Security Interests in Minerals and Timber: Delicate Balance between Real Estate Law and the Uniform Commercial Code

Abstract

The financing of collateral that is located deep within the earth (oil, gas, minerals), or firmly rooted to the ground (timber), can be complicated. The complications arise not only because of the interplay between real property and personal property interests, and the separate legal regimes that operate in each area, but also because historical traditions in the extraction, harvesting, sale and financing of these assets are long-established and have strongly influenced developments in the law. This is particularly the case with minerals, where many states have enacted laws that apply specially to the financing of mining, drilling and related activities, perhaps none more prevalent than in the oil and gas industry. With respect to both minerals and timber, Article 9 of the Uniform Commercial Code is careful to tread lightly into the real estate world, entering the picture only when the collateral takes on (or is about to take on) characteristics of personal property. It does this primarily by applying its rules to two rather awkwardly named categories of collateral: “as-extracted collateral” in the minerals group, and “timber that is to be cut and removed under a conveyance or contract of sale.” Oil, gas and minerals in the ground before extraction are not covered by Article 9. They are deemed to be part of the real estate. The coverage of “as-extracted” minerals, however, allows a person who has an interest in minerals while they are in the ground (typically the landowner) to enter into an Article 9 security agreement covering those minerals before they are extracted. Upon extraction, the Article 9 security interest attaches. The approach to timber is somewhat different and seems intended to benefit purchasers of the timber as well as the landowners or sellers. Like minerals, standing timber is not covered by Article 9 when the trees are deemed to be part of the land, but an Article 9 interest can arise once the timber is covered by a conveyance or contract and is expected to be cut and removed from the land at some later point in time. Once timber is covered by such a contract, an Article 9 security interest can attach to the timber. This paper examines the rules for attachment, perfection, and priorities of Article 9 interests in minerals (including oil and gas) and timber. While there is some discussion of real estate financing principles, the focus is primarily on how Article 9 addresses these two types of land-related collateral.