WHAT IS A TITLE OPINION?

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1 Intro Session WHAT IS A TITLE OPINION? MINERAL TITLE EXAMINATION DAVE HAMPTON

2 Title Opinions: In General Title examination = title assurance Title opinions serve to assure companies and individuals that the exploration or drilling projects they wish to engage in is legally supportable Legally supportable projects depend upon marketable & defensible title Marketable title Title that is free from apparent defects, grave doubts and litigious uncertainty, and consists of both legal and equitable title fairly deducible of record O.S. Title Such marketable record title shall be subject to: (a) All interests and defects which are inherent in the muniments of which such chain of record title is formed; provided, however, that a general reference in such muniments, or any of them, to interests created prior to the root of title shall not be sufficient to preserve them, unless specific identification be made therein of a recorded title transaction which creates such interest. (b) All interests preserved by the filing of proper notice or by possession by the same owner continuously for a period of thirty (30) years or more, in accordance with Section 74 of this title. (c) The rights of any person arising from a period of adverse possession or user, which was in whole or in part subsequent to the effective date of the root of title. (d) Any interest relating to a title transaction which has been recorded subsequent to the effective date of the root of title from which the unbroken chain of title of record is started; provided, however, that such recording shall not revive or give validity to any interest which has been extinguished prior to the time of the recording by the operation of Section 73 of this title. (e) The exceptions stated in Section 76 of this title as to rights of reversioners in leases, as to severed mineral or royalty interests, as to easements and interests in the nature of easements, and rights granted, reserved or excepted by instruments creating such easements or interests, or restrictions or agreements which are part of a subdivision development plan, and as to interests of the United States. O.S. Title Mineral Title Examination, Paper No. 1, Page No. 1-1 & 1-4 (Rocky Mt. Min. L. Fdn. 2007) O.S. Title , 72

3 Title Opinions: In General Defensible Title as defined on a Purchase & Sale Agreement: DEFINITION OF DEFENSIBLE TITLE. As used in this Agreement, the terms 'Defensible Title' shall mean: (a) As to each Lease that title of Seller which: (i) is filed of record and free from reasonable doubt such that a prudent person engaged in the business of the ownership, development and operation of producing oil and gas properties, with knowledge of all the facts and their legal effect, would be willing to accept the same; and (ii) is free and clear (except for Permitted Encumbrances as defined in Section 3.3 below) of all liens, encumbrances, obligations or defects which are of record prior to Closing. (b) As to each Well that title of Seller which: (i) entitles Seller to own at least the 'Net Revenue Interest' for the Wells identified on Schedule 2.4 as being associated with such Wells, without reduction, suspension or termination throughout the productive life of such Well, except for any reduction, suspension or termination as set forth in Schedule 2.4; (ii) requires Seller to bear no greater 'Working Interest' than the Working Interest for each of the Wells identified on Schedule 2.4 as being associated with such Wells, without increase throughout the productive life of such Well, except for any increase as set forth in Schedule 2.4; and (iii) is free and clear (except for Permitted Encumbrances as defined in Section 3.3 below) of all liens, encumbrances, obligations or defects.

4 Title Opinions: In General Title examiners job is to declare a title valid Determining title validity depends upon one applying the applicable State or Federal law of deeds and conveyances in combination with the law of deed recordation, and the laws of Wills, Trusts, Intestate Estates, Contracts, and Civil Procedure The examiner applies the applicable law to the chain of title in order to declare his/her opinion which may hold up in the court of law Chain of Title: Chain of title all documents affecting a parcel of property. Chain of title is documents of conveyances, court orders, probate orders, leases, easements and all other documents which are title in the Registrar of Deeds, county clerks office in the county in which the property is located OR in a another title repository (e.g. State of Oklahoma Commissioners of the Land Office, Bureau of Indian Affairs title offices, and BLM (Bureau of Land Management) Regional Offices. **Abstracts compilations of all documents affecting title to the property under examination, certified and bonded by a licensed abstractor Mineral Title Examination, Paper No. 1, Page No. 1-1 & 1-4 (Rocky Mt. Min. L. Fdn. 2007).

