As I touched on in a recent post, the surge in oil and gas exploration and the accompanying concern with mineral rights and interests have created significant challenges for county recorders and title insurance companies across the state. The strong demand on county offices (often in counties still feeling effects from the recession) for time to search the official record often exceeds the office’s resources and hours. The results range from interested parties banking on uncertain alternative search companies to underwriters denying mineral interests in their loan policies.
Read on after the jump.
No Title Insurance For You
In connection with the difficulties in performing title searches related to mineral interests (or perhaps because of it), and concerned by the risks presented by the industry, title insurance underwriters in Ohio are now taking exception for all mineral interests in their owners’ and loan policies, meaning that they are not willing to provide any insurance as to (i) the ownership of the underlying mineral estate, (ii) whether any person or entity other than the surface owner has the right to extract minerals, and (iii) whether other parties have rights to use portions of the surface estate.
Policies underwritten by First American are taking exception as follows:
“Coal, oil, natural gas, or other mineral interests and all rights incident thereto now or previously conveyed, transferred, leased excepted or reserved.”
Fidelity has taken a similar position, with a prescribed standard exception that will read as follows:
“Any lease, grant, exception or reservation of minerals or mineral rights together with any rights appurtenant thereto.”
Fidelity has taken the extra step of requiring any issuance of the ALTA 9 endorsement (the so-called “comprehensive” endorsement, a very commonly requested endorsement) to be approved by state or regional underwriting counsel, because it provides affirmative coverage against damage to improvements as a result of the extraction of minerals. In fact, it would not be surprising if all underwriters in Ohio eventually took the liberty of removing this coverage from the ALTA 9 entirely.
The impact of this exception cannot be understated, particularly in counties most affected by the recent increase in oil and gas exploration. Ordinarily a title insurance policy would provide affirmative coverage on these topics – in other words, insure that the surface owner in fact owned all of the underlying mineral interests, and that no other party had a right to the minerals (or a related right to use the surface) except as expressly set forth in Schedule B-II to the policy. With these changes, however, owner’s policies of title insurance will no longer provide such coverage, leaving the landowner without any assurances about the state of their title vis-à-vis mineral interests, which of course is a rather big gap in coverage in those areas of the state where oil and gas exploration and production is rampant. Adding to the problem is the fact that no one is even searching for these interests anymore, meaning that it’s possible that there could be a recorded oil and gas lease or other instrument purporting to convey mineral interests or related rights that does not appear as an exception to coverage in Schedule B-II, simply because the scope of the search ordered by the title insurance company would not necessarily discover that instrument. So, not only will they not insure against adverse claims by the holders of mineral interests and related rights, but may no longer even tell you when such a claim actually exists.
Purchasing real estate in an oil- and gas- heavy county has therefore become a good deal more risky than it ever used to be. As such, purchasers should take this into consideration and perform some additional due diligence before closing a transaction. For example, they may want to search the database operated by the Ohio Department of Natural Resources (ODNR) to determine whether any active or inactive oil and gas wells affect the property in question. Physical inspections of the property (particularly large tracts of acreage) should also be undertaken to determine whether any there exists any evidence that another party is working or has worked a mineral interest on the property, such as oil well infrastructure or roads. There are some legal steps that can be taken as well. Although most residential properties are conveyed by general warranty deed in Ohio, many commercial transactions are completed with limited warranty deeds. Purchasers in those scenarios may want to insist on receiving a general warranty deed so as to have some recourse in the event a detrimental mineral interest turns up at a later date. The use of those alternative search companies might be helpful in this context as well, subject to the risks and limitations noted in part one of this series.