Understanding the Legal Framework for Transferring and Dealing with Mineral Titles

A mining company may hold a mineral title over an area with significant commercial potential, while another investor may be prepared to pay substantial consideration to acquire that interest. But can the parties simply sign a sale agreement, pay the purchase price and treat the mineral title as transferred?

The short answer is no. A mineral title can be commercially dealt with, but it is not an ordinary commercial asset that passes from one party to another merely because the parties have signed an agreement. The Nigerian Minerals and Mining Act 2007 (“NMMA”) recognises the transferability of certain mineral titles and expressly permits various forms of dealing with the rights arising from them. At the same time, those transactions remain subject to the statutory and regulatory framework administered principally through the Mining Cadastre Office (“MCO”).

A transaction involving a mineral title has two related but distinct dimensions: the commercial bargain between the parties and the regulatory process required to give that bargain effect within the mining framework. A properly drafted agreement must therefore do more than record the purchase price and the parties’ respective obligations. It must be structured around the status of the title, the eligibility of the proposed transferee, the regulatory approval process, existing obligations and encumbrances, and the liabilities that may survive completion.

Section 147 of the NMMA is the principal starting point. Subject to the statutory provisions, a mineral title is transferable, subject to the approval required under the Act and registration with the Mining Cadastre Office. More significantly, section 147(2) provides that the rights arising from a transferable mineral title or permit may be “wholly and partially assigned, sub leased, pledged, mortgaged, charged, hypothecated or subject to any security interest.”

The commercial significance of this provision is considerable. The holder of a transferable mineral title is not restricted to keeping the title until expiry or disposing of the entire interest in a single transaction. Depending on the circumstances and the nature of the title, the rights may be transferred wholly or partially, sub-leased or used as security for financing.

This is also why the expression “selling a mineral title” requires some caution. A proposed transaction may involve an outright transfer of the mineral title, an assignment of some of the rights arising from it, a sublease, the creation of a security interest or, in a different transaction altogether, an acquisition of the company that holds the title. These are not necessarily the same legal transaction and should not be documented as though they were.

The first question in any proposed transaction should therefore not simply be whether the seller has a mineral title, rather what should be asked is what exactly is the seller proposing to transfer?

The next question is whether the particular title is capable of being transferred in the manner proposed.

The 2011 Regulations distinguish between different classes of mineral titles. In particular, a holder of a mineral title other than a Reconnaissance Permit may apply to transfer or assign the ownership of the mineral title. A Reconnaissance Permit is therefore treated differently and should not be approached as though it were freely transferable in the same manner as other mineral titles.

This is an important due-diligence issue. Before negotiating consideration or preparing a deed of assignment, the parties should establish the precise nature and status of the title, the rights it confers, its duration and validity, and the statutory restrictions applicable to dealings with it.

A transaction may otherwise appear commercially straightforward while being incapable of producing the regulatory result contemplated by the parties.

The identity and qualifications of the proposed transferee are also material.

Section 147(5) provides that the Mining Cadastre Office shall approve a transfer where the transferee is a qualified applicant. Section 147(10) reinforces the point by providing that no mineral title or rights in a mineral title may be assigned to a person to whom that mineral title could not have been granted under the Act.

Qualification is therefore not merely an issue for an investor applying for a mineral title for the first time. It remains relevant when an existing title is being transferred.

This has an obvious commercial consequence, in that a buyer may negotiate a transaction, sign the agreement and even pay substantial consideration, but if it does not satisfy the statutory requirements for holding the particular mineral title, the transaction may not produce the regulatory interest it was intended to acquire. This is why the transferee’s eligibility should therefore be established early in the transaction rather than left to the completion stage.

The most important point to be made in respect of mineral title transfer transactions is that the execution of the sale agreement between the contracting parties on its own does not complete the regulatory transfer of the mineral title. Section 147(3) requires the holder to apply to the Mining Cadastre Office for approval of the transfer in the prescribed manner, together with the details and other information required by the regulatory framework.

The Regulations provide the procedural framework for making such applications, while the MCO’s published requirements indicate the type of documentation that may be required. Depending on the transaction, this may include the relevant application and transfer documentation, copies of the mineral title, evidence of prescribed payments, corporate documents, the underlying agreement, activity reports and corporate authorisations. The proposed transferee may also be required to provide evidence of technical competence, financial capability and other regulatory information.

The practical point is that the commercial agreement and the regulatory transfer are related but distinct events. The agreement records what the parties have agreed to do, while the compliance with the statutory and regulatory framework gives that bargain effect within the mining system. Section 147(5) also contains a deeming mechanism under which an application is treated as approved if it is not acted upon within thirty days from official receipt, provided the statutory requirements are satisfied. That provision should not, however, encourage parties to treat the process casually. The parties should be able to establish that a valid application was properly lodged, officially received and supported by the required documentation, and should ensure that the resulting regulatory position is properly recorded.

