CHAPTER 10 CURATIVE DOCUMENTS AND TOOLS: YOU HAVE A DEFECT NOW WHAT DO YOU DO?
| Jurisdiction | United States |
CURATIVE DOCUMENTS AND TOOLS: YOU HAVE A DEFECT NOW WHAT DO YOU DO?
Angela L. Franklin
Holland & Hart LLP
Salt Lake City, UT
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DAVID B. HATCH is an oil and gas title and transactional attorney in the Salt Lake City office of Holland & Hart. Dave has extensive experience with drilling title, division order, financing, and acquisition title opinions, leading the oil and gas title group in New Mexico. He provides efficient and reliable work on simple to complex issues involving federal, state, Indian, and private lands from the Bakken to the Permian. He also represents clients in all types of oil and gas transactions, including conducting due diligence, drafting and negotiating agreements, resolving issues, and getting deals to the closing table. Before joining Holland & Hart, Dave gained valuable experience and deeper understanding of issues from the client's perspective working as a landman for an independent oil and gas company. During that time, he gained broad exposure to workings of an upstream oil and gas company by running title in the county records, negotiating oil and gas leases and assignments, and managing the company's land database. Dave speaks frequently at industry conferences. He is an active member of the Rocky Mountain Mineral Law Foundation and the American Association of Professional Landmen. He received his J.D. from University of Utah S.J. Quinney College of Law and B.A. in Business Administration from the University of Utah.
1. INTRODUCTION1
During any title examination, it is common to discover one or more title defects. Title defects are usually identified in a title opinion rendered by a title attorney for a company and its landman. Ideally, the title opinion will discuss how the title defect was created and include a title curative that completely resolves the issue. Where not possible or practical to completely cure the issue, the title opinion may include one or more alternatives that eliminate some but not all of the risk associated with the title defect. Title defects can also be identified by the landman at other stages. For example, during leasing, a landman might find a gap in the chain of title where there
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is a missing probate and distribution of an estate. After production is obtained on the lands, the apparent ownership of an interest may change without a proper transfer of ownership.
Once a title defect is identified, it is the landman's job to determine how or when to cure the issue. Title curative is most frequently a joint effort of the attorney, the landman, and the company. The attorney is responsible for identifying the defect and drafting and/or approving the curative document. The landman can prepare the necessary curative document in some cases and is responsible for negotiating and obtaining execution of the same. The company, who will ultimately bear the risk, should bless the title curative approach. The landman is in the best position to choose how or when to cure the issue because she garners information about the title from the title opinion and has access to the company's files and plans of development. For example, while the title attorney's knowledge may be limited to the lands and leases being examined, the landman may be aware that the defect covers additional lands and leases.
2. DETERMINING HOW AND WHEN TO CURE
In the world of title curative, the following slogan clearly applies: "one size does not fit all." Title defects come in all different shapes and sizes. The same applies to the risks the title defect impose to each individual company. So long as practitioners and individuals continue to draft their own form of title documents, new and puzzling title issues will continue to be created. While the intent of the parties is traditionally a guiding toll to interpret the effects of a document, statutory and case law can vary significantly from one state to the next. Therefore, a prudent title examiner must analyze each title defect on its own legal and factual basis and within the context of the applicable state's laws.2
Each time a title defect is identified, the following questions should be addressed:
o Whose and what interest does the title defect affect? This should be answered in the title opinion. It should identify specifically whose interest is involved, which other parties are indirectly affected by the defect, and how much interest is affected. For example, consider that Blackacre is owned of record 100% by Smith, who has recently leased to Big Oil, and Smith's interest is subject to a potential claim to an undivided 25% interest in Jones. If Jones can validate his claim to an undivided 25% interest, Smith is directly affected, but only by 25% of its interest. Big Oil is indirectly affected because it would mean that it effectively leased only 75% of Blackacre.
o Does the title defect need to be cured now? The type of opinion will give some indication of the urgency of the curative.
• If the purpose of the opinion is for acquisition of leasehold or mineral interests and the defect affects the seller's interests, it is easier to have the seller cure the defect now rather than wait until years later and the seller no longer has any desire to assist
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in obtaining the curative. The seller will be motivated only so long as she has a financial stake in getting the curative done.
• If the opinion is for financing, the lender will likely require the curative of any title defects that adversely affect the secured party's net revenue interest prior to closing.
• If the opinion is for drilling purposes and the defect does not adversely change the company's working interest or net revenue interest, then it may be reasonable to wait to see if production is actually achieved before embarking on the curative efforts. The classic example is a dispute as to an overriding royalty interest, which is a non-cost-bearing interest not directly relevant to the drilling of a well. This type of title defect can be punted down the road until it is time to begin paying proceeds from production. In contrast, in the example above, an undivided 25% interest in Blackacre is potentially unleased and the title defect must be addressed prior to drilling.
• If the opinion is for division order purposes, a title defect may require the suspension of production proceeds affected by the defect. It is now time to deal with the dispute as to an overriding royalty interest that was punted down the road in the drilling title opinion. These types of opinions (with their requirement to hold proceeds in suspense) are often a great incentive for other working interest owners and for royalty and overriding royalty interest owners to clean up their title defects.
o What is the risk to the company if the defect is not cured? The title opinion should outline the risk of any title defect. Although title attorneys aim for perfect title and generally provide requirements to cure all title defects, some defects are of such a nature that failure to cure the defect will not cause any present or future harm to the company. The title attorney should give some indication as to the significance of the defect; this will be conveyed in the language of the requirement - "must" versus "recommend."3 There are also those defects that are either impossible or impractical to cure. If the opinion provides an alternative to curing the title defect with some risk, the landman must weigh the benefits of using the alternative over the risk of not completely curing the defect. As the company bears the risk of not having perfect title, it is ultimately the company's decision (guided by the landman) whether to complete the title requirement, settle for an alternative curative, or waive the title requirement altogether.
This paper is not intended to be a "cure-all" paper. It is, however, intended to provide guidance and generally address the advantages and disadvantages of the various curative documents and tools available to all title examiners, including title attorneys and landmen. Each state has its own set of statutes and case law creating many variations to the general rules for the curative documents and tools discussed below. Before embarking on a course of action, the applicable state's statutes and case law should be examined to determine the right approach to the title defect for the company.
3. CURATIVE DOCUMENTS
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A. General Rules
As with any real property instrument, a number of general real property and contract law requirements apply. The following is a summary of some of the more basic requirements applicable to most real property instruments relevant to landmen.4
Parties. The name shown in the granting clause of the instrument, the signature block, and the acknowledgment should be identical. The name should also be identical to the name in which title is held. If the party's name has changed, a recital can be included in the instrument. If there is a discrepancy between two previously recorded instruments, an affidavit of identity can be recorded to connect varying names.
Drafting Recommendation: Full names should always be used to assist in properly identifying the parties. Other information can also be included, such as "an heir of ___" to assist in identifying the source of the grantor's interest where the decedent owner's estate has not yet been probated and distributed.
Execution.
Power of Attorney. A person or entity can appoint another party as an agent or attorney-in-fact by entering into a power of attorney. When properly drafted, a power of attorney will define the scope and extent of the agent's authority. They are generally strictly construed. 5 Several states require the power of attorney to be recorded in the county where the property is located. 6
Individuals. An individual executing an instrument should be an adult and competent to...
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