CHAPTER 11 NON-RECORD TITLE CONSIDERATIONS
| Jurisdiction | United States |
(Feb 1992)
NON-RECORD TITLE CONSIDERATIONS
Hinkle, Cox, Eaton, Coffield & Hensley
Roswell, New Mexico
TABLE OF CONTENTS
Page
I. Introduction and Scope of Paper
II. Farmout Agreements
A. Definition and Common Provision.
B. Effect on Title.
1. Restrictions on Alienation
2. Rights of Farmee Before an Assignment
3. Rights of Farmee After an Assignment
4. Interest Earned
III. Joint Operating Agreements
A. Definition and Purpose.
B. Scope of Operating Agreement.
1. Single Tract Agreement
2. Working Interest Unit
3. Widely Scattered Contract Area
C. Operating Agreement as a Document of Title.
1. Rights and Interests of Parties in the Contract Area
(a) Cost Bearing Interest.
(b) Interest in Production.
(c) Burdens on Production.
(1) Royalty
(2) Subsequently Created Interests
(3) Excess Burdens on Non-Consenting Party's Interest
(d) Assignment Restrictions and Preferential Rights to Purchase
(e) Gas Balancing
(f) Renewal Lease
(g) Loss of Title Provisions
2. Lien Provisions
D. Recording.
IV. Communitization, Pooling and Well Spacing
A. Definitions and Distinctions.
B. Cross-Conveyance Theory.
C. Interests of the Parties.
1. Communitization Agreements
2. Pooling
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D. Approval and Recording.
E. Forced Pooling.
F. Examination of Title to the Entire Communitized Area or Pooled Unit.
V. Unitization
A. Unit Agreements.
1. Types of Agreements
2. Concepts that Must be Understood in Title Examination
(a) Commitment of Leases to a Unit
(b) Effect of Unitization
(c) Allocation of Production
B. Unit Operating Agreements.
C. Title Examination and Unit Agreements.
1. Cross Conveyance Theory
2. Perpetuation of Leases
3. Segregation
(a) Pugh Clauses
4. Term Interests
5. Loss of Title
VI. Zoning
A. Impact of Zoning on Mineral and Oil and Gas Examination
B. Relief From Zoning
VII. Due Diligence in Acquiring Property
A. Role of the Title Examiner
B. Scope of Examiner's Review
C. Single Property Transaction
D. Multi-Property Transaction
1. Complete Title Examination
2. Limited Title Examination
3. Record Review
4. File Review
VIII. Environmental Considerations
A. Disclaimer of Environmental Laws and Regulations
B. Property Presently Utilized for Generation, Storage or Disposal of Hazardous Wastes or Hazardous Substances
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C. Properties That May Have Been Use for Storage, Disposal or Generation of Hazardous Wastes or Hazardous Substances
IX. Bankruptcy Considerations
A. Automatic Stay
B. Assumption or Rejection of Executory Contracts or Unexpired Leases
C. Avoidance Powers
D. Power to Transfer Property
E. Abandonment of Property
F. Ownership of Production
X. Liens
A. Definition
B. Statutory Liens
C. Equitable Liens
D. Common Law Liens
E. Contractual Liens
F. Inchoate Liens
XI. Surface and Other Matters
A. Acreage, Boundaries, Location on the Ground and Survey
1. Acreage
2. Boundaries
3. Location on the Ground
B. Apparent Rights of Way and Easements
C. Rights of Parties in Possession
D. Suggested Limitation Provision
XII. Conclusion
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I. INTRODUCTION AND SCOPE OF PAPER
The syllabus for this Special Institute on Mineral Title Examination states that this paper will explore non-title matters which directly impact ownership, such as farmout agreements, joint operating agreements, pooling, spacing, unitization, zoning, due diligence in acquiring property, environmental considerations, and bankruptcy considerations. Each one of these specific areas is sufficiently broad to require a separate paper and many excellent articles and papers have been written on most of the subjects addressed herein. For this reason the paper will attempt to limit discussion of these non-record title matters to their effect and impact upon ownership and the paper will not discuss many of the intricate issues that arise in such areas. Where appropriate, citation is made to legal treatises, articles, and other materials that further address a specific topic. The paper does not cover securities issues or matters that pertain to Indian lands and leases. State statutes may alter the effect of some of the non-record title considerations reported herein, such as the effect of a proceeds payment act.
