29 Jan 2017

Title Opinions for Mineral Buyers

Mineral buying is speculative business due to inherent fluctuations in the energy market. Along with the financial risks of a mineral purchase as an investment, there are also title risks. When buying minerals in Appalachia, title risks should be taken very seriously.

Mineral buyers are adept at controlling and minimizing financial risks by performing due diligence in order to assess future revenue prospects. They perform analysis on the location, the geology and the predictable decline in well production over the course of time. They even take into account the fluctuations of the boom and bust cycles of the oil and gas industry when deciding how much money to invest in a particular tract.

However, in order to become informed about the title risks inherent in a mineral tract so that value and risk can be comprehensively analyzed, the mineral buyer can and should obtain a certified title opinion from an attorney who is experienced and knowledgeable in oil and gas title, which is a very specific area of law.

A mineral buyer can use an attorney’s certified title opinion in the same way a residential home buyer uses a home inspection report. If carefully negotiated as part of the purchase agreement, the buyer can use the information in the title opinion to have title problems fixed before closing, negotiate a lower price or abandon the deal if the cost of fixing the defects is not worth the investment or a fix is not possible. A cursory title search performed by a non-attorney, which seems more economical, may not reveal the more complex and difficult title issues that have the potential to prevent or severely limit the development potential of the purchased asset, thus costing much more in lost revenues.

Here are some common examples of title issues that are often overlooked in cursory title searches that are not performed or reviewed by an attorney knowledgeable in oil and gas title law:

  1. When a person dies without a will, different states have different laws about who inherits the property. In West Virginia, for example, the laws of intestacy changed four times in the last 150 years. If the title searcher does not know the changes in the law or makes a mistake about the law, they may follow the wrong ownership chain forward and miss an interest.
  2. Different states have different laws about how long different types of liens can attach to property. It is possible that a federal, state or municipal tax lien or civil judgment against a former owner in the chain of title can attach to the property, thus affecting the present owner, even though the present owner is not the tax debtor. If the title searcher is not aware of these laws, he or she may miss liens that encumber the property.
  3. Survivorship between spouses in ownership of mineral varies from state to state. In West Virginia, for example, taking title to oil and gas as husband and wife does not automatically create survivorship, but in Pennsylvania, survivorship between spouses is assumed. If the title searcher assumes survivorship where it doesn’t exist, an entire ownership interest can be missed.
  4. Interpretation of language in deeds that attempts to reserve portions of oil and gas or oil and gas royalty revenue interest often requires legal interpretation. A preliminary title search may misinterpret such language and attribute the wrong type or amount of interest to an eventual owner.

A mineral buyer that chooses to obtain a certified title opinion prior to purchasing mineral rights will be informed about the defects and encumbrances that are present in the official property records of the jurisdiction where the minerals are located. In addition, the mineral buyer will receive solutions to curing the title defects and an assessment of the risk of each defect.