A California appellate court has held that a railroad cannot charge rent to a petroleum pipeline on rights-of-way where the title claimed by the railroad is derived from 19th-century land grants by the US Congress, which were intended to encourage the building of the transcontinental railroads. The decision in Union Pacific Railroad Co. v. Santa Fe Pacific Pipelines, Inc., 231 Cal. App. 4th 134, 180 Cal. Rptr. 3d 173 (2014) (pet. for Cal. Sup. Court hearing pending), has potentially far-reaching implications for both railroads and their tenants in the western United States.

During the trial to determine the fair market rent payable under an easement agreement between a railroad and a petroleum pipeline company for a ten-year period, the pipeline moved for judgment on the grounds that the railroad had failed to prove that it owned the property through which the easements and pipeline ran, even though the easement agreement only required payment for easements on the “property of the railroad.” The trial court conceded that the railroad had not offered “direct evidence of its title,” but nevertheless concluded that the railroad’s ownership had “been adequately shown for purposes of this proceeding.”

On appeal, the Second District of the California Court of Appeal disagreed, based on a lengthy analysis of both federal and state case law discussing 19th-century Congressional land grants to railroads, and reversed the $100 million judgment for back rent. The court noted that public land had been “allocated to the railroads by the federal government for a specific purpose—to construct and operate a transcontinental railroad, in order to help protect the nation during civil strife, to expand its frontier, grow its economy, and develop its future.” In this context, the court analyzed the General Right-of-Way Act of 1875 and concluded that “the railroad’s rights to the land underneath its rights-of-way granted by the 1875 Act were limited to what was necessary to support the railroad itself,” and that the subsurface through which the pipeline ran was unnecessary to support the railroad and thus not a “railroad purpose”; it therefore was not the “property of the railroad.”

The court then reached the same result under Congressional land grants prior to 1875: “Renting out the subsurface to a third party from a different industry for private gain cannot reasonably be considered a railroad purpose” within the meaning of those earlier grants. The court ordered that the case be remanded so the trial court could identify those portions of the right-of-way where the railroad held a property interest sufficient to grant the pipeline an easement, and to calculate the fair market rent due just for those portions.

This decision will be of interest to both railroads and their many tenants in the western United States, because the California court’s analysis of the scope of the Congressional land grants is likely to be applicable to a number of other railroad rights-of-way, and also to entities that may pay rent to railroads for use of railroad rights-of-way (such as gas and electric utilities, municipal water and sewer systems).