The transaction should therefore be structured around the regulatory process from the outset. Regulatory approval should not be treated as an administrative matter to be “regularised” after the commercial bargain has already been completed.

What Exactly Is Being Transferred?

Section 147 is deliberately broader than an outright transfer of the entire mineral title. The Act recognises the possibility of partial assignment of the rights arising from a transferable mineral title. It also recognises subleases and the use of the relevant rights as security through pledges, mortgages, charges, hypothecation and other security interests.

This flexibility can be commercially useful, but it creates a greater need for precision in the transaction documents. Where only part of an interest is being transferred, the agreement should clearly identify the rights affected, the relevant area or interest, the economic arrangements between the parties and the obligations to be assumed by each party. The same principle applies where the transaction involves a sublease or security interest. The parties must understand whether they are transferring ownership, granting a right of occupation or use, or merely creating security over an existing interest.

A poorly structured transaction can create uncertainty not only about who owns the interest, but also about who is entitled to exercise particular rights and who remains responsible for the corresponding obligations. It is imperative to be specific with regards to these details or particulars, because in mining transactions, ambiguity could be very expensive.

There is another distinction that is sometimes overlooked.

A party interested in acquiring a mining operation does not necessarily have to acquire the mineral title directly. It may instead acquire shares in the company that already holds the title. In that situation, the mineral title may remain registered in the name of the same company even though ownership or control of that company has changed. This process is conceptually different from an assignment or transfer of the mineral title itself.

This distinction is very important because the legal, regulatory, contractual, tax and liability consequences of an asset or title acquisition may differ materially from those of a share acquisition. A prospective investor should therefore establish at the outset whether the proposed transaction is an acquisition of the mineral interest, an acquisition of the title-holding company, or a corporate restructuring involving the existing holder.

This particular decision is not one that is simply a matter of drafting terminology, but rather one that can determine the regulatory approvals required, the liabilities acquired and the scope of the due-diligence exercise.

How Existing Encumbrances Are Treated

A mineral title should never be treated as clean merely because the seller produces a valid title document. A buyer should establish whether the title or the rights arising from it are already subject to any assignment, sublease, mortgage, charge, pledge, security interest, joint venture arrangement or other third-party interest. Existing contractual commitments may also affect the seller’s ability to deal with the title in the manner proposed.

This is particularly important because section 147 itself recognises that mineral-title rights can be used as security. A financing arrangement entered into years before a proposed sale may therefore have consequences for the transaction if the relevant security has not been discharged or otherwise dealt with. The buyer’s due diligence should consequently include an independent verification of the title and its history, rather than reliance solely on documents supplied by the seller.

In addition to the issue of encumbrances that may have been created prior to the decision to deal or transact in the mineral title, another very important consideration that both parties should take note of is the accrued and unsatisfied liabilities of the mineral title holder/ transferor. Section 147(8) provides that the transferor remains liable for obligations arising from acts or contracts made in respect of the mineral-title area, including environmental obligations incurred before the transfer and claims for damages or injuries by bona fide third parties.

The practical implication is that a seller cannot assume that transferring the mineral title automatically cleanses it of every historical liability associated with the title. This means that where a project has accumulated environmental obligations, unpaid regulatory liabilities, community-related issues, contractual commitments or third-party claims before the transfer, some of those liabilities may remain with the transferor notwithstanding the commercial agreement between the parties.

This is why a mineral-title transaction should include a pre-completion liability audit. The seller/ transferor should identify outstanding regulatory obligations, payments, environmental liabilities, third-party claims, contractual commitments and other matters arising before completion. The buyer, on the other hand, should understand precisely which liabilities it is assuming and which it expects the seller to retain. The transaction documents should then allocate the commercial consequences through appropriate representations, warranties, indemnities and other risk-allocation provisions.

There is, however, an important distinction between allocating liability contractually and extinguishing statutory liability. An indemnity may determine who ultimately bears the financial burden between seller and buyer, but it does not necessarily eliminate a statutory obligation owed by the transferor to Government or a legitimate claim by a third party. In such instances, the statutory liabilities shall remain with the transferor.

Security Transactions

As we have discussed previously, a mineral title may also form part of a financing structure, as it may be used as a security in respect of such transactions. Section 147(9) addresses transactions involving security interests and provides that the mineral title holder remains liable for obligations attached to the title until the later of redemption of the security or expiration of the mineral title.

This is significant for mining companies seeking project finance. The fact that a mineral interest has been pledged, mortgaged or charged does not mean that the existing title holder ceases to be responsible for the obligations associated with that title. For lenders, the security may provide important protection against default. For the mining company, however, the underlying regulatory obligations continue to require attention. The financing documents should therefore be considered alongside the mining-law requirements rather than in isolation.

How Should the Buyer Conduct Due Diligence?

The buyer’s due diligence should go beyond confirming that the seller possesses a mineral title. The buyer or transferee is required to take further or additional steps to verify not just that the transferor has a valid mineral title, but also that the said title is free from encumbrances and that all liabilities in respect of that title have been satisfied. How then should such a transferee or buyer conduct this due diligence?

