Texas probably wouldn’t have become the epicenter of the shale revolution if energy companies faced California-style tax burdens and environmental regulations. The Lone Star State’s history with oil and gas primed the pumps, providing industry expertise, great gobs of capital needed for drilling wells and developing new extraction methods and a legal framework that both allowed and rewarded the extraction of hydrocarbons.
And within that legal framework, oil and gas companies exercise the power of eminent domain to condemn private property for their own use, with or without the owner’s consent.
Lately, however, the industry is facing strong challenges from private property owners, particularly in disputes involving eminent domain. In a growing number of pipeline-easement condemnation lawsuits, juries and some courts of appeals are siding with landowners. This trend suggests that, despite a legal system generally favorable to oil and gas companies, Texas juries and Texas courts still take property rights seriously.
There is a balance between promoting hydrocarbon development and protecting landowners’ property rights. Pipeline and oil and gas companies must understand and respect the legal system’s framework for striking that balance between those often-competing interests.
Free-market standard
The basic premise of the condemnation process is to put the property owner in the same position monetarily as he would have occupied if his property had not been taken. Thus, a condemnation award should reflect the compensation the landowner would have received in a free market transaction rather than as a forced exchange because of the condemnation.
This usually means awarding “market value,” which should reflect consideration of “all factors” that willing buyers and willing sellers would weigh in their negotiations if there had been a freemarket exchange.
When only a portion of a larger tract of land is condemned, as is the case with pipeline easements, the landowner is entitled to both the market value of the easement taken and the resulting damages to the remaining property, which is commonly referred to as the “remainder.”
While most partial takings damage the remainder, pipeline companies may—and often do—allege that the pipeline causes no damages to the remainder. In these situations, the burden rests with the landowner to prove that the market value of the remaining property was greater before the easement was taken, and that it was the addition of the pipeline that caused the decline in value.
Three recent Texas cases have reaffirmed the viability of claims for remainder damages caused by pipeline easements and also provide guidance about the proper methods for proving up remainder damages.
Sales-comparison approach and remainder damages
The three traditional approaches to setting land values in condemnation cases are (1) the sales-comparison approach, (2) the income approach and (3) the cost approach. Sometimes one approach is more appropriate than another, depending on specific facts of a particular case. However, courts have typically favored the sales-comparison approach when determining the market value of real property.
In the sales-comparison approach, which is the most common valuation approach used in pipeline easement takings, an appraiser finds data for sales of similar property and then makes upward or downward adjustments to these sales prices based on differences in the subject property.
Parties often disagree about how to apply the sales-comparison approach. For example, one issue that sometimes comes up in comparable-sales fights is whether a sale can be thrown out as not being sufficiently “comparable” to the subject property. Another common point of contention is how to make adjustments.
A relatively recent court decision in the Eagle Ford Shale region will influence the application of the comparable sales approach in pipeline-easement cases. LaSalle Pipeline LP vs. Donnell Lands LP involved two pipeline easements running across two tracts of an 8,000-acre ranch owned by the Donnell family in McMullen County, Texas. The first pipeline easement covered 4.4 miles, and the second 1,400 linear feet.
At trial, the landowner’s appraiser based his total compensation partly on a paired-sales analysis, which is an appraisal technique that tries to isolate and quantify a specific dollar amount for the impact of a particular feature. Here, the appraiser adjusted all other dissimilar features between the sales to isolate and identify the negative impact caused by pipeline easements on the price of ranch properties.
That paired-sales analysis demonstrated that pipeline easements caused an approximate 20% decline in value. Based in part on this paired-sales data, the appraiser testified that a portion of the large land tract (about 4,000 acres out of the 8,000-acre tract) would suffer a 10% decline in value and that the smaller tract (about 46 acres) would suffer a 25% property decrease, concluding that the damages to the remaining properties totaled over $840,000.
The pipeline company’s appraiser testified that the pipelines and permanent easements caused no damages at all to the remainder properties. The jury sided with the Donnell family, awarding $658,689, including $604,950 in remainder damages. The Fourth Court of Appeals in San Antonio affirmed the jury award, and in doing so reaffirmed three important principles about the salescomparison approach.
Source: Johns Marrs Ellis & Hodge LLP
First, “the case law indicates there is no requirement that comparable sales be in the same county as the subject property,” and standard appraisal methodology does not impose such a requirement, either. Second, appraisers relying on a sales-comparison approach are not always required to determine the subjective reasons why buyers and sellers agreed to a particular price on a particular sale. Third, Texas law does not require mathematical precision in making sales adjustments.
The decision appeals to common sense. Appraisers should find out whether sales transactions are truly market transactions, but the buyers’ and sellers’ subjective reasons for doing particular deals can sometimes be irrelevant. As long as a sale is “arm’s length,” not the result of duress or influenced by the condemnation project itself, and is comparable, consideration of the sale price can be appropriate.
