Minerals & Title Insurance in Texas. Presented By Richard Worsham Vice-President/Underwriting Counsel

Transcription

1 Minerals & Title Insurance in Texas Presented By Richard Worsham Vice-President/Underwriting Counsel

2 3 What s Going On Here?

3 4 What s Going On Here?

4 What s Going On Here? Computer Technology Advances Allow More Detailed Seismic Analysis 5

5 Computer controlled directional drilling allows you to drill into the right strata. What s Going On Here? 6

6 What s Going On Here? A group of pump trucks pump high pressure chemicals into wells to fracture rock and open up production. 7

7 What s Going On Here? This Technology has created the Barnett Shale Play This effects 12 counties: Dallas, Denton, Tarrant, Johnson, Hill, Bosque, Somervell, Hood, Parker, Wise, Palo Pinto, and Erath. Traditionally, we have said that the dividing line fro the Barnett Shale is along I-35E. 8

8 What s Going On Here? This Technology has created the Barnett Shale Play This effects 12 counties: Dallas, Denton, Tarrant, Johnson, Hill, Bosque, Somervell, Hood, Parker, Wise, Palo Pinto, and Erath. Traditionally, we have they said that the dividing line fro are the now Barnett leasing as Shale far is over along as I-35E. I-75! 9 We have been told

9 What s Going On Here? And the Eagle Ford Shale 10

10 What s Going On Here? And the Eagle Ford Shale We have been told that oil and gas landmen are in the title plants in the Counties along the Gulf Coast as well, researching leasing opportunities. 11

11 What s Going On Here? & A Few Other Shale plays. 12

12 What s Going On Here? A Few Points to Remember - Just because there is no oil & gas drilling in your area, does not mean that will always be true. You re title plant needs to be keeping track of mineral reservations. People who move from producing areas will be concerned about mineral ownership. This CAN affect residential transactions. At one time, a ¼ acre housing tract in the Barnett Shale would receive $6,000-$7,500 up front to enter into a mineral lease. 13

13 What Minerals? In this seminar, we are primarily going to discuss oil and gas, but mineral rights can include any minerals on the property. 14

14 15 Let s Start with Planet Earth

15 What is Property? In law school we talk about property being a bundle of sticks. Each stick in the bundle represents the right to do something with the property, and each stick can be divided from the other. Examples: The right to cross the property (an easement), is a separate stick in the bundle. The right to tax the property, is a separate stick in the bundle. The right to cut timber or hay on the property is a separate stick in the bundle. 16

16 What is Property? The point is that property is not just something tangible, but an intellectual construct that can be divided into as many individual sticks as the mind can imagine. 17

17 What is Property? Mineral Rights are a big stick out of that bundle of sticks, & those rights can be intellectually divided from the rest of the property. 18

18 Dividing Interests Normally, we think of dividing property two dimensionally. 19

19 Dividing Interests but you can divide the property horizontally, selling the portion below the surface of the property. 20

20 Dividing Interests You can divide the subsurface property further by giving away only certain rights, such as the right to produce oil or to mine for other minerals. 21

21 Dividing Interests We call this dividing of the mineral interest from the surface estate severing the mineral interest. Before you sever the mineral estate, it is part of the property. After you sever the mineral interest from the real property, it is no longer part of the property, but a separate property. 22

22 Dividing Interests Before the mineral interest is severed, a deed will convey title to the minerals along with all of the other property, even though the deed doesn t mention minerals. After the mineral interest is severed, the exact same deed, with the same terms, will not convey title to the minerals, because the minerals are no longer part of the property. Consequently, you cannot tell for sure whether someone owns the minerals by looking at their deed. 23

23 Dividing Interests The minerals are normally severed from the property using a deed. The deed can be an individual conveyance of the mineral interest, or, more commonly, a reservation in a deed conveying all of the rest of the property except the minerals. 24

24 Dividing Interests Minerals can also be severed from the real property with an assignment of minerals, in a will, or in any other document of title. 25

25 Dividing Interests When mineral interests are assigned, they are often assigned in fractions, and not with equal rights. Example: 1/8 of the mineral rights are assigned to Fred, who shall have no executive rights. Executive rights means the right to contract for production of the minerals, either directly or through leasing. In this example, Fred has the right to share in mineral production, but not to separately lease the mineral rights. 26

26 27 Mineral Exceptions If a title commitment has no exceptions to minerals, then it proposes to insure ownership of the minerals. This is a huge increase in liability. TRGC will insure minerals without any exception ONLY when the title agent has searched title to the property back to sovereignty, and found the minerals have not been assigned to any 3 rd party.

