CHAPTER 3 BASIS OF OPINIONS, TYPES OF OPINIONS, AND LAYOUT OF OPINIONS
| Jurisdiction | United States |
(Feb 2012)
BASIS OF OPINIONS, TYPES OF OPINIONS, AND LAYOUT OF OPINIONS
Law Offices of Allen D. Cummings
San Antonio, Texas
ALLEN D. CUMMINGS is a solo practitioner with offices in San Antonio and Houston, Texas. He concentrates his practice in oil and gas title examination, oil and gas transactions, and oil and gas litigation, arbitration, and mediation. He has practiced law in the energy area since 1975, in both corporate legal departments and in private practice. He received his J.D. degree from the Dedman School of Law, Southern Methodist University in Dallas, Texas (1974), graduating Order of the Coif. He has been Board Certified in Oil, Gas, & Mineral Law by the Texas Board of Legal Specialization since 1987. Allen is a past Chair of the Oil, Gas, and Energy Resources Law Section of the State Bar of Texas, and the Oil, Gas, and Mineral Law Section of the Houston Bar Association. He was selected as a Texas Super Lawyer in oil and gas law in the years 2004 through 2008, he was among the Top 100 Texas Lawyers - Houston Region in 2006 and was listed in Best Lawyers in America - Energy for the years 2005 through 2009. Allen has presented numerous papers on oil and gas matters at annual and special institutes and continuing education seminars sponsored by the Rocky Mountain Mineral Law Foundation, the Oil, Gas, and Energy Resources Law Section of the State Bar of Texas, the University of Texas, the American and Houston Associations of Professional Landmen, and similar organizations.
Introduction
Why Examine Title?
This may seem an unusual question, but it may be the first question from someone who is accustomed to obtaining a title insurance policy on real property. I know of no state where a mineral owner or producer can obtain a title insurance policy covering mineral fee or mineral leasehold ownership. One major reason is the complexity of mineral fee and mineral leasehold ownership. The "bundle of sticks" that comprises a mineral fee interest (executive right, bonus, delay rentals and royalty) can be owned separately in undivided shares in perpetuity or for a limited term. Mineral leasehold ownership can be divided into different cost bearing and non-cost bearing interests (working interest, carried working interest, back-in working interest, overriding royalty interest, production payment, net profits interest, before and after payout interests) which may be owned in divided and undivided shares and for a term coincident with the continuation of the lease or some shorter term defined by the parties. It would be very difficult to underwrite a mineral fee or leasehold title policy, which is essentially an indemnity agreement based on the value at interest at the time of the insured transaction.
Therefore, buyers and sellers of mineral fee and leasehold interests must rely on title examination to assure themselves that they are getting the title they bargained for, free from irregularities, defects and encumbrances. While whether to insure title is primarily a business decision by the title insurer, the standard used by a title examiner is marketable title. Each state has a body of law, statutory and/or case law that defines marketable title. It is not the purpose of this paper to define marketable title in the many jurisdictions represented by those attending this seminar. However, in spite of many different wordings all the various definitions of marketable title incorporate these concepts:
• deducible from recorded instruments
• free from reasonable doubt
• will not expose a purchaser or mortgagee to the reasonable probability of litigation
• acceptable to a reasonably prudent purchaser or mortgagee
Therefore, the purpose of a title opinion is inform the client about matters that make title to a mineral property unmarketable, could reasonably be expected to materially affect the value or use of said property and what action is necessary to secure marketable title. Most producing states have title standards setting forth the basic title concepts about what constitutes marketable title and what defects render title unmarketable. Where there are such title standards, they are the starting point for preparing a title opinion.
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Who is your intended audience and what are they looking for?
Who is the Client: What are their Goals?