First, there should be title and regulatory due diligence. The buyer should independently verify the registered holder, type of title, area covered, validity period, renewal history, modifications, relinquishments and other relevant dealings. The buyer should also confirm the title’s regulatory standing and identify outstanding fees, royalties, reports and other obligations.

Second, there should be encumbrance and contractual due diligence. The buyer should establish whether the title is subject to any mortgage, charge, sublease, assignment, security interest, joint venture arrangement or other third-party rights. Existing contractual commitments affecting the title or project area should also be reviewed.

Third, there should be operational, environmental and community due diligence. What activities have been conducted on the title area? What environmental obligations have arisen? Are there outstanding community or land-related claims? Are Community Development Agreement obligations applicable and up to date? Have there been regulatory inspections, notices or disputes?

Fourth, there should be technical and commercial due diligence. Depending on the nature of the transaction, lawyers may need to work alongside mining engineers, geoscientists, environmental consultants, financial advisers and other specialists. A mineral title may be legally valid but commercially unattractive, just as a potentially valuable mineral deposit may be burdened by legal or regulatory problems. A Legal title is only one component of the value of a mining asset, its commercial value is what moves parties to want to invest or not.

The legal documentation should reflect the fact that the transaction is subject to a regulatory process. This means that the agreement should ordinarily address the conditions that must be satisfied before completion, including any required regulatory approvals, confirmation of the title’s status, discharge or treatment of existing encumbrances and satisfaction of other agreed conditions precedent.

The seller’s representations and warranties should address matters such as ownership and authority, validity of the title, regulatory compliance, outstanding obligations, existing encumbrances, litigation and claims, environmental matters and material contracts affecting the title or project.

The parties should also agree clearly on the treatment of pre-completion and post-completion liabilities. Where appropriate, this should be supported by indemnities, survival provisions and a clearly defined liability cut-off date. The completion mechanics should be equally clear. The parties should establish when consideration becomes payable, what documents must be delivered, what regulatory steps must be completed, what happens if approval is delayed or refused, and when possession, control and economic benefits are intended to pass.

A transaction involving a mineral title should therefore not be drafted as a simple sale agreement with a reference to regulatory approval added at the end. The regulatory process should be built into the architecture of the transaction from the very beginning.

The seller’s preparation is equally important. Before entering into the transaction, the seller should establish the precise status of the title and ensure that its corporate and regulatory records are in order. It should identify outstanding rents, fees, royalties, reporting obligations, environmental matters, community obligations and third-party claims.

The seller should also review the history of activities undertaken on the title area and assemble the records necessary to demonstrate the position as at completion. This should include relevant regulatory filings, correspondence, payment records, environmental documentation, inspection records, agreements and other evidence of compliance. A proper handover is particularly important where the transferor may retain liability for pre-transfer matters. The parties should agree a clear completion or cut-off date and maintain sufficient records to establish which obligations and events arose before and after that date.

Completion should therefore not be treated as the point at which the seller simply hands over a title document and walks away.

Once the transfer has been properly approved and registered, the transferee enters a new phase of responsibility. The holder remains subject to the applicable mining laws and regulations, including obligations relating to payments, reporting, operations, environmental matters, community obligations and regulatory inspections. The buyer should therefore establish a post-completion compliance system rather than treating registration of the transfer as the end of the matter.

The seller on its own part should also retain its transaction and compliance records, particularly where statutory liabilities arising from the pre-transfer period may survive completion.

In all, it is expected that the parties should leave the transaction completion with more than a signed agreement. They should have a clear record of what was transferred, what liabilities were retained, what obligations were assumed and what regulatory requirements remain outstanding.

So, Can You Sell a Mineral Title in Nigeria?

Yes, but “sale” is not quite the whole legal story. The Nigerian Minerals and Mining Act recognises that certain mineral titles and the rights arising from them can be transferred, assigned, sub-leased or used as security. But the ability to commercially deal with a mineral interest does not place it outside the regulatory framework. The nature of the title, the qualification of the transferee, the statutory approval process, existing encumbrances and the liabilities attached to the title must all be considered.

The central mistake that a whole host of industry participants make is to treat the transaction as though it were simply the sale of an ordinary asset whereas it is not. There is the commercial bargain between the parties, and there is the regulatory process through which the mining interest is recognised and administered.

For the seller, the pertinent question is therefore not simply “How much can I sell it for?” but should also include “What obligations and liabilities may remain with me after the transfer?”

For the buyer, the question is not just about “What minerals are in the ground?” the buyer must also ask “What exactly am I acquiring, what is already attached to it, and what obligations will I assume?”

That is why a mineral-title transaction should begin with legal, regulatory, technical and commercial due diligence, not with the signing of a sale agreement. In mining, the most expensive asset can sometimes be the one that looks perfectly clean on paper.