CHAPTER 1 TYPES, NATURE AND SCOPE OF TITLE OPINIONS
| Jurisdiction | United States |
(Feb 1992)
TYPES, NATURE AND SCOPE OF TITLE OPINIONS
Clanahan, Tanner, Downing & Knowlton, P.C.
Denver, Colorado
TABLE OF CONTENTS
INTRODUCTION
I. TYPES AND PURPOSES OF TITLE OPINIONS
Lease Acquisition Opinions
Drilling Opinions
Division Order Opinions
Security or Financing Opinions
Production Purchase Opinions
Federal and State Status Reports
II. FORMATTING OF OPINION
Lands Covered by Opinion
Materials Examined
Ownership
Lease and Assignment Analysis
Liens and Encumbrances
Exceptions to the Opinion
Comments and Requirements
Zoning and Land Use Controls
Special Districts
Extension and Renewal Clauses
Reassignment Clauses
Miscellaneous
Selected Requirements Requiring Curative Action—Fee
Patent Reservation
Execution of Instruments
Defective Acknowledgments
Unadministered Estates
Tax Sales
Expired Oil and Gas Leases
Possession
Selected Requirements Requiring Curative Action—Federal
Instruments Not Filed in Bureau of Land Management State Office
Unrecorded Instruments
Operating Rights, Working Interests, and Record Title
Mining Claims
Possession
III. STREAMLINING THE TITLE EXAMINATION PROCESS
EXHIBIT A: Sample Drilling Title Opinion
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The purpose of a title opinion, whether it is for lease acquisition, drilling, division order, security, or production purchase purposes, will control the format of the opinion, the information reported in the opinion, and what title defects must be addressed by title requirements. Cognizance of the purpose of the title opinion from beginning to end of the examination process will ensure the usefulness of the opinion to the client and the economic efficiency of the examination process.
Since I began practicing law twelve years ago, there has been a steady pressure from the marketplace to reduce the cost of title opinions. The first step is to communicate with the client. Find out what formations or depths are targeted by the client's drilling or are being acquired or mortgaged by the client; whether state spacing rules and regulations, existing pooling agreements, unit agreements or communitization agreements may operate to reduce the lands covered by the opinion. The title examiner should request that the client provide any specific content and format directions that will render the title opinion more useful to the operator, production purchaser, buyer or mortgagee.
The examiner should continue to communicate with the client. If you encounter inordinately complicated mineral or leasehold chains of title, title issues which require extensive research or multiple metes and bounds tracts or subdivisions, let the client know. Often, the client is familiar with the property and will have formulated expectations with regard to the cost of title examination. You should endeavor to ensure that those expectations are realistic and in those cases where they are not, be prepared to explain the circumstances which result in the higher cost to the client.
I. TYPES AND PURPOSES OF TITLE OPINIONS
A. Lease Acquisition Opinions
A title opinion prepared for lease acquisition purposes determines either the mineral ownership for the purpose of obtaining a lease, or the ownership of an existing leasehold interest which is to be assigned in whole or in part to the client requesting the opinion. The lease acquisition opinion advises the client of unleased mineral interests and the net revenue interest represented by the leasehold interests being acquired. An
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acquisition opinion is most frequently requested prior to payment of the bonus or acquisition payment for oil and gas leasehold interests. A client is primarily interested in matters which directly pertain to his purchase of a leasehold estate in the lands under examination. Matters such as surface ownership or the death of a fee landowner after execution of an oil and gas lease should be noted so that a subsequent drilling or division order opinion need not be undertaken from scratch, but such facts should be clearly identified as advisory or informational for the purposes of the acquisition opinion.