The identity and goals of our client tell us something about what kind of a title opinion is needed and how it will be drafted. You will want to discuss with the prospective client his experience in owning and exploiting minerals and with mineral title opinions. You will want to discuss with the prospective client her intended use for the mineral title opinion and what she expects from a mineral title opinion. Based on the knowledge and experience of the prospective client, the title examiner should be prepared to assist the client in choosing what type of opinion is required. For example, if your client is:
• a the prospective purchaser of a ranch in a area prospective in the Eagle Ford or Bakken Shales, then she will likely want to know the extent of the seller's mineral ownership in the ranch and whether it is subject to existing leases.
• an independent geologist seeking to buy leases covering his geological idea, then he will likely want to know who owns the right to lease minerals in the lands included in his prospect and whether those minerals are already leased to another party. He will, for example, likely be less interested in who owns the royalty in those lands, but he may be interested in the royalty fraction reserved in any existing leases and whether those leases are already subject to overriding royalty interests.
• a small independent producer who purchased an oil and gas lease based on a mineral take off, then she will likely want to know, whether the lease covers all of the minerals in the lands covered by the lease, or whether additional leases must be purchased to cover the full mineral interest in the lands covered by the initial lease.
• a purchaser of royalty interests in prospective trend areas, he will likely what to know who owns the fee royalty interest, the quantum of their ownership, whether the royalty interest is subject to an existing lease, and, if so, what is the royalty fraction reserved in the lease and what is its primary term.
• a buyer, under a purchase and sale agreement, of an undivided interest in producing oil and gas leases long past the expiration of their primary term, then she will likely be interested in obtaining an opinion concerning whether the seller owns marketable title to the undivided working interest and net revenue interest in production represented by the seller in the purchase and sale agreement, free and clear of all liens and encumbrances.
• a financial institution loaning money on fee or leasehold minerals, then it will likely want to know that its borrower owns the working and net revenue interest contained in the engineering report used to determine the borrowing base, free and clear of all liens and encumbrances, and specifically that its mortgage lien will be a first lien. The financial institution may also require that the mineral title opinion, or another attorney opinion, state that the mortgage instruments are enforceable under state law.
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• an exploration and production company preparing to drill a well on the mineral lease(s) it owns, then it will likely want to know that the lease(s) cover the full mineral interest in lands covered by the lease(s) and to be traversed by the wellbore, free and clear of all liens and encumbrances. It is becoming very common for exploration and production companies to require not merely a drilling title/drillsite title opinion, but to require that the ownership of production, i.e. a division of interest, be prepared at the same time.
This is not an exhaustive list, but covers the more common types of clients and what they are mainly looking for from a mineral title opinion.
What is the Client's Knowledge and Experience?
The experience and knowledge of your client my affect how you draft the mineral title opinion. For example, if your client has been in the business of owning and/or exploiting minerals for many years, then she will be familiar with the commonly used terms relating to oil and gas ownership. On the other hand, if your client is a New York City hedge fund making its first investment in the mineral exploration and production industry, you may have to be more descriptive in making your comments and requirements so that they are meaningful to someone unfamiliar with the exploration and production industry. If you draft your opinion for an inexperienced oil and gas client in the same way you would for the experienced client, then it is likely you will spend hours on the phone trying to explain what you mean. It is understandable that the title examiner would treat all those phone calls as billable time, but the title examiner should not be surprised when the client is displeased that he has to pay for an education in oil and gas. Therefore, it is really easier to incorporate the education in the mineral title opinion itself.
What does the Client Expect from Mineral Title Opinion?
With the increasing fractionalization of fee mineral and leasehold title, it is rare for a title examiner to deliver a mineral title opinion without comments and requirements. There are just too many circumstances that render a title less than marketable and, therefore, marketable mineral title is hard to achieve. For example, it is not uncommon for title to mineral property to pass based on the state laws of intestate succession. While some form of judicial heirship proceedings are required in some jurisdictions, in many other jurisdictions the recorded evidence of title passing under the laws of intestate succession is an affidavit of death, marital history and...
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