Daily Development for
Monday, November 17, 1997
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
SERVITUDES; COVENANTS; "TOUCH AND CONCERN:" Royalty Royalty agreement requiring payment of royalty on minerals from tracts of land later acquired by covenantor is not "real covenant" running with the land, even though the parties expressly so state in the agreement, because the obligation does not "touch and concern" benefitted land.
Vulcan Materials Company v. Miller, 691 So.2d 908 (Miss. 1997).
This remarkable case comes just at the right time - when the "Academy" - through the American Law Institute, is questioning the legitimacy of the "touch and concern" requirement for running covenants. The test, in fact, has already been administered, and the requirement has failed. According to the forthcoming Restatement of Servitudes - now in draft form - the "touch and concern" requirement is dead.
Of course, it's not dead yet in Mississippi, as this case makes quite clear.
Miller was retained to explore for commercially valuable limestone deposits. He found a valuable deposit underlying certain lands owned by various persons. Miller's original employer, after acquiring one tract, and negotiating, through Miller, for others, determined not to go ahead with its plans, and Miller acquired an option on all its rights. Miller then entered into an agreement with a third party to transfer that option (and, presumably, the information about the deposits and their location) to Lambert, Defendant's predecessor. The parties executed a royalty agreement based upon limestone binding the purchaser of these rights to pay a royalty to Miller not only with regard to the tract transferred but with regard to certain other properties as well.
"In the event Lambert should purchase any of the said pieces of land, the royalty to Miller shall continue as hereinabove provided.
If Lambert should sell, assign or trade their rights under this agreement, it is understood that the obligations and responsibilities set forth herein shall be imposed upon the assignee or buyer.
Lambert acknowledges that Miller discovered this mineral deposit and has made is possible for Lambert to do business in this regard. If Lambert should open any other business related to this industry, Lambert agrees to pay a royalty of five cents per ton on minerals produced from such other source."
The controversy centered on the last paragraph, where any buyer of the land in question would be obligation to pay a royalty on minderals produced from "such other source," which apparently referred to "any other business related to this industry." Prior decisions (there have been many) apparently interpreted this clause to mean that the parties intended that if the assignee, its successors and assigns, ever engaged in limestone production on *any* land (not just that described in the original deed), a royalty would be payable based upon such extraction.
Further, in prior litigation, successors in interest to the original covenantor had been ordered to pay royalties to Miller for minerals extracted from tracts of land other than those involved in the original transfer. One of the issues discussed at length in this case is whether any of those prior decisions in fact predicated their conclusion on the notion that the covenant in question "ran with the land." Here, the court ultimately concluded that this was not the case. Prior decisions had instead imposed liability on successor owners because they were "alter ego" of the prior owner or because they had expressly assumed the covenants in question. Further, the only issue in prior cases was whether the covenant was binding as to property that admittedly was part of the original group of tracts upon which Miller had an option to obtain limestone extraction rights, which option Miller transferred in connection with the original covenant.
As matters developed, an assuming successor to the original covenantor acquired additional limestone bearing property (the Tennessee River tract) in the same county that was not part of the property originally subject to the option first acquired by Miller. That successor already had been ordered by judicial decision to pay royalties on limestone extracted from the original group of properties, but the court in that decision had not made any ruling with regard to this additional property.
Soon thereafter, this party transferred all of its limestone bearing parcels to Vulcan, the present defendant, and Vulcan received a deed in which it assumed the liabilities under the original royalty agreement.
Later Vulcan began mining limestone from the Tennessee Tract and this dispute arose over whether it was bound to perform under the original covenant.
Lower courts had determined that the covenant was binding upon Vulcan because, based upon prior precedent, it was a "covenant runnning with the land."
On appeal: held: Affirmed. But on different grounds. The court held that the covenant was not a covenant running with the land because it did not touch and concern the land, but that the terms of the assumption set forth in Vulcan's deed indicated that it had agreed to be bound by the agreement anyway.
Two dissenters contended that the assumption should not have been read as an agreement to pay royalties on limestone mined from any tracts other than those that were referred to expressly in the original agreement.
In reaching its conclusion that the covenant did not touch and concern the land, the court cites to Am.Jur.2d and reiterates the requirements of intent, privity of estate and the requirement that the covnenant "touches and concerns" the land in question. The court, following the reasoning of a dissent in the lower appeals court opinion, concluded that the covenant did not "touch and concern" the Tennessee River Land.
It is difficult to know exactly what defect the court sees as dispositive in the covenant in question (arguably there are several). At one point, the court includes a quotation from AmJur that appears to focus on the impact of the covenant on the land to be burdened. Because the covenant does was not "so related to the land as to enhance its value and confer a benefit upon it, or, conversely, impose a burden on it, " it does not "touch and concern."
Subsequently, the court suggests that an additional problem may be the fact that the covenant does not benefit any identified property of the grantor. In other words, it does not "touch and concern" as to benefit.
In the end, the court states:
"Since the burden that would be placed on the Tennessee River property by the royalty agreement would not enhance its value or render the property more beneficial or convenient to its owner or occupant and instead merely imposes a benefit for Miller personally, the covenant does not run with the land."
It is not clear whether this is two reasons or one reason. The two reasons would be failure to touch and concern as to benefit and failure as to burden. To the extent that it is following the "burden" rationale, it also would have been helpful if the court had not limited its comments to the Tennessee River property. We'd like to know as well if the covenant "touched and concerned" the original properties , so as to run with them.
Comment 1: Interestingly, since the court states in dicta that it also is going to require privity of estate, there at least a good argument that there was no horizontal privity here. The only interest transferred in connection with the royalty agreement was an option. Options, one would think, do not involved "privity of estate." But the editor is just as glad that the court didn't dredge up this generally discredited line of reasoning as a basis for its opinion, even though it suggested that the requirement still exists.
Comment 2: Under the new Restatement, there would be no "touch and concern" requirement or privity requirement. Theoretically, if the court concluded that the parties really intended that this requirement run, it would run. What, really, is the matter with this? It's a dumb contract for the original transferees of the lease to sign, admittedly, but should the courts be the last resort for commercial dumbells? This agreement is not so sweeping that it restricts development of the Tennessee River land, or any of the other land. It apparently will die with the Miller. In the meantime, he has contracted for a reward for his discovery and marketing of the limestone, so why not let him have it? And why permit the original promissors to sell the benefits of the limestone deposits they own and escape their obligations to Miller?
Note that the new Restatement acknowledges that special rules might apply to interests such as oil and gas or mineral interests, and that the Restatement would not apply to the extent that there are such special rules. There is nothing in the case that suggests that the court applied any special rules here, however.
Comment 3: Two dissenters argued that Vulcan probably did not intend to be assuming responsibilities with regard to properties other than those originally covered by the royalty agreement. The dissenters, however, suggest that the royalty agreement as to the original covered properties does properly run with the land and would bind successor owners of that land. The majority does not comment upon this conclusion one way or the other, but, as indicated, its analysis of the touch and concern requirement would invalidate the agreement as to the original tracts as well.
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