More Changes to Ohio Title Insurance

Substitute Senate Bill 165 becomes effective on June 30, 2010. The bill amends ORC 1509.31 and includes the addition of a new paragraph 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 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 agreement or other instrument 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 royalties must be paid to the new purchaser of the foreclosed property.

In light of this new super priority for Oil and Gas Leases, Pipeline Agreements and other instruments related to the production or sale of oil and gas, the following standard exception will now start appearing in title commitments and policies:

“Oil and gas leases, pipeline agreements or any other instruments related to the production or sale of oil and gas which may arise subsequent to the date of the Policy.”

Unfortunately, because of the broad statutory reference to “other instruments related to the production or sale of oil and gas” which could include, for example such instruments as options to lease, pipe line right of ways, etc., title insurers will not be in the position to narrow this exception by attempting to define what is or is not an “instrument related to the production or sale of oil and gas” if requested to do so by the proposed owner or lender.

Unlike other standard exceptions which may be deleted based on a title insurer's underwriting requirements, this exception will have to remain in the policy.

It is unknown at this point whether oil and gas leases, which are currently subordinate to existing mortgages, will be treated under the new law retroactively, so that, those leases and/or instruments would remain as exceptions to title regardless of whether there is an attempt to wipe them out through the foreclosure action.

Additionally, with appropriate underwriting considerations ALTA 9 type coverage may still be provided, however, it is highly unlikely that title insurers will continue to provide the type of affirmative coverage which would insure the lender against loss or damage arising out the lack or priority of the insured mortgage over any oil and gas leases.