B. Drilling Opinions
A drilling title opinion (also referred to as a base title opinion, preliminary title opinion, or original title opinion) establishes the status of fee and leasehold title prior to drilling operations. It focuses on adequate leasehold coverage, ownership of the leasehold working interest, and defects which affect leasehold coverage. While the exact ownership of production allocated to royalty and overriding royalty owners may remain unresolved, the opinion should be sufficiently detailed to provide the working interest owners with information regarding the amount of production they will be entitled to receive and the percentage of costs they must bear. Title problems which relate only to royalty or overriding royalty ownership should probably be noted for future reference, although the client should be advised that curative action need not be taken prior to drilling operations.
When a drilling title opinion is requested, the client often intends that it serve as a lease or leasehold acquisition opinion as well as a drilling opinion. In a drilling opinion, however, additional attention will be paid to surface ownership, surface use restrictions, rights-of-way, and pooling or communitization problems with royalty or non-operating interests. As with the acquisition opinion, the drilling opinion presents the examiner's opinion as to the continued validity of the oil and gas lease and defects in leasehold interests. It may also analyze joint operating agreements or farmouts if submitted by the client for examination.
C. Division Order Opinions
A division order title opinion is prepared after a productive well has been completed. The division order opinion focuses on the ownership of production and will require that defects relating to the ownership of leasehold interests such as overriding royalties, production payments, net profit interests, and division of royalty among mineral owners or non-participating royalty owners be cured prior to distribution of proceeds allocated to those interests. The opinion may call for suspension of the proceeds of production attributable to a particular interest until
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requirements pertaining to the interest have been satisfied.1 A greater emphasis will be placed on the analysis of agreements affecting the allocation of production from a pooled, communitized, or unitized area, such as joint operating agreements, farmout agreements, and communitization and unit agreements. The opinion addresses the location of the well, the formation from which it is producing, spacing and acreage information, and the date of first sale of production.
D. Security or Financing Opinions
The format of a security, financing or mortgage opinion differs considerably from that of a drilling or division order opinion. The opinion will report only the interest of the borrower in the producing property, and analyze and comment only on those matters pertinent to the interest of the borrower. The opinion will set forth the borrower's leasehold interest in current oil and gas leases as well as royalty and non-expense bearing interests burdening the borrower's interest. The borrower's net revenue interest in production is shown. The security opinion emphasizes other outstanding liens or encumbrances burdening the borrower's interest in the property, including security interests in personal property which can be ascertained from an examination of the appropriate Uniform Commercial Code records. Letter agreements, farmouts, operating agreements, and pooling and unit agreements affecting the secured interest will also be reported. The opinion generally covers not only the borrower's leasehold interest but also its interest in personal property, fixtures, and production attributable to its interest in the property. The security opinion will often be used to prepare an exhibit to the mortgage instrument which accurately describes the borrower's interest.
The security opinion may also discuss local laws which will affect the transaction and relate to the ability of the mortgagee to foreclose the lien instrument. The lender will often request an opinion concerning effective execution of the mortgage, security agreement, financing statement or other security instruments, the priority of the mortgagee's lien and security interest, and advice concerning maintenance of the priority of the mortgagee's interest in the future.
A large financing transaction may involve the mortgaging of thousands of properties, and include both producing and undeveloped acreage located in numerous states. The cost and manageability of examination of all properties is prohibitive. The client should be advised to select the most valuable properties only, with the cooperation and agreement of the mortgagor.
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Frequently, the title examination can be limited to a composite of properties which in the aggregate are valued at a stated percentage (e.g., 75%) of the amount loaned. Usually, those properties are producing and underlying title materials through the date of first production can be retrieved, evaluated for their adequacy and, hopefully, relied upon (together with supplemental materials) in the rendering of a security title opinion.
E. Production Purchase Opinions
A potential purchaser will require the same type of information as the secured party in a mortgage of oil and gas interests. As with the security opinion, the production purchase opinion will generally contain only information pertinent to the interest being purchased. The opinion may discuss questions of local law pertaining to the valid transfer of the interests which are the subject of the purchase. The information contained in a production purchase opinion will often be used to prepare an...
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