27 Mineral Exceptions TRGC expects every commitment and title policy to either: Have a General Exception for minerals as provided under Procedural Rule P-5.1; OR Specific Exceptions showing that 100% of the minerals have been assigned to 3 rd parties; OR Have been searched back to sovereignty by the title agent closing the transaction, showing no assignment of the minerals. 28

28 General Exceptions Procedural Rule P-5.1 provides TWO possible general exceptions for minerals in the title commitment: When in Schedule B: "All leases, grants, exceptions or reservations of coal, lignite, oil, gas and other minerals, together with all rights, privileges, and immunities relating thereto, appearing in the Public Records whether listed in Schedule B or not. There may be leases, grants, exceptions or reservations of mineral interest that are not listed." 29

29 General Exceptions Procedural Rule P-5.1 provides TWO possible general exceptions for minerals in the title commitment: When in Schedule A: "Lot 1, Block 1, Thunhorst Subdivision, Phase 19, an addition to McNutt County, Texas, subject to, and the Company does not insure title to, and excepts from the description of the Land, coal, lignite, oil, gas and other minerals in, under and that may be produced from the Land, together with all rights, privileges, and immunities relating thereto." 30

30 Specific Exceptions SPECIFIC EXCEPTIONS Typical SPECIFIC exception: 100% of Minerals were withheld by grantor in that certain deed dated August 19, 1958, filed in Volume 999, Page 999, of the real property records of McNutt County, Texas. Title Company did not search minerals after this date. 31

31 Specific Exceptions Another SPECIFIC EXCEPTION Example: 1923 conveyance withholds ½ the minerals. ½ assigned to sibling in /8th retained by grantor in /8th conveyed by owner in ½ retained in 1970 conveyance. All Minerals sold to X in Who owns the minerals? 32

32 Specific Exceptions 33 Another SPECIFIC EXCEPTION Example: 1923 conveyance withholds ½ the minerals. There s no real way of knowing from this information, without examining what each owner owned and intended to convey. ½ assigned to sibling in /8th retained by grantor in Sometimes it is unclear what owner s are conveying ½ of their ½, all of the ½ they owned, 1/8 th of their ½? 1/8th conveyed by owner in ½ retained in 1970 conveyance. All Minerals sold to X in The information here is insufficient to remove the general exception, even though interests conveyed, when added up, exceed 100% of the minerals. Who owns the minerals?

33 Legislative Changes Your Basic Manual for Title Insurance is not current. Legislative changes trump the provisions in your Basic Manual for Title Insurance. 34

34 Legislative Changes As you may recall, there was some disagreement in the title insurance industry over mineral coverage. TDI came up with various procedural rules and new endorsements. Now the Texas legislature has changed them. 35

35 Legislative Changes Summary of Changes involving minerals in House Bill HB % credit is GONE (R-36) It is no longer mandatory to issue T-19.2 or T upon request when you are taking a general exception to minerals, as stated in P They are discretionary. You may no longer charge for T-19.2 or T-19.3 on a Loan Policy of Title Insurance (R-29.1) You may still charge for them on an OTP. Your Texas Basic Manual for Title Insurance has NOT been updated with these changes at this time! 36

36 Legislative Changes Two percent credit GONE! In 2011, TDI required a 2% credit on the basic rate if Title companies used the general exception and there were no specific exception showing assignment of ALL of the minerals to a 3 rd party. See, R-36. The 2% credit was repealed effective January 1, 2012, by the Texas legislature. Section (b) of the Insurance Code now states: A reduction to, or credit on a premium charge for, a policy of title insurance or other insuring form may not be directly or indirectly based on an exclusion of, or general or special exception to, a mineral estate in the title insurance policy. 37

37 Legislative Changes Although Procedural Rule 50.1 still says that the agent must provide T-19.2 or T-19.3 upon request if the general exception is taken, that obligation was repealed Effective January 1, Insurance Code Section : REQUIREMENT OF CERTAIN PROVISIONS PROHIBITED. The commissioner may not require by rule, or through adoption of a title insurance policy or other insuring form, that a title insurance policy delivered or issued for delivery in this state: (1) insure against a loss that a person with an interest in real property sustains from damage to the property by reason of severance of minerals from the surface estate; or (2) provide insurance as to ownership of minerals. 38

38 Legislative Changes Despite provisions in R-29.1, you may no longer charge for T-19.2 or T-19.3 on a Loan Policy - Insurance Code Sec (c): An additional premium or other amount may not be charged for an endorsement to a loan policy of title insurance if the endorsement: (1) insures against loss from damage to improvements or permanent buildings located on land that results from the future exercise of any right existing on the date of the loan policy to use the surface of the land for the extraction or development of coal, lignite, oil, gas, or another mineral; (2) expressly does not insure against loss resulting from subsidence; and (3) was promulgated by the commissioner in calendar year This does not change the obligation to charge for this coverage on any owner s title policy per Rate Rule R

39 Legislative Changes You can be sure there will be changes to the Basic Manual on these issues in the coming year. 40 How TDI will enforce these legislative changes, and what else may be changed is unclear.

