Title Insurance Considerations for Severance of Mineral Rights

At a Glance

• For real estate owners, tenants and lenders, understanding whether a mineral rights severance has occurred is essential to assessing property value, potential risks and legal obligations.
• In addition to the information value of a title search and a mineral rights search, in certain instances, specialized endorsements can be obtained to provide coverage for certain risks associated with the mineral rights for a specific property.
• It is paramount that real estate owners, tenants and lenders perform rigorous due diligence for potential transactions involving real estate located in areas where minerals have been discovered or with a history of mineral extraction.

Mineral rights “severance” is a critical issue in real estate transactions across the United States, particularly in regions with a history of mining activity. Severance occurs when the rights to explore, extract and sell the minerals located beneath a property are legally separated from the rights to own and use its surface. The consequences of an undiscovered severance can be dire.

For instance, an owner may discover that the mineral rights beneath its property were severed long ago, allowing a third party to bring heavy equipment onto the property to commence subsurface mining operations. In some cases, such a party may also discover that it has no legal right to have the surface of its property supported by the minerals located beneath it, leading to damage to the structures on the surface. These situations can result in unforeseen disruptions, damage and litigation.

As a result, for real estate owners, tenants and lenders, understanding whether a mineral rights severance has occurred is essential to assessing property value, potential risks and legal obligations. By providing protection from potential financial losses associated with defects in the title to a given property, including potential claims relating to the minerals located on and underneath its surface, title insurance offers such parties a way to mitigate some of the risks associated with mineral rights severances.

Title Searches and Mineral Rights Searches

The path to obtaining a title insurance policy and understanding the mineral rights for a particular property starts with a title search. As many mineral rights severances date back to the 19th and early 20th centuries, an additional and more intensive mineral rights search may be required to identify if a mineral rights severance has occurred. In many cases, poor record keeping of historic documents may make a title search or mineral rights search difficult or impossible to complete. Additionally, since tracing ownership through decades of transactions can be time-consuming and costly, all parties involved should allocate sufficient time for searches to be performed, reviewed and analyzed.

Where it is possible to complete a full mineral rights search, the applicable title insurance company will identify any mineral rights severances that have taken place and list them as exceptions to the coverage provided by the title insurance policy to be issued. These searches provide potential buyers, tenants and lenders with valuable information concerning the details of past severances, which can be used to evaluate the risks affecting the specific property’s potential use and value.

Endorsements

In addition to the information value of a title search and a mineral rights search, in certain instances, specialized endorsements can be obtained to provide coverage for certain risks associated with the mineral rights for a specific property. For instance, where available, the ALTA 9-06 (Restrictions, Encroachments and Minerals) endorsement offers coverage for damage to existing improvements caused by surface access related to easement rights or mineral interests. While coverage from this endorsement excludes subsidence and is limited to surface entry-related damage to structures, it does provide protection from recorded environmental covenants. For loan policies, the ALTA 9.7-06 (Restrictions, Encroachments, Minerals — Land Under Development) endorsement extends similar coverage to future improvements.

Similarly, the ALTA 35 Series of endorsements is designed for situations where mineral rights have been severed and surface entries to access the minerals are possible. For instance, where available: the ALTA 35-06 (Minerals and Other Subsurface Substances — Buildings) endorsement insures against losses from the removal or alteration of buildings arising from the exercise of mineral rights; the ALTA 35.1-06 (Minerals and Other Subsurface Substances — Improvements) extends coverage beyond buildings to nonstructure improvements; and the ALTA 35.3-06 (Minerals and Other Subsurface Substances — Land Under Development) covers future improvements against the same risks.

In Conclusion

While title insurance can, to an extent, protect against potential risks associated with mineral rights, such protection is not, however, comprehensive. As a result, it is paramount that real estate owners, tenants and lenders perform rigorous due diligence for potential transactions involving real estate located in areas where minerals have been discovered or with a history of mineral extraction.