Real Estate

Understanding How the Development of the Barnett Shale May Affect Real Estate Transactions in North Texas

Buying real property can be compared to walking through a mine field, requiring a purchaser to avoid the hidden dangers. Now, a new challenge has arisen in the form of the Barnett Shale. The Barnett Shale is a subterranean geological formation estimated to cover an approximately 5,000 square mile area of land in North Texas counties. While the Barnett Shale has an estimated 30 trillion cubic feet of natural gas resources, it was not until recently that much of its potential began to be realized due to recent advances in the technology of horizontal drilling.

The recent boom in drilling has created issues for real estate transactions in the North Texas area, given the unique nature of Texas mineral rights, which may be severed from the surface rights. One party may own the land and improvements and another, the rights to the oil and gas located beneath that land. Sometimes, many parties will own the mineral rights. This is particularly problematic because, in Texas, the mineral estate is dominant over the surface estate. In other words, if the owner of the oil and gas rights wants to explore for gas on the property, the surface owner can do little to prevent a gas well from being drilled on his land. Any owner of a mineral interest, no matter how small a percentage that party owns, may encumber the property with a mineral lease.

Title companies have reacted to the recent boom by seeking to protect themselves from potential owner policy claims. The insurer will either place a blanket exception to title (covering any and all issues related to mineral interests) or adjust the description of the insured estate to exclude the mineral estate. Generally, the language used will cover “fee simple, save and except any and all rights, titles, and interest previously reserved, conveyed or created with respect to oil, gas, or other minerals in and under the land.” Either of these exceptions should be unacceptable to buyers, given the potential adverse affects of onsite drilling activities.

A recent bulletin by the Texas Department of Insurance has called these practices into question. On April 10, 2008, the Commissioner of the Texas Department of Insurance issued Bulletin #B-0013-08 entitled “Coverage of Mineral Estate” which requires that any special exception to minerals must include a reference to a recorded instrument. This requirement would invalidate the blanket exception discussed above. The bulletin also requires that the insured estate in a title commitment must be the same as that conveyed to the selling party. Therefore, reducing the estate by excluding minerals would be impermissible.

While this bulletin appears to solve both problems purchasers face when working with a title company’s exceptions to minerals, it must be noted that a bulletin does not carry the authoritative weight of a statute. Many title companies have been resistant to the bulletin and have not adjusted their practices to conform to its guidelines. It may require stronger action on the part of the Texas Department of Insurance to force title companies to insure the mineral estate.

Even if a purchaser is able to obtain an acceptable title policy, a mineral interest holder may still place a lease, and potentially a gas well, on the purchaser’s property. Purchasers must be careful to identify every party holding either a mineral interest or a
mineral leasehold interest in the property, as they have the capability to disrupt development of the property with drilling activities. Once a purchaser has identified each such interest holders, the purchaser must obtain waivers sufficient to remove the risk of drilling or exploration on the property. The waivers are documents that prohibit mineral interest holders from granting leases with dominant surface rights and that prevent leasehold interest holders from drilling on the property.

By Jeffrey J. Porter and Brian Baker