5 Title Assurance in Real Property There are 4 general types of title assurances: 1) Warranty Deeds (oldest) Deed warrants title to the Sellers interest 2) Title Certificates under the Torrens land registration system (outmoded) 1) Attorney s title opinion based upon abstract and/or stand-up search (our focus) 2) Title Insurance Applicable in most cases to surface title and not mineral title. Attorneys opinions are usually forms of title insurance for the mineral estate. Mineral Title Examination, Paper No. 1, Page No. 1-9 (Rocky Mt. Min. L. Fdn. 2007).

6 Abstracts and Title Opinions Licensed Abstractors Attorneys historically prepared title opinions from abstracts assembled by abstractors Abstract of title: A concise statement, usually prepared for a mortgagee or purchaser of real property, summarizing the history of a piece of land, including all conveyances, interests, liens, and encumbrances that affect title to the property. Also termed brief ; brief of title. - Black's Law Dictionary (8th ed. 2004). A summary of the independent elements of each recorded document in the chain of title. They were initially handwritten early on. Abstractors keep independent set of Indexes which are usually done on a tract basis (i.e. description of land as opposed to Grantor-Grantees or successive parcel numbers whereas the County Clerk maintains Indexes based on Grantor-Grantee or successive parcel numbers or receptions numbers Formal abstracting has disappeared over time Attorneys will perform stand-up searches of mineral title, or outsource this duty to landmen With the advent of computers, most records may now be accessed online, or, will be available soon. This enables the County Clerk of Registrar of Deeds electronic archiving as well as a new source of revenue. All Counties are being digitized in some way with some allowing full access to others providing other briefs of the documents Mineral Title Examination, Paper No. 1, Page No. 1-9 & 1-13(Rocky Mt. Min. L. Fdn. 2007).

7 Abstracts and Title Opinions Title Attorneys Duties Disclose all discoverable defects and explain the various potential impacts Review all past conveyances, past probate proceedings and other orders issued by a court Identify all easements and outstanding mortgages and all documents concerning the leasing of all oil, gas, and other mineral interests and assignments *Note: title insurance is N/A to mineral titles Most title companies will not draft a policy of title insurance for minerals because of the inherent obscurity in mineral titles The title opinion issued by an Attorney constitutes title insurance in that the Attorney certifies as to his/her opinion of the title, and, warrants the same subject to his objections, comments, and requirements Mineral Title Examination, Paper No. 1, Page No. 1-9 & 1-13(Rocky Mt. Min. L. Fdn. 2007).

8 Marketable Title: What is it? Marketable Tile Definition: A title that a reasonable buyer would accept because it appears to lack any defect and to cover the entire property that the seller has purported to sell Also termed good title Black s Law Dictionary 722 (3 rd pocket ed. 2006). Title that is free from apparent defects, grave doubts and litigious uncertainty, and consists of both legal and equitable title fairly deducible of record O.S. Title Courts have used this term to denote title that is good enough that a reasonable buyer would accept it (i.e. no material defects) A.K.A. merchantable title, good title, good and marketable title, indispensible title, and perfect title Many states have enacted marketable title acts E.g. Model Marketable Record Title Act -found in the Uniform Marketable Title Act; adopted by the National Conference of Commissioners on Uniform State Law (An internet search indicates that as many as 22 states have adopted some form of the MRTA) See, e.g., OK Marketable Record Title Act O.S. Title ~ Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007) O.S. Title O.S. Title ~ 30.14

9 Title Opinion Definition: Statement of a opinion by an attorney, surface in the form of a letter, as to the state of the title to land, mineral, royalty or working interests. The opinion will often recommend (OK requires) that curative instruments be obtained before the property interest is purchased, drilled on, on otherwise dealt with. Reports and Opinion Letters Usually limited to the clients interest or the interest of another party to be obtained (i.e. client is purchasing the WI s (working % s), ORRI s (Overriding Royalty % s, or mineral interests of a certain individual or entity Title Memo s, Status Reports, and Mineral Certificates Cursory Title Reports Take-Off Reports Title Memoranda Status/Ownership Reports Mineral Certificiates Oil and Gas Title Opinions Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