40 Mineral Endorsements 41 There are no TX endorsements which insure mineral ownership. The following endorsements insure damage to improvements on the property from mineral productions: T-19 (paragraph 4) T-19.1 (paragraph 3) T-19.2 T-19.3

41 Mineral Endorsements T-19 and T-19.1 provide coverage for matters other than minerals Primarily Encroachments and HOA issues. T and 19.3 insure only against damage to improvements from mineral production. 42

42 Mineral Endorsements T-19 available for Loan Title Policies T-19.1 available for Owners Title Policies T-19.2 or T-19.3 may be offered on Owners or Loan Policies, when requested. T-19.2 or T-19.3 are redundant if T-19 or T-19.1 have been issued, but you may issue T-19.2 or T-19.3 with either T-19 or T-19.1 if requested to do so. 43

43 Mineral Endorsements Excerpts from Rule P-50.1 As to real property of one acre or less improved or intended to be improved for one-to-four family residential use, the Company upon request by the insured must issue its Minerals and Surface Damage Endorsement (T-19.2) to an Owner or Loan Policy. As to real property improved or intended to be improved for office, industrial, retail, mixed use retail/residential, or multifamily purposes, the Company upon request by the insured must issue its Minerals and Surface Damage Endorsement (T-19.2) to an Owner or Loan Policy. As to other real property, the Company upon request by the insured must issue its Minerals and Surface Damage Endorsement (T-19.3) to an Owner or Loan Policy. As to an Owner or Loan Policy covering multiple parcels of real property that consist of a combination of real property described in paragraphs 1 or 2, and 3, the Company upon request by the insured must issue for each parcel the applicable Minerals and Surface Damage Endorsement (T-19.2 or T-19.3) to the Owner or Loan Policy. 44

44 Mineral Endorsements T-19.2 is available for Residential property under 1- acre. Any other type of nonresidential improved property. T-19.3 is available for Residential property over 1- acre. Any undeveloped property. 45

45 Mineral Endorsements You may still delete provisions of T- 19, or T-19.1 if we do not wish to cover the risk. Paragraph 4 of Endorsement T- 19 is hereby deleted. Paragraph 3 of T-19.1 is hereby deleted. 46 Both Endorsements provide coverage for matters other than damages from mineral production, so you may want to issue them but delete mineral coverage.

46 Mineral Endorsements UNDERWRITING GUIDELINES Residential Property 5-Acres or Less: Unless you have been informed a drilling rig or strip mine is on the premises of the property you are insuring, I don t want you to be concerned about issuing any of the T-19 coverages. We are not asking you to make inquiries, but if someone says there is a rig or strip mine on the property, call underwriting. 47 You may give T-19 paragraph 4, T paragraph 3, or, upon request, T-19.2 or T-19.3, without regard to whether your owner does or does not own the minerals, and without regard to surface waivers or mineral rights.

47 Mineral Endorsements UNDERWRITING GUIDELINES Rural Property & Residential over 5-Acres If the P-5.1 general exception is taken in the policy for minerals outstanding, or the Sch. A exception is taken, and you are requested to issue the T-19.3 endorsement, that is applicable, for either an Owner s policy or Loan policy, we will allow you to issue this endorsement unless you know of drilling being done on the property at the time of the sale or loan. If you have questions please call our underwriting counsel. 48

48 Endorsement Charges T-19.2 or T-19.3 No Charge on a Loan Policy $50 on an OTP. 49 T-19 and T-19.1 can vary in price. Minimum Charge for T-19 and T-19.1 is $50. From there it gets complicated.

49 Endorsement Charges T-19 Residential - 5% of the Basic Rate Non-Residential - 10% of the Basic Rate Not Less than $50 T-19.1 Residential 10% if no Survey Deletion 5% if Survey Deletion charged for. Non-Residential 15% if no Survey Deletion 10% if Survey Deletion charged for. 50

50 A Few Words on the TREC Contract 51

51 52 If you get the TREC One-to-Four Family Residential Contract form up in Adobe and do a search for the word minerals, you will find.

52 53 The TREC Contract

53 The TREC Contract To reserve minerals to the seller, realtors must use the mineral addendum adopted in There is no provision in the TREC contract form for stating that minerals are going to be conveyed to Buyer. TREC feels that the obligation to provide a general warranty deed under Paragraph 9 of the TREC One-to-Four Family Contract form obligates you to convey without exception to minerals. 54

54 The TREC Contract Paragraph 9.B.(1) on page 4 of the TREC form says that seller must deliver a general warranty deed, with no exceptions except as allowed by Paragraph 6 of the contract. 55

55 The TREC Contract There s nothing in Paragraph 6 about minerals. 56 In the absence of a mineral addendum, nothing in the deed is required to convey minerals.

56 57 Deeds The number one claim related to minerals is the failure to withhold minerals in the deed at the time of closing, though the contract provides for it. The closer make sure the deed complies with the contract provisions related to minerals. Particularly if drafted by Lender s counsel.

57 Deeds Look for the TREC Mineral Addendum Remember that mineral provisions can be put in the body of the sales contract, so read it. Always use an attorney to draft mineral reservation provisions. Review Deeds drafted by outside counsel. Remember that if the P-5.1 mineral exception is in Schedule B, lender s counsel might miss it, because they draft deeds using the Schedule A description. 58

58 Deeds At the same time, if you use a Schedule A exception to minerals as allowed by P-5.1, be aware some lender s counsel may accidentally draft a deed that carves out the minerals when they are not suppose to. 59

59 60 END