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Real Estate

New Order Changes Treatment of Minerals in Texas Title Policies

Purchasers of real property secure title insurance to protect themselves against adverse claims to their land. Because mineral rights can be leased or deeded separate from the surface estate of the property, such rights can create an interest adverse to the property owner. Texas title companies and owners have been struggling with how to address mineral interests in title insurance since the recent resurgence of mineral development in Texas. Finally, the Texas government has settled the dispute.

On August 12, 2009 the Texas Department of Insurance adopted Order No. 09-0650 which introduced certain changes to the Basic Manual of Laws, Rates and Forms for the Writing of Title Insurance in the State of Texas. In doing so, the order significantly affects the way title companies and property owners address issues involving mineral rights in Texas title policies.

New Rule – Excepting to Minerals

First, the order creates a new procedural rule, Rule P-5.1, which permits title companies to generally except to insuring mineral rights in Texas title policies. It should be noted that when referring to mineral rights in the context of P-5.1, the term “minerals” includes “coal, lignite, oil, gas and all other minerals in, under and that may be produced from the land together with all rights, privileges and immunities relating thereto.”

P-5.1 permits a title company to except minerals from coverage of a title policy in two ways. First, a title company may specifically exclude minerals from the description of the insured estate in Schedule A, Item 2 of the policy. Also, P-5.1 allows a title company to generally except to minerals in Schedule B as a separate and distinct title exception, in addition to any mineral leases or severed mineral rights specifically listed in Schedule B of the policy.

Given the broad definition used for the description of “minerals” under P-5.1, landowners are exposed to significant risks which may arise from the future development of minerals which have either been leased to third parties or severed from the surface estate. However, while the title to minerals and related rights can be excepted from title coverage, a land purchaser can receive title protection for the improvements existing on, or to be built on, such land through endorsements.

New Endorsements Available.

Procedural rule P-5.1 requires title companies, upon request by the insured, to issue one or more applicable endorsements as provided in procedural rule P-50.1. Procedural rule P-50.1 introduces two new title endorsements that insure minerals otherwise excepted in the policy. These endorsements operate similarly, but are applicable in different situations.

The T-19.2 endorsement, titled “Minerals and Surface Damage Endorsement,” is available for real property of one acre or less, whether currently or intended to be improved for use as a one-to-four family residential property. The T-19.2 endorsement is also available for real property improved or intended to be improved for office, industrial, retail, mixeduse retail/residential or multifamily purposes. Any other type of real property not specifically permitted coverage under T-19.2 is eligible for the T-19.3 endorsement, also titled “Minerals and Surface Damage Endorsement.”

The two endorsements generally provide the same coverage. Each endorsement insures against loss by reason of damage to improvements resulting from the exercise of a right to use the surface of the land for the extraction or development of minerals. One notable feature of both endorsements is that they protect against damage to improvements existing not only as of the date of the policy, but also those improvements added to the property in the future. However, any mineral interest causing the damage to improvements must exist as of the date of the policy and be specifically excepted to in either Schedule A, Item 2, or in Schedule B. Notably, there is one minor difference between the T-19.2 and T-19.3 endorsements. While the T-19.2 generally protects against damage to all improvements (excluding only lawns, shrubbery or trees), the T-19.3 protects only against damage to permanent buildings. Therefore, any improvements that are not permanent buildings would receive protection only under the T-19.2. Each
endorsement requires the payment of a $50.00 premium.

Potential Cost Savings for the Insured

Prior to availability of the T-19.2 and T-19.3 endorsements, owners relied upon the T-19.1 endorsement for protection against any mineral exceptions. The mineral protections in the T-19.1 endorsement reflect those provided in the T-19.2. However, the T-19.1 endorsement provides additional protections beyond minerals, and in certain situations, those protections could exceed the needs for the specific property. Generally, if the insured property is unimproved and no applicable covenants or conditions are listed in the title commitment, a T-19.1 endorsement may not be the most cost effective method of mineral insurance. Since the title premium for the T-19.1 endorsement on nonresidential property is either 10% or 15% of the basic rate for a single issue policy, the cost of the T-19.1 would far exceed the $50.00 cost of a T-19.2 or T-19.3 endorsement.

Conclusion

Beginning November 1, 2009, title companies will begin generally excepting to minerals and all rights related to those minerals in Texas title policies. The new endorsements provided by procedural rule P-50.1 will be necessary to protect property owners from the risk of development of minerals on their properties.

By Brian H. Baker and Jeffrey J. Porter

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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