10 Cursory Title Reports, Title Memo s, Status/Ownership Reports, and Mineral Certificates Cursory Title Reports Commonly performed by a landman Cursory Lease Checks Determine if minerals are currently leased and/or held by production in order to determine if they are available for lease (usually conducted by field landman) Cusory Surface Title Examination pipeline right-ofway, road construction, etc (usually conducted by field landman) Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

11 Cursory Title Reports, Title Memo s, Status/Ownership Reports, and Mineral Certificates Take-Off Reports AKA run sheets Used during the lease acquisition phase of a natural resource project in order to establish mineral ownership in regards to leases LEAST thorough and comprehensive of title reports Frequently prepare by a landman or lease broker Can take the form of a written report ID ing apparent mineral ownership by tract OR...it may be in the format of a standard BLM (Bureau of Land Management) use plat or other map VERY limited Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

12 Cursory Title Reports, Title Memo s, Status/Ownership Reports, and Mineral Certificates Title Memoranda Used at the acquisition phase of a project Reflect material conveyances, reservations, exceptions, unreleased leases, and encumbrances MORE thorough than the Take-Off report but still less thorough than a formal status report or title opinion Mostly prepared by an abstractor or landman Limited to what is specifically requested NOT used in drilling Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

13 Cursory Title Reports, Title Memo s, Status/Ownership Reports, and Mineral Certificates Status/Ownership Reports Detail the status of the lands as reflected by title records or one or more title repositories (e.g. BLM state office) Itemized list of all historical index entries for the lands covered, relevant statutes, etc. Examiner many times attaches photocopies of relative orders, patents, surveys, plats, and serial register pages Historically, requested at the acquisition phase or drilling stage of a project Prepared by attorneys OR landmen for delivery to in-house or ultimately, outside title examiners Most documents and records are available on the BLM State Office, Bureau of Indian Affairs title offices, and state land agency websites In general they exist as limited updates of title Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

14 Cursory Title Reports, Title Memo s, Status/Ownership Reports, and Mineral Certificates Mineral Certificates Sometimes available from abstract title companies Generally 1 or 2 pages long Contain a tabulation of ownership and indentify title encumbrances Very rarely used today Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

15 Oil and Gas Title Opinions Comprehensive examination of all documents filed against a certain tract of land used for Drilling purposes. Covers surface minerals, leasehold ownership, and overriding royalties and, provides an opinion as to all mineral owners how they acquired their interests and all problems associated with their ownership 4 Basic Elements of Attorney s Opinion: 1. ID s ownership of lands: 1. Surface used for identifying the proper surface owner(s) for rights of ingress & egress for the oil company (i.e. surface location, lease roads, easements both past and future) 2. and mineral ID s all owners of minerals so that OGL leases can be secured from proper parties 2. ID s evidence upon which he draws his legal conclusions 3. ID s defects in title 4. Recommends how defects might be cured Acquisition Opinions Drilling Title Opinions Division Order Title Opinions Drilling and Division Order Title Opinions Division Order Summaries Security or Financing Opinions Supplemental Title Opinions Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

16 Oil and Gas Title Opinions Acquisition Opinions Obtained prior to closing of an asset sale or stock acquisition** (note lock-stock & barrell asset acquisition doesn t necessarily require title opinion might just have cursory title opinion or let the landman do his due diligence) If acquiring proven/producing assets, the acquisition opinion may not ID surface ownership i.e. usually will only pertain to seller s working interest in the property (cost-bearing interest and working interest) If acquiring unproven assets, acquisition opinion may take surface ownership into account Also used to determine proven un-developed properties for additional drilling after acquisition Usually limited to the sellers interest and its defects and limitations Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

