Mineral rights are a hot issue in real estate transactions. Since mineral rights can also be a confusing topic, I sat down with our legal counsel Jay Fitzgerald to try and clarify what mineral rights are and whose role it is to determine those rights.
Q: Let’s say a buyer is interested in the mineral rights on a potential property. How would a buyer find this information?
A: What we usually suggest they do is hire what our industry has historically called a “landman”. A landman is a person who professionally reviews the mineral conveyances or severances in a chain of title, and they will usually give an opinion as to who holds the mineral interests in a piece of property. If an owner holds both the right to use the surface of the property and the right to produce the minerals on the property, they hold an unsevered property interest. A “severance” occurs when the rights to use the surface of the property and the rights to the minerals from the property are split, with one person owning the right to use the surface and another person holding the right to produce and benefit from the minerals on the property.
Q: Are mineral rights something title companies research?
A: For insurance purposes, title companies will typically do one of two things: In a county where we are able and willing to do so, we will research the minerals back to the early 1900s in order to be able to list specific mineral severances on our title insurance commitment in Schedule B as exceptions. When we do that, there will generally be language in those exceptions stating that we did not research any further conveyances of a given mineral interest once it was severed. In other words, we do research conveyances of a mineral interest to a limited extent, for the purpose of determining how we will insure. The other way mineral rights are addressed by title insurance companies is to show the promulgated general mineral exception, which makes exception for any mineral severance or lease of record.
Q: Would the promulgated general mineral exception eliminate coverage in cases where there was a mineral severance prior to 1900?
A: Yes, although the more typical case, in a situation where there is limited title evidence, would be that we only have title evidence going back to around 1950. If we can research back to 1900 or earlier, the typical underwriting standard is that we may proceed to list specific severances as exceptions without the general mineral exception.
Q: If I am the owner of the property and I have a title commitment with an exception stating that one-third of the mineral estate has been conveyed to someone else, am I guaranteed by my title company to own the other two-thirds interest in the mineral estate?
A: No. The only reason we have exceptions on the title commitment, and ultimately the policy, is because the company is willing to insure on those terms. If you’re the seller on the transaction, nothing on the title commitment insures you whatsoever. You might look at your existing title policy and see what it reveals. If you’re the buyer and want to know the status of the mineral rights for a property, our advice in every case will be to have a landman review the chain of mineral severances and conveyances for you. Regardless of what’s reflected on the commitment, which will usually only contain the original mineral severances (and perhaps mineral leases that we find that have not been expressly terminated), the buyer may want to know exactly how the mineral rights have been divided. It is entirely possible that there are scores of fractional interests in the mineral rights on a property, particularly if a large portion of the mineral estate has been separated out and then re-divided through the years among several people. This is often the case when there has been active mineral production on the property.
Q: Would it be correct to say the title commitment and title policy represents more of a notification of what has been filed in the county records regarding the mineral estate and is not a guarantee as to what mineral interests are owned?
A: I would say that our commitment is never intended as a representation of title, whether it’s title to the mineral estate or any other aspect of property rights. It’s simply an indication of how we propose to insure on the policies that we are going to issue.
Q: So the policy doesn’t guarantee that an owner actually owns any mineral rights?
A: It depends on the exceptions. If you have a policy where there are no general exceptions made as to minerals, and no specific mineral exceptions taken, then you may have policy coverage extending to a mineral estate. It is unusual to see a policy owner make a claim because they thought they had a mineral estate and they didn’t actually have one because in an active production county the mineral rights have most likely already been severed by instruments of record. The last major slew of claims like this came out of the Dallas area a few years ago, when people realized there was value in natural gas in the Barnett Shale.
Q: While mineral rights issues don’t apply to most transactions we deal with, there are a few outliers. In what instance should an agent advise their buyer/seller to use the TREC mineral addendum?
A: First, when the seller simply says, “Hey, I want to be sure I reserve any mineral rights I have.” That’s pretty obvious. Additionally, the TREC form could be used when there is active production on the property or some other value in the minerals. In most cases there’s already mineral production and a stream of income from production, and as a seller you want to figure out if you’re going to hang on to your rights to mineral production, or you could decide to adjust the sales price for whatever you think is the value of the future mineral income.
Q: So really at the time of listing, when a realtor is taking a listing that doesn’t fit in the box, maybe it’s out past Liberty Hill, they need to be asking the question “Do you know anything about your mineral rights?” and they need to know if they want to keep that or convey it.
A: Often, yeah, it will be outlying ranch lands, right.
Q: In order for the seller to reserve their mineral rights, do they have to work with a landman to be sure they’ve correctly reserved their rights?
A: It’s always a good idea to figure out exactly what you have now when you’re trying to negotiate for a future value. For example, in a situation where the property has a mineral lease on it that’s going to terminate in three years, that’s vastly different than other interests that are for a longer term and therefore more valuable, or may have more future value than present value. Part of the trouble we have right now in clarifying mineral rights is there are new and novel ways of extracting minerals from property that have not been considered in the past.
Q: How much does it typically cost for a landman to do research on a property’s mineral estates?
A: It’s going to vary depending on the complexity of the chain of title, and also the volume of real estate records for a given county. If it’s a county with a relatively small volume of real estate records and the property has relatively few severances to follow, then the research is probably going to be less expensive. If the property is located in a county where there has been a lot of mineral activity, there is a larger volume of real property records to research, and there are more records directly affecting the mineral estate, that research is probably going to cost more.
Q: Does Independence have a list of people they use for minerals searches?
A: Yes. We have a short list of people to whom we refer “land man” work.
Q: How do mineral rights differ from water rights?
A: There’s a running debate on what “mineral rights” are. There are certain mineral interests perhaps you could consider as the “classic” mineral interests, which included rights in common mineral types considered included in “minerals” generally and requiring no specification. But there are other types of mineral interests that are a little bit more exotic that require specification because people were concerned these types of minerals wouldn’t be included under the general scope of “classic mineral rights”. Water rights are separate and apart from mineral rights. They’re governed by a different area of law. Once you get into the area of water rights, there’s a whole separate set of licensing and records for water rights interests that are kept by the state. There are experts that practice water rights law. If someone is concerned about their potential water rights on a piece of property, they should go to a water-rights expert.
Q: So we’ve established that a title policy and commitment do not guarantee whether a property owner holds a mineral estate or water rights, and there are other experts who need to research these issues for the owner to be certain of full ownership and use of any rights on the property.
A: The title insurance policy only insures mineral rights subject to the exceptions set out in Schedule B.
I hope this information regarding mineral rights in real estate was helpful to you. We also wanted to let you know that if mineral rights have been severed from a piece of property then the Central Appraisal District in your area will typically assign the severed piece of property its own account number.