The New Kid on the Block: The Geothermal Energy Exception

If you have received a Texas title insurance policy recently, you may have noticed the inclusion of a new type of coverage exception related to “geothermal energy and associated resources.” The exception may read something like “all leases, grants, exceptions, or reservations of the geothermal energy and associated resources below the surface of the land, together with all rights, privileges and immunities relating thereto.”  Why are these geothermal energy exceptions now popping up in title policies?

What is geothermal energy and is it different than minerals?

Geothermal energy is a renewable energy source that comes from the heat stored beneath the Earth's surface. When extracted, it is primarily used for heating and to generate electricity. Historically, Texas law has defined mineral rights to include substances like oil, gas, and coal, but not expressly to include geothermal energy. This has led to some confusion and disputes over ownership of geothermal resources and whether geothermal rights are included in a standard mineral rights transfer or whether they need to be explicitly mentioned. If geothermal energy is located under a piece of land, does the landowner also own the rights to that resource? Unlike oil and gas, which have well-established legal frameworks in Texas regarding ownership rights, geothermal ownership rights have been less clear.

How do title companies handle mineral rights and geothermal energy rights in Texas title policies?

Title companies have long taken exceptions for oil, gas, and mineral rights. In Texas, the ownership of mineral rights is often separate from surface land ownership. This separation can lead to complex and layered histories of ownership that can be difficult to fully trace. Due to the potential for undiscovered claims related to mineral rights, as well as the potentially costly nature of legal disputes over mineral rights and mineral development, title companies typically exclude minerals from coverage in Texas. By contrast, until recently, title companies did not take separate exceptions for geothermal energy rights.

What is Texas SB 785?

That began to change with the passage of a new Texas law, SB 785, which took effect June 18, 2023. In SB 785, the Texas legislature clarified that “geothermal energy and associated resources” do not constitute minerals, and minerals do not constitute “geothermal energy and associated resources,” under Texas law. In other words, heat is different than oil and gas. Further, the legislature cleared up the question of ownership of geothermal energy rights. SB 785 adds a new section to the Natural Resources Code (Section 141.004) that provides that “geothermal energy and associated resources” below the surface of the land are owned as real property by the landowner, or, if the surface estate and mineral estate have been severed, by the surface estate owner. Finally, the new law amends Section 2703.056 of the Texas Insurance Code to allow title companies to take exceptions for “geothermal energy and associated resources.”

How has Texas SB 785 impacted title insurance in Texas?

As a result of that statutory amendment, title companies have begun to add exclusions to Texas title insurance policies for rights related to geothermal energy and resources. Despite SB 785 more clearly defining geothermal ownership rights, title companies still see a significant risk of disputes over this issue, as parties continue to wrestle with the complexities of defining and enforcing these rights. Such disputes may include, for example, a boundary dispute affecting title if a geothermal resource pool crosses property lines and leads to overlapping claims. Geothermal development and extraction could also lead to title issues if, for instance, they are carried out in a way that leads to enforcement actions or environmental liabilities that encumber the property title.

In an effort to mitigate these types of risks, title companies are availing themselves of the amendment to the Texas Insurance Code to carve out coverage for geothermal energy rights. It remains to be seen whether Texas will ultimately promulgate an insurance endorsement for coverage for geothermal resources, as it has done with minerals endorsements. But what is clear is that parties to real estate transactions in Texas can expect to see geothermal energy exceptions in title commitments and policies more often.