17 Oil and Gas Title Opinions Drilling Title Opinions Prepared prior to the commencement of drilling operations Examine all title repositories affecting proposed drill-site lands: A. Fee titles, County Clerk or Registrar of the Deeds for that county, Borough or Township B. BLM Public Rooms and online services for Federal Lands C. State land offices for lands owned by the State (i.e. Commissioner land office OK, GLO Texas, Colorado State Board of Land Commissioners) D. Companies selling online digital access to records in various counties Examine BLM records, applicable state agency records, county recorder records (of which the land is situated in), and county clerk/assessor/treasurer records Also focus upon easements, zoning restrictions and lease stipulations that affect the timing or location of drilling operations Needs to accurately reflect the record ownership of both surface and mineral estates including examiners comments upon title defects and recommendation(s) re: corrective action(s) N/A for title issues relating to allocation of proceeds of production however, due to advances in spreadsheets revenue distributions are usually included ALWAYS prepared by Attorney s Mineral Title Examination, Paper No. 1, Page No Paper No. 15, Page No (Rocky Mt. Min. L. Fdn. 2007).

18 Oil and Gas Title Opinions Drilling Title Opinions SEE attached opinions Mineral Title Examination, Paper No. 1, Page No Paper No. 15, Page No (Rocky Mt. Min. L. Fdn. 2007).

Oil and Gas Title Opinions Division Order Title Opinions Prepared after well is drilled, when it is evident that well is capable of producing in paying quantities deals with mathematical distribution

19 Oil and Gas Title Opinions Division Order Title Opinions Prepared after well is drilled, when it is evident that well is capable of producing in paying quantities deals with mathematical distribution of royalties Based on Supplementing the prior Drilling Opinion by inclusion of all leasehold assignments, royalty conveyances, and other transactions to effectuate the drilling of the well Report ownership of minerals produced from a property for purposes of proceed distribution E.g. lessor s royalties, working % s, overriding royalties, production payments, net profit % s, and other lease burdens Usually report net revenue % of each owner in decimal format, with a basis of 1.0 representing the whole mineral pie interests (**usually carried out to 7 or 8 decimal places) Net revenue % 18.75% 26% 20% 25% 10% Working %'s #1 Bobby B Carey C Working %'s #2 Royalty %'s Mineral Title Examination, Paper No. 1, Page No Paper No. 15, Page No (Rocky Mt. Min. L. Fdn. 2007).

20 Oil and Gas Title Opinions Division Order Title Opinions Title comments focus less on surface estate and more on issues affecting the oil and gas leasehold interests and mineral/royalty interests Used by corporate landman/division order analyst Division order title opinion is usually delivered to a division order analyst, a more detailed mathematical and analytical person, whose main job is to cure the post production title defects and set-up the companies distribution, division of interest decks for each O&G well this includes payments of royalties, overrides and working interests this division order analyst is usually a more detailed land person whose job is to distribute revenue and proceeds to owners of leaseholds and is someone who is probably the most critical and most knowledgeable towards an attorney s title opinion Statutory Penalties for non-payment of revenue: **Note various states have enacted statutory penalties for non-distribution of royalties within a timely period and also they provide for immediate interests to accrue on royalties upon first sales at rates that do not exist in the current economic climate (i.e. 6% for royalty payments that are not paid immediately and anywhere from 12-18% for royalties not paid within a certain specified period this can be very costly to an O&G company on wells that are not producing but are distributing royalties upon first sales and may even result in mal-practice in the future) ***Many consider this the HIGHEST state of the title examiner s art*** Mineral Title Examination, Paper No. 1, Page No Paper No. 15, Page No (Rocky Mt. Min. L. Fdn. 2007).

