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.


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

Commercial Litigation

Limiting the Scope of Qualified Written Requests Under RESPA

“Dear Servicer, Please provide all documents concerning the Loan, as required by RESPA. Sincerely, Borrower”

With the increase in residential mortgage defaults across the United States, mortgage servicers have also seen a rise in what is being termed a “qualified written request” (“QWR”) under the Real Estate Settlement Procedures Act (“RESPA”) from borrowers. Many of these alleged QWRs read like the title of this article, request voluminous documents, and cost servicers valuable time and resources to answer. When reviewing these purported QWRs, servicers should take a closer look to determine whether they actually qualify as such under RESPA.

Under 12 U.S.C. § 2605(e), a QWR means “a written correspondence, other than notice on a payment coupon or other payment medium supplied by the servicer, that — (i) includes, or otherwise enables the servicer to identify, the name and account of the borrower; and (ii) includes a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provides sufficient detail to the servicer regarding the other information sought be the borrower.” Servicers must acknowledge receipt of the QWR within twenty business days of receipt by written response and take action on the inquiry, if necessary, within sixty business days of receipt of the QWR. Violating these provisions can result in liability for the borrower’s
actual damages and costs, including attorneys’ fees. 12 U.S.C. § 2605(f). An additional $1,000.00 can be awarded to the borrower if a pattern or practice of non-compliance with these requirements is found. Id.

Generally, it is relatively simple for servicers to investigate specific allegations of servicing errors and answer the same in an economic fashion and within the given time frames set by RESPA. However, some borrowers have latched onto the language “regarding other information sought by the borrower” at the end of Section 2605(e) and have used it to request extensive documents and other information concerning the loan that is not servicing-related. For example, borrowers will request entire loan origination files, the original Note or Security Instrument, information regarding attempted rescission of the loan, or other nonservicing issues. In effect, these borrowers are trying to conduct improper discovery without filing suit, stall default proceedings
on their loans, or submit the request for some other reason that is not supported by the intention of the statute.

Case law from numerous federal districts has shed light on the extent of what “other information sought by the borrower” can be sought through this Section. Specifically, courts have limited those requests for “other information” to information related to the servicing of the loan. Servicing is defined as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts…, and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.” 12 U.S.C. § 2605(i)(3). As such, servicers would only be required to respond to requests relating to payment issues, not origination, validity of loan, or other issues frequently alleged by borrowers. When reviewing these purported QWRs, servicers should look to what documents or other information that is actually being requested and compare it to the definition of  “servicing” as set forth in RESPA to see if it actually fits that description. Even if the request does not require an answer, it is the better practice to respond to the borrower, in writing, advising of such. Because this is a quickly expanding area of the law, servicers should consider consulting an attorney concerning any questions as to whether to answer the alleged QWR.

By J. Allen Smith and Jeremy J. Overbey

Real Estate

Landlord and Tenant Considerations When Negotiating Economic Concessions in Commercial Leases

Landlords and tenants enter into leases with the expectation that the document which they execute will govern their relationship throughout the term of the lease. However, shifting economic realities may move a tenant to pursue some form of relief from the terms of the lease. It is important to note that while this may initially appear to be a negative for the leasing relationship, it can also prove to be an opportunity for both parties. In order to fully realize these opportunities, there are several considerations landlords and tenants should evaluate.

The starting point for lease modification would naturally be the lease document itself. Both parties should be mindful of the original lease negotiations. Each party likely made concessions during that process, and if a tenant introduces the idea of modifying a provision of the lease (for example, the rent), it is appropriate for the parties to discuss the possibility of other revisions to the lease. Therefore, once a landlord learns of a tenant’s proposal to alter the economic terms of the lease, the landlord should consider which currently unfavorable terms could be modified to make an amended lease more palatable, such as the elimination of a tenant’s early termination right, renewal option, expansion right or other preferential rights or adding restrictions on tenant’s use of the premises. Likewise, before a tenant approaches the landlord for a concession such as rent reduction or abatement, that tenant should “think ahead” and try to anticipate what other favorable terms of the lease could be affected and balance the benefits and drawbacks to each scenario.

Next, the parties must consider the terms of the proposed economic concessions. This can come in many forms, the most common being rent abatement, rent reduction, and space reduction. In these conversations, the landlord and tenant must each have a realistic view of the value of the tenant’s lease. A tenant with a poor payment history or extended financial hardship will have a weak bargaining position. Conversely, during an economic market in which landlords are having difficulty finding new tenants to fill vacant spaces, tenants may have notably increased bargaining power.

While the proposed concession is intended to benefit the tenant, it may lead to opportunities for the landlord to reconfigure its balance of occupied and vacant space. The landlord may wish to reduce a tenant’s space or relocate a tenant to another (perhaps less marketable) location in the project in order to free up the relinquished space to be remarketed or “bundled” together with other space, creating the ability to lease to a larger full-floor/full-building tenant. Each party may also be well served in such discussions to do the other side’s homework for them in advance, including analysis of market rents, the net value of any rental adjustments and any other analysis which may help streamline negotiations.

Once a tenant asks for an economic concession, the landlord is justified in asking to examine the tenant’s financials. An open review of tenant financials will not only help the landlord determine whether to give a concession, but also help determine the amount of any concession. It is also common for such a landlord to then require continued periodic reviews of the tenant’s financials. The parties
should also address other cost saving methods available to the tenant. It will hurt a tenant’s bargaining position if it cannot show evidence that it has taken steps to reduce costs in other areas. The landlord should also take this opportunity to re-evaluate the security the tenant has given to secure its obligations and whether some modification is justified, such as the addition of a personal guaranty or additional security deposit.

Economic recovery by the tenant may trigger the end of any concession provided. In the event of rent concessions, the parties must then consider the concept of recapture. Landlords may expect the tenant to reimburse them for any rent that is forgiven. Once a balance of expectations is considered, the parties should evaluate the multiple options for recapture, such as a simple increase in the base rent at such later time as the parties reasonably project, or, for retail tenants, the addition of, or increase in, percentage rent. Because percentage rent is dependent upon tenant sales, the parties may need to manipulate the breakpoint calculation in order to guarantee repayments.

Finally, there are several issues outside the confines of the actual lease document that both parties must consider when negotiating economic concessions in the lease. First, one or both parties may be subject to loan agreements, and should seek all necessary lender approvals for modifications. Second, a landlord may want to request a waiver of all tenant claims against landlord arising prior to the effective date of the amendment via the inclusion of “estoppel” representations from such tenant. It stands to reason that a landlord that gives relief to a struggling tenant should not fear claims from a matter arising before such relief and the amendment giving tenant its economic concession. Third, any concession should be deemed terminated upon the filing of bankruptcy by a tenant in order to attempt to have the bankruptcy court consider the lease on its original terms during such process.

When tenants face difficult financial times, it is often necessary for tenants and landlords to work together to find a mutually beneficial concession which relieves the tenant’s burden while also adequately addressing the concerns of the landlord. So long as the parties carefully consider the full range of issues involved with such concessions, it can be an important step to securing a positive and sustained economic relationship between the landlord and tenant.

By Jeff Mosteller and Brian H. Baker