The Texas Supreme Court’s recent refusal to hear the case means that the decision from the Fourth Court of Appeals will hold some sway in other similar disputes.
Development potential and remainder damages
Another important issue involves development potential. What if the remainder tract is undeveloped, but both parties agree that development is its highest and best use? Is its potential for future development reflected in its present market value? If so, should the landowner be compensated when a pipeline negatively affects this reasonably foreseeable development potential?
In Crosstex Energy vs. Button in Denton County, Texas, another condemnation case involving a pipeline easement, the pipeline company maintained a list of general restrictions on any future development of the remainder “property above, around, and adjacent to the pipeline.” Among Crosstex’s restrictions—which ranged in detail from landscaping limitations to restrictions on blasting operations—were limits on the future construction of any other underground utilities across the easement and stipulations as to the materials to be used in their construction.
Additionally, the landowners’ paving of any roads, streets or driveways on or across the pipeline easement was conditioned upon written permission from Crosstex.
At trial, the landowners’ first expert, an engineer, testified as to whether these restrictions could cause difficulties or delays in the potential development of the remainder. He testified that if, as an engineer, he were advising a potential buyer interested in developing the remainder, he would tell the buyer to consider the complications associated with what kind of development, if any, could be viable on a property encumbered by such restrictions. The landowners argued that the existence of Crosstex’s pipeline and development restrictions would complicate any prospective development of the remainder, thereby reducing its marketability and, inherently, its present market value.
The landowners’ second expert, an appraiser, testified that although portions of the property were zoned residential, the property’s highest and best use for the entire undeveloped remainder was for commercial use, valuing damages to the remainder at $1,377,163. In forming her opinion, she considered the reasonable probability that a buyer could obtain a zoning change (from residential to commercial), and she “discounted what those kinds of uses would sell for to account for the risk associated with the fact that the zoning was not in place” as of the date of taking.
Ultimately, the jury awarded the Buttons $665,968 in remainder damages. On appeal, Crosstex asserted (1) that the testimony offered by the Buttons’ engineer “was no evidence of damages because it was purely hypothetical and speculative” and (2) that the appraiser’s analysis “improperly assumed a change in use and zoning that was unsupported by and inconsistent with known evidence.”
Affirming the jury award, the Second Court of Appeals in Fort Worth overruled Crosstex’s complaints, explaining the general principle that an expert “may consider the property’s potential for future uses as well as the perception of the property’s potential for future uses in determining what a willing buyer would consider in deciding whether to buy a property and for how much.”
Thus, there was no error in allowing testimony about the adaptability of the remainder to other uses or about the probability that a potential buyer could obtain a zoning change since such testimony addressed factors that willing buyers and sellers would take into account in a free market exchange.
Continuing the trend
Similarly, in Peregrine Pipeline Co. vs. Eagle Ford Land Partners LP, a Johnson County, Texas, jury recently recognized remainder damages caused by a pipeline easement.
Peregrine condemned for a 2.9-acre natural gas pipeline easement across a tract of more than 400 acres in Mansfield, Texas, that was already encumbered with multiple pre-existing pipeline easements. The landowner presented evidence that Peregrine’s pipeline easement, which required the landowner to get Peregrine’s approval to “move even just one shovel full of dirt within the easement,” created development complications that extended beyond the easement.
Supported by numerous paired sales and other market data demonstrating remainder damage, one of the landowner’s appraisers testified to remainder damages ranging from 5% to 25%, which when considered with the easement taking and construction easement, resulted in total compensation of $1.63 million. Peregrine’s appraiser testified that only $80,000 in total compensation should be awarded, finding that no remainder damages existed.
The jury awarded total compensation of $1.63 million, which included remainder damages of $1,350,410, continuing the trend of recognizing remainder damages, and rejecting arguments from pipeline companies that pipeline easements cause no decline in the value of the remainder property. Peregrine has filed a notice of appeal.
A common-sense trend
The results from the three cases discussed here are summarized in the accompanying chart. These recent Texas cases demonstrate a common-sense trend: The taking of a piece of land for a pipeline easement almost always causes damage to the remaining property. Recognition of market-driven remainder damages is positive.
When government and private condemnors must pay “just” and “adequate” compensation for the property they take, including remainder damages, and when courts are serious about enforcing property rights, people are more willing to take care of the property they already own and to make investments to increase their holdings.
Luke Ellis is a partner in the Austin, Texas, office of Johns Marrs Ellis & Hodge LLP. He focuses on representing landowners in eminent domain and condemnation cases. He was the lead trial lawyer in Peregrine Pipeline Co. vs. Eagle Ford Land Partners LP.
Chris Johns is a partner in the Austin office of Johns Marrs Ellis & Hodge and focuses on high-stakes trials and appeals.
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