CHAPTER 14 VITAL TO TITLE SURVIVAL: TITLE ISSUES FOR MIDSTREAM COMPANIES
| Jurisdiction | United States |
VITAL TO TITLE SURVIVAL: TITLE ISSUES FOR MIDSTREAM COMPANIES
Clark, Hill and Strasburger
Houston, TX
Jeffrey I.H. Soffer
Lewis, Brisbois, Bisgaard & Smith
Houston, TX
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JAMES F. ENGLISH is Senior Attorney at Clark, Hill & Strasburger in Houston, focusing in the areas of international and domestic energy transactions, upstream exploration & production, natural gas commercialization, LNG & natural gas marketing, midstream and renewable energy. Mr. English routinely works on upstream commercial arrangements, international corporate/asset transactions, divestitures, joint ventures, host government investment contracts, international statutory interpretation, and advises on the execution of appraisal/development projects. While at Anadarko he gained on the ground experience in over 30 countries, with a particular focus in Africa, Asia, Australasia, Canada and the Caribbean. In addition to traditional upstream work, he has been involved in natural gas commercialization and marketing projects, particularly in Trinidad, Cote d'Ivoire, Ghana, China, Texas, Colorado and Canada. Mr. English has also negotiated selected agreements in the seismic acquisition, service, transportation and maritime industries as they relate to the development of major oil and gas projects. Prior to his time at Anadarko, he was an attorney in Colorado focusing on mergers & acquisitions, E&P work, mining projects and energy regulation. Mr. English worked on major oil and gas acquisitions and development projects in the Piceance, DJ, Uinta, Paradox, Powder River, Florence, and Raton basins. Mr. English also assisted both M&A clients and project developers in understanding state and federal regulations relevant to their business objectives. In addition to his transactional practice, Mr. English appeared before multiple administrative agencies, obtaining favorable orders on behalf of clients. Outside of private practice, Mr. English clerked for the Colorado Oil & Gas Conservation Commission and spent some time as an oil and gas valuation economist in Colorado.
I. Introduction
Due to the rising volatility of oil and gas prices, as well as the growing need for takeaway capacity in mature shale basins, the midstream industry is receiving significant attention from investors. Landmark cases related to the gathering and processing segments have elevated the focus on title problems in midstream deals. In particular, problems related to surface rights, easements, and rights-of-way are key factors to which developers need to give increasing attention.
This paper analyzes what a company or project developer should do when looking to acquire projects in the midstream industry - and what can happen if title is not adequately understood. Most of the cases cited and the practices referenced are derived from Colorado and Texas law. However, for the most part, the law impacting the midstream industry is similar across the United States.
II. Property Rights Impacting the Midstream Industry
A. Introduction to Examining Surface Title Issues in the Midstream Industry
Unlike mineral title opinions, which involve primarily landmen and land brokers, surface title opinions are performed by the title companies that serve the real estate industry. Ascertaining what surface title issues exist for a network of pipelines or a midstream facility is a multi-step process that demands investigating several key deliverables provided by the aforementioned title companies. The four primary documents that require analysis are the title commitment, title report, current interest report, and statement of liens and encumbrances.
The title commitment is an insurance policy that is created after the title company produces an abstract of surface title. Provided on behalf of the named insured, the title commitment includes a detailed land description and a long list of exceptions, many of which are the midstream company's documents of highest importance. For example, a party acquiring a midstream project (whether pipeline or facility) must specifically request that an easement be insured, as they are commonly excluded from coverage. This is of central importance to owners of both the dominant and servient estates, as the dominant estate wants to protect its right to use the easement, while the servient estate must ensure the easement is correctly limited in size and scope. Beyond the title commitment and negotiation of exceptions, a midstream company will need to decide on the extent of special coverage; for example, contiguity is insurable (coverage of contiguous tracts), and site-specific endorsements can be used to protect particularly valuable property rights.
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Next, the title report is an index of documents (along with the links to those documents) that delineate the surface tract's title history. The title report typically goes back sixty years and accompanies the title commitment. The start date varies depending on the county, as well as the availability of electronic records held by the title company. Examiners should make specific requests for physical documents if title data extends further back than electronic records are kept. An examiner should also be aware of the presence of federal land, because index searches may differ if they fall under BLM or BIA jurisdiction.
The final two primary documents are the Current Interest Report and the Statement of Liens and Encumbrances. The current interest report is a short document indicating the current owner of the property, while the statement of liens and encumbrances limits the title search only to liens and encumbrances. The latter is typically used as a spot check tool by midstream companies and incurs a smaller cost than the title commitment and title report.
In addition to title companies, surveying companies are also a crucial part of the process of uncovering title issues related to a network of pipelines or a midstream facility. Although title commitments reference pre-existing surveys, often those surveys are out-of-date. Instead, a midstream company should commission a new survey to help uncover unrecorded or adverse property rights, which will provide a more accurate picture of the competing property rights. When requesting a survey, the developer should request that the survey follow the American Land Title Association and National Society of Professional Surveys (ALTA/NSPS), both of which have adopted industry-wide standards for the performance of land title surveys.1 Of particular importance is Section 5(E)(i-iv) of the Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys, which governs the depiction and surveying of disclosed documents and open and apparent undisclosed easements.2 Table A, Item 11 of the Minimum Requirements discusses the location of utilities on or serving the surveyed property and is also a helpful resource.3
In determining title rights, one must always consider the size and geographic extent of the project. For example, a small piece of land that holds a fractionation facility would require a review of all record title, while a geographically expansive pipeline network might only allow spot-checking of title in key areas along the line (relying on condemnation for any gaps). In many cases, cost management simply will not allow an in-depth review of every property along a line. With this in mind, certain basic surface title rights should be determined.
B. Surface Ownership
Unsurprisingly, surface ownership is one of the first areas checked prior to a purchase or embarking on a planned development. More often than not, the individual who holds the surface interest in the land will be the primary point of contact for a purchaser or a right-of-way agent. Even if a property is owned by tenants in common and consent cannot be obtained from all tenants,
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an acquirer of land rights will still approach ascertainable owners, and the title examiner can recommend a corrective easement with the appropriate signors be obtained as soon as possible.4
The critical issues related to surface ownership vary, depending on whether the purchaser is a pipeline company or a midstream facility. Since pipeline companies must coordinate logistics for an extensive system that is spread out over a vast area, their greatest concern is whether the planned route for the gathering system or long-distance pipeline is consistent with the use and enjoyment of the surface owners. This requires an inspection of any deed restrictions that may exist, whether any property along the proposed route will require enhanced payments or rerouting based on the property's current use, and whether the property is held subject to liens. If there is a lien on a current landowner's property, that lien might affect desired easement rights. For instance, when mortgage liens or mechanic's liens have not been released (a common record-keeping error in surface real estate), it can present a problem. The examiner should advise the midstream developer of the risk, but also verify state statutes to determine whether undischarged mortgage liens can be disregarded after a certain number of years.5
Midstream facilities are typically more concerned with whether the land descriptions stated in the title report are consistent with the surveys and the visual inspection of the property. Discrepancies in the expected use and enjoyment can justify the need to move or accommodate encroachments, adjustments to the purchase price, or occasionally even the buyer pulling out of the transaction altogether. In many cases, a surface location for a midstream facility is selected for its apparent lack of potential conflicts, and ideally the presence of preexisting easements that can be used to support the facility. If a midstream developer decides to obtain a ground lease, the same issues will apply, and the developer can use the title...
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