What is a Warranty of Title in an Oil and Gas Lease (OGL) and what are its implications?
A warranty is an assurance by one party to the other party that specific facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed.
In an OGL a warranty of title provision creates only a covenant of warranty, a promise to defend the lessee against future lawful claims and demands. Therefore, the warranty of title provision binds the Lessor to defend the title against all claims - even those arising from previous owners.
The remedy is if there is failure of title, the Lessee may recover damages from the Lessor.
A warranty of title in an OGL (or business or real estate transactions) may be express, statutorily or implied.
For example, an express warranty in an OGL may read substantially as follows:
“Lessor agrees to warrant and forever defend…”
An implied warranty arises from the common law implications of warranty of merchantability or suitability or a particular purpose.
As the name implies a statutory warranty occurs by operation of statute.
With no alteration to the express provisions of the OGL, if title fails, you must repay the money.
In many cases, the mineral owner had some or no knowledge of its ownership in a particular tract. The landman pays good money, and they sign a lease. The landman makes a mistake on title and the company wants either his hide or the money back – all of it in the event of total title failure.
What is the mineral owner to do to avoid this potentially disastrous result?
Here is what some do.
1. They strike the warranty clause. This does almost no good. You have that nasty little implied warranty thing. But you say, I ran a pen through it and deleted it – that means that I did not want to warrant title! No, Kemosabe, that is not what you did. By the interlineations, you forced the interpreter to IGNORE the interlineated portion. The interpreter cannot guess what you wanted. Repay the money.
2. They change the clause to read, “Lessor does not agree to warrant nor defend…” Again, that nasty implied or statutory warranty thing, along with the COVENANT OF SEIZIN. The Covenant of Seizin is possession only, and it is therefore not broken if the Lessor is in possession and delivers such possession to the Lessee. Possession is not the same thing as title. BUT, if there is anything in the agreement that even implies that the Lessor is in possession of a particular title, then the Covenant of Seizin applies. The way that this triggers in an OGL is in the granting clause. When words or grant are used, such as “lease, set over and convey to Lesseee…” then the Lessor has asserted constructive title by the granting language and the end result is the same as title failure. Repay the money.
So how do you handle this problem? So far, the commonly used methods leave much to be desired.
The real answer is in an artfully crafted clause that does some very important things.
- The clause broadly disclaims warranty of title.
- The clause provides that any monies received by the Lessor under the terms of the lease will not be returned.
- The artfully crafted language in the clause will ensure that the covenant of seizin will not attach.
- The clause will state that the burden of examining title rests with the Lessee.
- The clause will prohibit the Lessee from requiring a bond or abstract to be furnished.
- The clause will state that the risk, cost and expense of title failure rests with the Lessee and not with the Lessor.
To really protect yourself get with a lawyer or trusted professional to get the clause that keeps you from re-paying monies after you have spent them and also paid taxes on the income.
Items 1 and 2 above are the result of do-it-yourself landowners and landmen protecting their client.