An Article by James F. Berry, Commercial Title Attorney, Fidelity National Title Insurance Co. & Chicago Title Insurance Co.
The ALTA (America Land Title Association) title policies our companies issue are designed to insure fee simple or leaseholds such as long term ground leases, and were not designed to insure oil and gas leases. Oil and gas leases are generally shown on Schedule B, Part 2 of commitments or in Schedule B of Owners and Loan Policies as “Exceptions to Coverage” rather than as an insured estate in real property.
A typical exception for oil and gas lease might read:
“Oil and Gas Lease from John Doe and Jane Doe to ABC Oil Co., dated May 16, 2012 and filed May 18, 2012 as Reception No. 152637 of Summit County Records.
Note: No further examination has been made under the above referenced oil and gas lease.”
The reason for the note is that the Oil and Gas interest is a separate chain of title and may involve several adjacent fee simple owners, as adjacent owners are often “pooled” into one or more drilling units. A typical drilling unit is 20 acres (40 acres for deeper oil/gas wells) and the land owners typically share a 1/8 royalty based on production while the oil and gas company retains the other 7/8 (but also has the cost of drilling and extraction). The oil and gas company usually relies upon an “Attorney’s Opinion” based on an abstract of title or title report.
Current oil prices and new methods of extracting oil and gas, such as “fracking” have caused a resurgence of oil and gas activity in Ohio. We saw a similar resurgence in Ohio oil and gas exploration in the late 1970s and mid 1980s when rapidly increasing oil prices and the oil embargo limited the supply of foreign oil. This resurgence has caused delays in title examinations in many Counties as County Recorder’s Offices are overwhelmed by the number of title examiners.
The increased interest in oil and gas exploration has also led to legislative change in the form of Ohio Substitute Senate Bill 165 (which became effective June 30, 2010). One aspect of this new law added a new Paragraph (D) to Section 1509.31 of the Ohio Revised Code which provides that if a mortgaged property that is being foreclosed upon is subject to an oil and gas lease, pipeline agreement or other instrument related to the production or sale of oil and gas and the aforementioned lease, agreement or instrument was recorded subsequent to the mortgage (and if the aforementioned lease, pipeline agreement or other instrument is not in default), it has priority over all other liens, claims or encumbrances so that the oil and gas lease, pipeline or other agreement will not be terminated or extinguished upon foreclosure of the real property. If the owner of the mortgaged property was entitled to oil and gas royalties before the foreclosure sale then these new royalties must be paid to the new purchaser of the foreclosed property. This alters previous Ohio law which generally favors priority of legal interests in real estate based on the order of filing of those interests.
Ohio Revised Code Section 1509.31 (D) has required title companies to show a new general exception in title commitments which reads:
“Oil and Gas leases, pipeline agreements or any other instruments related to the production or sale of oil and gas which may be subsequent to the date of the Policy.”
This exception is then carried over to all Loan Policies as an insured lender would not have any control for oil and gas interests created after the filing of their insured mortgage.
Many current and prospective owners are now concerned over exceptions in their Owners Policies for existing oil and gas interests as many would like to enter into new oil and gas leases or are concerned about surface development subject to the rights of an oil and gas developer. Determining the owner (working interest) of an existing oil and gas lease may require additional title examination and longer due diligence periods by purchasers. Additional difficulties are caused by mergers, sales and assignments of leases and by oil companies no longer being in good standing. ORC Section 5301.09 calls for an oil and gas company to file a release of an oil and gas lease upon its expiration or termination but this rarely seems to occur in practice.
There are several options to ease these difficulties which may satisfy a purchaser or owner. The first is obtaining and filing a full release of expired or terminated oil and gas leases. Another option is a partial release or modification of an existing oil and gas lease. Such a modification might release all surface rights to allow development of the land. This option might be exercised when the lease is pooled with other lands and the well(s) are on adjacent parcel(s). A new lease of this nature would be called a “Non-Drilling Lease”. Leases can also be drafted or modified to limit what areas can be utilized for drilling and extraction of the oil and gas to allow the wells to exist with surface development planned around the oil and gas wells.
Finally, Ohio has a statute allowing for forfeiture of oil and gas leases (ORC Section 5301.332) which requires legal notice to the holder of the oil and gas lease and filing of an affidavit of non-production and forfeiture 30-60 days after said legal notice. It is important to strictly follow the requirements of the statute to obtain such forfeiture and use of legal counsel is strongly encouraged. Oil and gas leases usually have an initial term during which an oil or gas well may be in use but the lease may be extended as long as oil, gas or their constituents are extracted in paying quantities, and may also be extended if the lease has provisions for “delay rentals” (a contract provision allowing extension of the initial term for a set payment) or provisions for shut-in fees or payments (which allow the oil and gas company to temporarily shut down a producing well when market prices drop too low).
Due diligence should always include a detailed review of oil and gas leases, review of existing state and local regulations pertaining to oil and gas production and review of title or subdivision restrictions which may affect oil and gas extraction. This is a complex area of law and owners and purchasers are encouraged to seek legal or other expert assistance in reviewing these matters.
James F. Berry is the “Commercial Attorney” for Fidelity National Title Insurance (“FNTI”) Company & Chicago Title Insurance Company (“CTIC”). FNTI and CTIC are part of Fidelity National Title Group (NYSE: FNF), one of the nation's largest providers of title insurance and escrow services. The title insurance underwriters that comprise Fidelity National Title Group issue approximately 50% percent of the residential and commercial title insurance policies in the United States. Fidelity National Title Group's leading title brands include Alamo Title Insurance, CTIC, Commenwealth, FNTI, Lawyers Title, and Ticor Title Insurance. Fidelity National Title Group provides additional real estate related services through brand names such as Fidelity National Home Warranty, ServiceLink, Fidelity National Property and Casualty Insurance Group and IPX (1031) Investment Property Exchange Services Group.
For more information you may contact Jim at: (330) 376-0000 and (330) 864-8115; or by E-Mail at: Jim.Berry@FNF.com or JBerry@ctt.com
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