21 Oil and Gas Title Opinions Drilling and Division Order Title Opinions Most comprehensive title opinions Combine elements of both drilling and division order title opinions into one Are usually limited to the well drilled and the formation produced because most agreements for the operations are focused on the producing horizons All title defects are discussed, including surface, mineral, and leasehold % s Distinguishes between requirements needing action prior to drilling and those requiring action prior to production proceeds **Companies & attorneys are moving this direction The advent of spreadsheets & easier number crunching has helped drilling opinions become more comprehensive thus, a drilling opinion needs less work to supplement it to a Division Order title opinion and usually the Division Order Analyst will prepare revenue distribution decks **However, not that assignments and farmouts and joint operating agreements (JOA s) can cause a complete different title than the original drilling opinion Mineral Title Examination, Paper No. 15, Page No (Rocky Mt. Min. L. Fdn. 2007).

22 Oil and Gas Title Opinions Division Order Summaries Prepared when: 1. Separate title opinions for different tracts have been previously prepared and are combined for a different unitized formation 2. Tracts are pooled and/or unitized voluntarily or statutorily 3. Client wishes to know how to distribute proceeds of production within a pooled, or unitized area Mineral Title Examination, Paper No. 15, Page No (Rocky Mt. Min. L. Fdn. 2007).

23 Oil and Gas Title Opinions or Acquisition tile opinions Security or Financing Opinions Created in connection with mortgages of producing mineral properties and leasehold OR current or future production for project exploration and development (i.e. proven undeveloped leasehold [PUDS] or minerals) Follow tabulation form of either Drilling Title Opinion or Division Order Opinion Big difference these opinions are tailored for financial institutions AND the opinions are only direct at the interest of the borrower or debtor and not other involved parties within the well (e.g. Have working %) Mineral Title Examination, Paper No. 1, Page No (Rocky Mt. Min. L. Fdn. 2007).

24 Oil and Gas Title Opinions Supplemental Title Opinions Prepared because an existing title opinion is too old to be relied upon or because drilling was postponed due to economics, current market conditions, or waiting on off-set well results towards proving up the new drilling activity Relevant public records are searched & existing title opinion is updated/changed as need be Any title issues that have arisen since previous title opinion should be discussed Issues and requirements from prior title opinions should be addressed and restated Also accounts for gate-crashers (i.e. people joining up at the last moment) holds everyone accountable Should examine the prior opinions to determine any and all limitations of the prior examination, should further determine any inconsistencies from prior opinions to the present. If prior opinion is limited supplement the same to overall relevant title as to the new proposed operations Mineral Title Examination, Paper No. 15 Page No (Rocky Mt. Min. L. Fdn. 2007).

25 Format of Title Opinions: a. Legal Description b. Materials Examined c. Ownership d. Taxes e. Easements and Rights-of-Way f. Liens and Encumbrances a. Prior O&G leases which are not released of record g. Current Oil and Gas Leases h. Current Assignments of Oil and Gas Leases i. Current Assignments of Overriding Royalty j. Title Comments and Requirements k. Summary of royalty, leasehold, and overriding royalty interests (Gross interests and net interests) Mineral Title Examination, Paper No. 15 Page No. 15-3/4/5/6 (Rocky Mt. Min. L. Fdn. 2007).

26 Format of Title Opinions: Title Comments and Requirements* 1. Patents 2. Delay Rentals 3. Lease Maintenance 4. Special lease provisions 5. Unrecorded assignments 6. Unreleased oil and gas leases 7. Unrecorded agreements 8. Zoning 9. Split-estate laws 10. Surface inspection 11. Limitations and exceptions 12. Joint Operating Agreements (JOA s) 1. same as above with the exception of requirements as to distribution of royalty *comments commonly found in drilling and division order title opinions Mineral Title Examination, Paper No. 15 Page No. 15-6/7/8/9 (Rocky Mt. Min. L. Fdn. 2007).

PREPARING TITLE OPINIONS, COMMENTS AND REQUIREMENTS: DECIDING WHAT S IMPORTANT (IS THIS THE BABY OR THE BATHWATER?) Table of Contents

PREPARING TITLE OPINIONS, COMMENTS AND REQUIREMENTS: DECIDING WHAT S IMPORTANT (IS THIS THE BABY OR THE BATHWATER?) Table of Contents I. Introduction 1 II. Overview of Contents of a Title Opinion 1 III.