the Pipeline Company abandoned the easement and the easement terminates.
23. Whether the Pipeline Company Must Remove its Structures if it Abandons the Pipeline
Unless the Easement Agreement provides otherwise, the Pipeline Company can leave its structures in place if it abandons the pipeline. A Landowner should ask that when abandoned, the Pipeline Company remove its structures – both pipeline and above ground facilities. The Landowner should seek to include a provision requiring the Pipeline Company to properly remediate the property after removal and compensate the Landowner for damages caused during the removal.
24. Where the Pipeline Company Will Place Warning Signs
The law requires the Pipeline Company to post certain signs along the pipeline route. A Landowner should work with the Pipeline Company in the Easement Agreement to determine where to place the signs. Otherwise, the Pipeline Company can post the signs anywhere along the easement.
25. The Pipeline’s Size
The Landowner wants the pipeline’s size to be as small as possible and the Pipeline Company wants maximum flexibility. The standard Easement Agreement does not specify the pipeline’s maximum size so the Pipeline Company can lay as large a pipeline as it wants. A Landowner should try to limit the pipeline’s size in the Easement Agreement. Usually the Pipeline Company knows what size pipeline it plans to use and ok with limiting it to that size.
26. Is There a Secrecy or Confidentiality Agreement?
When negotiating an Oil & Gas lease, there is power in numbers. When negotiating an Easement Agreement, however, it is every Landowner for itself. Why? Because unlike oil and gas exploration operations, the pipeline is probably coming through the Landowner’s property whether the Landowner likes it or not through the Pipeline Companies power of eminent domain. Given pipelines’ nature and design, certain above-ground facilities have to be built on either the Landowner’s land or their neighbors’ land. As the Landowner, you probably want those facilities on your neighbor’s land.
A Secrecy or Confidentiality Agreement benefits the Landowner because the Pipeline Company can pay more compensation and make other concessions without worrying about neighboring Landowners seeking the same terms.
27. Include the Easement’s Proper Legal Description and Drawings
Often the only legal property description in the Easement Agreement is of the entire property (a “blanket easement”). Frequently the Right-of-Way Agent has told the Landowner the pipeline would go in one place. Then, however, the Pipeline Company puts the pipeline somewhere else. How did this happen? It happened because the Easement Agreement granted the Pipeline Company a blanket easement and the right to put its pipeline anywhere on the property.
To prevent this, a Landowner should include the easement location’s proper legal description in the Easement Agreement and drawings of the easement’s location as exhibits to the Easement Agreement. These two things assure the Landowner that the pipeline is going where agreed.
28. Landowner Should Not Warrant Title
The Pipeline Company has its own professionals to research title and is in a better position than a Landowner to find potential title issues. If the Pipeline Company makes a mistake in its title research, the Landowner should not suffer. The standard Easement Agreement has the Landowner warranting title and promising to defend the Pipeline Company should a title issue arise. This is a large potential burden for a Landowner considering the amount of compensation it receives for the easement. The Pipeline Company is in a better financial position to bear this burden and will often do so if asked by the Landowner.
29. Right to Move the Pipeline at Landowner’s Expense
This provision helps Landowners with plans to develop their property. In some cases, it makes financial sense for the Landowner to pay to move the pipeline so the Landowner can go forward with its development plans. If the Landowner wants this right, it should include it in the Easement Agreement.
30. Whether the Pipeline Company will Repair Roads to Their Former Condition or Improve the Roads After Construction and Installation
The Pipeline Company will use many vehicles that can damage the Landowner’s roads. The Landowner should request that the Pipeline Company fix such damages. Otherwise, the Pipeline Company could argue it included such compensation in the consideration for the Easement Agreement.
31. Whether the Landowner Will Require Temporary Crossings Across Open Trenches or Ditches
Including a provision requiring the Pipeline Company to build temporary crossings across open trenches and ditches is another way to ensure the Landowner is always able to access its entire property during the pipeline’s initial construction and installation.
32. The Maximum Pressure a Line Can Transmit
If a Landowner had to choose between a pipeline that transported gas or other substances at high pressure or low pressure, the Landowner would choose low pressure. Why? Because it is safer. The Pipeline Company should know approximately what pressure level will be transmitted through the pipeline. The Landowner should try to limit the maximum pressure amount allowable. If the Pipeline Company plans a high pressure line, the Landowner can use this as a negotiating point for more compensation, even if the Landowner can’t get the Pipeline Company to agree in the Easement Agreement to a maximum pressure the line can transmit.
33. Whether There is an Established Maintenance or Inspection Schedule
Landowners wants to know who is going to be on their property and when. As such, a Landowner should get the Pipeline Company to agree to an established routine maintenance and inspection schedule. This lets the Landowner know when the Pipeline Company’s employees will be on the property and why.
34. Whether There is an Indemnity Agreement to Protect the Landowner Against any Future Lawsuits in any Way Related to the Pipeline or Other Facilities
Since the Pipeline Company is putting its equipment on the Landowner’s property, if a lawsuit arises related to that equipment, the Pipeline Company should bear the risk. For example, assume a guest is walking across the Landowner’s property and trips over a piece of the Pipeline Company’s improperly marked surface equipment. The fall injures the guest. Along with suing the Pipeline Company, the guest might also sue the Landowner because the accident resulted from a dangerous condition on the Landowner’s property. Including an indemnity provision can shield the Landowner from liability for suits related to the pipeline and other facilities.
35. State that the Landowner Must be Notified if the Easement is Assigned to Another Company and that Assignees Must Strictly Comply with the Easement Agreement’s Terms
Often the Pipeline Company will assign the easement to a related or unrelated company. This concerns the Landowner because the Landowner thought it was dealing with one company and now has to deal with another one. Landowners always want to know who has the right to do what on their land. As such, a Landowner should include a provision that if the easement is assigned to another company, the Pipeline Company must notify the Landowner within thirty (30) days of the assignment. Additionally, a Landowner should include a provision requiring the assignee’s strict compliance with the Easement Agreement’s terms.
36. Whether Pipeline Company is Liable for the Payment of Surveyors, Appraisers’, and Attorneys’ Fees Incurred Incidental to the Easement Agreement
Surveyors, appraisers, and attorneys can be expensive. During the negotiations, a Landowner can sometimes get the Pipeline Company to pay for, within reason, the Landowner’s survey, appraisal, and attorneys’ fees. This concession is easier to obtain with a Secrecy or Confidentiality Agreement in place. Note that if the Landowner is rude and unreasonable, the Landowner is less likely to get this concession, especially if it has the power of eminent domain and can condemn the easement.
Since the pipeline will be on the Landowner’s property for decades or longer, it is very important that the Landowner take the time to negotiate a strong Easement Agreement on the front end. A Landowner should seriously consider hiring an attorney to assist with these negotiations. Many attorneys that handle these matters are willing to do so without requiring an upfront payment from the Landowner or even offer free initial consultations.
A Landowner should remember during these negotiations that the Pipeline Company usually holds the ultimate trump card – the right to use eminent domain to condemn the land. Pipeline Companies do not like to do this as it is expensive and causes bad publicity, but they will use the power if they feel a Landowner is completely unreasonable or unwilling to sign an Easement Agreement. Generally, Landowners should not want to go through a condemnation proceeding because it is expensive and only determines the amount of compensation due to the Landowner – meaning the Landowner may have missed its opportunity to negotiate all the special provisions listed above. To ultimately get the best terms in the Easement Agreement, a Landowner should negotiate in good faith maintaining civility – i.e. kill them with kindness.