Exploring for oil and gas involves many complicated component parts. Title work is one small (yet vitally important) part of the process. In the simplest sense, title work is the process by which professionals determine ownership in a tract of land. Speaking very generally, a person receives title in land through a document, usually a deed. That document is recorded at the courthouse of the county where the land is located. When a petroleum geologist determines that a particular area is favorable for oil and gas exploration, before any drilling may occur, the company must obtain leases from landowners in the area. After the leasing process commences, a title attorney is retained to create a title opinion. Title opinions are confidential legal documents which serve two primary functions: (1) to determine ownership percentages; and (2) to recommend title curative measures. This article will focus on the second of those two functions.
Generally, the first step to obtaining a title opinion is compiling an abstract. Abstracts for mineral development are often compiled by field landmen. The abstractor will receive a parcel number or section, township, and range, describing one particular piece of land. She will then go to the courthouse in the county where that land is located and begin to review public records. The abstractor will include any and all documents related to the property, including easements, mortgages, leases, deeds, agreements, and any other document that pertains to the subject land. After locating every document possible, the abstractor will then create a “run sheet.” A run sheet is a spreadsheet showing an overview of the chain of documents in chronological order and how they link to one another.
After an abstract is obtained, the oil company will retain an attorney to review the abstract and write a title opinion. As I mentioned above, the attorney will chain all the documents in the abstract to calculate the ownership of the surface and minerals. Landmen regularly prepare these ownership reports, as well. What truly sets a title opinion apart, however, is the section where the title attorney notes title defects.
Generally speaking, a title defect is anything that could cause issues with a person’s claim to title in the property. A simple example: you are in charge of drilling a well for your oil company. The geologist has identified parcel number 12.345.678.900 in the state of Nowhere as the location of a promising underground formation. You send an abstractor to the courthouse in Fake County to prepare a title abstract. This will include every document that has anything to do with parcel 12.345.678.900. When he’s finished, you retain a title attorney to prepare a title opinion. The abstractor sends the attorney a copy of the completed abstract.
The attorney reviews the abstract and soon notices that someone named John Smith owned the property in 1935. A few documents later, in 1961, someone named Mary Smith conveys the property by deed to Susan McLandowner. What is wrong with this picture? The abstract appears to be missing a link between John and Mary. We don’t know from the abstract how Mary received title from John.
Any number of things could have caused this gap in title. John could have died, leaving the land to his daughter Mary in his will. The deed between John and Mary could be sitting in a dresser drawer somewhere. The abstractor may have simply overlooked the deed or forgotten to include it in the abstract. What does this mean in practice? It could mean nothing–a simple oversight. But consider the following scenario. Suppose John actually died in 1950 and left his land to his daughter Mary and son Dane in equal shares. Doesn’t that mean the son Dane we’ve never heard of actually owns half of the interest? Yes–Mary would own 1/2, and Dane would own 1/2.
At first blush, the abstract makes it appear like Mary owns everything in the transaction from Mary to Susan. In the above scenario, however, Dane holds half the interest. It gets worse. Dane could very well be deceased now and have 4 kids. If he left the children his estate including the 1/2 interest in parcel 12.345.678.900, each of these kids, all of whom you don’t know exist, now own 1/8 (1/4*1/2=1/8) each. That means Susan McLandowner owns 1/2, and four of John’s grandchildren each own 1/8. That’s four new parties with whom you have to negotiate and obtain leases.
This is one simple (yet surprisingly common) example of a title defect, and why the title attorney‘s work is so vital. The title attorney identified and objected to the gap in title between John and Mary, and now needs to make a judgment call. How should the operator fix this issue to minimize the risk of the unknown grandchildren scenario? To remedy this issue, the title attorney may recommend several measures that will “cure” the defect. This is what is meant by the term “title curative.” Curative measures are actions recommended by a title attorney that reduce or eliminate the operator’s business risk arising from title defects. In the case of a missing probate such as the one above, the most obvious curative measure would be to send landmen to the courthouse to obtain copies of John’s probate proceedings. The landmen could also attempt to obtain some other proof of death showing John’s heirs.
So, to recap, the attorney: (1) identified a gap in title between John in 1935 and Mary in 1961; (2) wrote an objection identifying the gap in title and explaining it with citations to each deed; and (3) recommended the operator obtain the probate or some proof of death showing that Mary obtained interest due to John’s death. Title opinion in hand, you now have a choice before you. Do you hire a broker to send a landman out to get the probate as your attorney recommended? Or do you choose to waive the objection and accept the business risk? Some risks are worth the expense of hiring a landman to cure defects, and some are not. The title attorney reports, and you decide.
Title defects are as varied as grains of sand on a beach. Some tracts of land belong to the same person for 80 years. Others are so fractionated that there are likely people who own fractions of a percentage point of interest who don’t even realize they own anything. Complex ownership is likely to have complex defects. A competent title attorney will identify these defects and be able to recommend curative measures that can mitigate title risk.