Corporate Law / 5 min read
A client recently went under contract to purchase a parcel of land to develop, and the seller purportedly had done the research and due diligence needed to make the property ready for this client’s planned development. Upon reviewing title, however, we discovered a pipeline easement running through the middle of the property in a way that our client’s planned development would not work. The seller told us that there was no pipeline within this easement, that the easement holder was no longer in existence, and that it shouldn’t be a big deal. Maybe. Maybe not.
If you are under contract to develop property in Texas and this were to happen to you, what should you take into consideration when you evaluate the situation?
1. The Seller.
The seller should have done some more due diligence. The seller knew about this pipeline easement but declined to do anything to address it when it was purchasing the property itself. The seller could have: (a) required that the property owner seek to get the easement terminated or abandoned before closing on the property, and then have the property’s survey reflect that no easement exists; (b) obtained either implied or affirmative coverage from the title insurance company regarding the easement; or (c) begun entitlements to the property with an understanding that the easement will remain and must be accounted for in the final plat or land plan. Instead, this seller decided to gamble by doing none of these and passing the risk along to whoever would purchase the property from the seller.
2. The Buyer.
You, however, as the purchaser, will have hired good legal counsel to help you through the buying process, which includes reviewing title and survey and discovering this easement issue. What are your options in this situation?
a. You could object to this easement during your title-review period and then terminate the contract if the seller does not adequately cure such objection.
This does not have to be a quick decision, of course. You could put pressure on your seller to take care of it, maybe by determining who might be able to speak for and bind the defunct easement owner and procure some sort of written release or termination of this easement, to be recorded in the real property records. The seller could also work with the title company and its counsel to determine what they would need to delete the easement from the list of exceptions on the title insurance policy. At the end of the day, though, if the seller does not sufficiently deal with the objection, you can terminate the contract and receive back your earnest money (if done timely and in accordance with the contract).
b. You could ignore the easement and/or waive the title objection, accepting the property as it is, without doing anything about the pipeline easement.
If this is your option, then you are accepting the risk of someone possibly deciding to utilize this easement, which could ruin your plans and/or your property improvements, depending on when this easement owner makes such decision. You are also accepting the risk that any subsequent buyer would be willing to accept the same risk whenever you are trying to sell the property.
One line of questions with respect to either option is the following: What did you and the seller agree upon with respect to the property? Are you purchasing property that is supposed to be fully entitled and ready to develop? Are you purchasing property with the understanding that it has some warts/risks to it? Does the purchase price reflect the amount of risk that you, as the buyer, are accepting?
3. The Easement.
The biggest question regarding the easement itself is whether or not there is an actual pipeline in the ground. An on-site inspection should be made, and the GIS website for the Texas Railroad Commission should also be consulted. If there is no pipeline in the ground (which our seller had insisted and the GIS site seemed to confirm), then the next most important question is whether the easement itself still actually exists. This easement could be either (i) an easement in gross or (i) an easement appurtenant.
a. An easement in gross is one that is owned by a person or business, personal to that grantee. If the easement owner/grantee dies or dissolves, then the easement itself terminates. b. An easement appurtenant is attached to (“runs with”) the land and is passed down to whoever owns the dominant estate (the land that benefits from the easement).
It is understood that most pipeline easements are in gross. But just because the easement in question is a pipeline easement does not necessarily make it an easement in gross. To determine which kind of easement we are dealing with, we need to review actual language of the document that created the easement. If this easement is an easement appurtenant, then it is still in existence, and any owner of the property should take the easement into consideration when making decisions about the property. However, if this pipeline easement is an easement in gross, then you can feel relatively comfortable that it has terminated with the dissolution of the entity that owned the easement.
4. The Title Company.
Notwithstanding the foregoing, it would still be smart (and we would advise you) to get the title insurance company to insure over the easement. You will want the seller (or yourself) to work with the title insurance company’s underwriting attorney, who will assess the risk for the title insurance company. If the underwriter determines that the risk is low enough for the title insurance company to insure over this easement, then the insurer may either (a) delete the easement from the list of exceptions to coverage or (b) issue affirmative coverage by way of a special endorsement to the title insurance policy. Either way, you can then feel even more comfortable moving forward with the purchase of the property.
At the end of the day, this pipeline easement (and many other considerations when buying and selling property) needs to be addressed, and the parties involved (whether buyer, seller, or the title insurance company) will negotiate who will take on the risk for dealing with any negative effects from the easement. The deal does not have to fall apart when something of this nature shows up on a title commitment or survey, but it will certainly be to your advantage to understand the ins and outs of how to deal with it. And good legal counsel can help you with that.