The purpose of this paper is to identify common instruments, issues, and problems that a title examiner needs to be sensitive to and familiar with while examining title and identify what matters do not generally appear of record in (1) the Office of the County Clerk and/or the District Court Clerk in and for the county in which the property to be examined is located, (2) the appropriate Bureau of Land Management Office where federal lands are involved, and (3) the office of the appropriate state official where state lands are involved. The different types of title opinions discussed in other papers of this Special Institute require different considerations as to the importance of certain non-record title matters. Likewise, if federal or state lands are involved some of the non-record title considerations discussed herein may have little or no importance with respect to such lands.
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With respect to environmental and bankruptcy considerations, this paper will attempt to highlight when these matters are likely to arise and offer some practical solutions concerning the handling of such issues in a title opinion. As a practical matter certain issues discovered in the course of a title examination may require the assistance of attorneys with specific expertise to handle such matters. Bankruptcy and environmental considerations are two areas where a title examiner is well advised to seek such expertise when those issues arise.
II. FARMOUT AGREEMENTS
A. Definition and Common Provisions.
Professors Williams and Meyers describe a farmout agreement as follows:
A very common form of agreement between operators, whereby a lease owner not desirous of drilling at the time agrees to assign the lease, or some portion of it (in common or in severalty) to another operator who is desirous of drilling the tract. The assignor in such a deal may or may not retain an overriding royalty or production payment. The primary characteristic of the farmout is the obligation of the assignee to drill one or more wells on the assigned acreage as a pre-requisite to completion of the transfer to him.1
Other commentators have utilized slightly different definitions;2 however, regardless of the definition utilized, a farmout agreement is simply a contract that must contain all of the fundamental elements of a contract. It is important for a title examiner to be familiar with
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common terms and provisions found in farmout agreements as farmout agreements directly affect ownership of oil and gas leases and the lands subject thereto.
Farmout agreements may take on a variety of forms, from a simple letter agreement setting forth basic terms of the parties' contract3 to a formal document that purports to integrate all terms and provisions of the parties' agreement. Regardless of its form, a farmout agreement is not generally found of record, although reference to a farmout agreement may appear in assignments of oil and gas leases, assignments of overriding royalty interest, or other documents of title appearing of record. It is common for such instruments to be made specifically subject to the terms of an unrecorded farmout agreement. The agreement must be more than agreement to agree and, as a contract, all elements of a contract are required, including the existence of an offer, acceptance of the offer and consideration. Farmout agreements are executory contracts.4 In most cases, neither party has performed the condition precedent at the time the agreement is consummated.
Attorneys and landmen have been warned that "Unless great care is exercised in preparing these executory contracts for highly speculative and often dramatic ventures, the opportunities for disappointment, misunderstanding and discord are apt to cloud the entire venture."5 Unfortunately, title examiners must deal with some agreements that were prepared without great care. It is helpful to understand the common provisions contained in most farmout agreements to give perspective to the probable intent of the parties when confronted with a skeleton agreement or an agreement that was prepared without great care. The following is a list of some of the more common provisions:6
Commencement and Drilling of a Test Well(s)
Date
Location
Standard of Performance
Acreage, Depths and Substances Earned7
Prohibition on Suspension of Operations and Abandonment
Tests, Notices, Reports, and Well Access
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Restrictions on Alienation
Assignability
Preferential Right to Purchase
Prohibition on Liens and Encumbrances8
Assignment of Rights Earned
Form of Assignment
Reserved Override
Overriding Royalty Interest
Reservation
Option to Convert to a Working Interest
Take-over Rights
Insurance
Legal Relationship
Exhibits
Operating Agreement9
Gas Balancing Agreement
There are several other agreements that are utilized from time to time in the oil and gas industry that are similar to a farmout agreement. An optional farmout or acreage contribution agreement is a method to lock up adjacent acreage to a proposed drill site tract. In the event the proposed drilling operations result in a discovery of oil and gas, the drilling party may exercise his option to acquire a farmout on the adjacent acreage on terms that have already been agreed upon. A shooting agreement usually covers a large block of lands and the unleased mineral owner or lessee enters into an agreement allowing an interested party to shoot seismic on the block and select certain lands to lease or acquire an assignment on previously agreed terms. A bottom hole letter is a form of agreement...
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