With the passage of laws during the 2011-12 North Carolina legislative session regarding the regulation of hydraulic fracturing, also called “fracking”, knowing whether your client’s new purchase has had or will have mineral rights severed prior to closing is important for you to responsibly represent your client.
Under long‐established principles of property law, the minerals in place underneath the surface of the earth, including oil and gas, can be owned separately from the surface of the property. Essentially, this means that minerals and mining rights can be created and transferred separately from the surface rights, and that those mineral rights constitute a separate and distinct property interest. As such, mineral rights can be transferred by a reservation in a deed, or by a direct grant, sale, or assignment of such rights, or by some other legal process just like the typical conveyance of a home.
Mineral deeds that convey the rights to all minerals may or may not specify the conveyance of oil and gas rights, in addition to the mineral rights. It is important to note that in North Carolina, a standard reservation of “mineral rights” in a deed, or a conveyance of “mineral rights” alone may not convey oil and gas rights. The ultimate determination of whether a plain “mineral rights” conveyance alone would include oil and gas rights would be made by a court or other arbiter based upon the terms of the conveyance and the intent of the parties at the time of the conveyance. Therefore, to avoid any ambiguity, agreements to transfer oil and gas rights along with any mineral rights should and typically do describe with specificity what the parties mean to convey.
When oil and gas companies believe deposits containing oil or gas may exist in an area, their employees or investors may approach private and public landowners with offers to lease such land for exploration and future mining. If a landowner decides to enter into a lease with a gas company, the company pays the landowner for the right to access and use the landowner’s land for exploration and extraction. Developers have sought to sever, or reserve, the mineral rights to a property before selling new construction homes. This means that the developer, and not the homeowner, has the right to lease its interest to gas companies and retain any benefits of the profits or possibly mine for the natural resources themselves.
Compensation
The main forms of compensation that are paid to landowners who enter into leases are bonus payments, royalties, and rentals. A bonus payment is a lump sum payment made to the landowner at the time the landowner executes the lease. Gas companies often negotiate bonus payments on a per acreage basis. Royalties are a share of the production profits that may be paid when and if there is oil or gas production on the property. Lastly, “delay rentals” are rentals paid to the landowner to maintain the lease during the interim period before production begins. In some cases, delay rentals are included as part of the initial bonus payment. Gas leases, like other types of contracts, are unique to the parties negotiating the terms and can vary greatly.
The process of fracking begins with well construction by drilling hundreds to thousands of feet below the land surface. This vertical well can then extend out into lateral or horizontal sections, often stretching as far as one thousand to six thousand feet outward (more than a mile). Fluids, consisting primarily of water with chemical additives, are pumped down into the well at high pressure. This process will open or enlarge fractures in the shale rock – fractures that may extend several hundred feet away from the wellbore. If the mineral rights are severed from the land being purchased by your client, then natural gas could be extracted from beneath that lot in the future through fracking.
Pursuant to property laws, the owner of the mineral rights typically has the right to use the surface of the property in such ways and to such an extent as is reasonably necessary to obtain the minerals under the ground. As such, in oil and gas extraction cases, the mineral rights owner’s interest is referred to as the “dominant” estate, and the surface of the land is deemed “servient” to the mineral owner’s right of use. Therefore, unless otherwise agreed upon, the mineral and gas rights owner may enter onto the land to explore for production, construct roads to the drill site, build pipelines, storage tanks, power stations, and other structures, and perform other activities consistent with the owner’s right to exercise its oil and gas rights. These substantial rights held by the owner of the subsurface mineral, oil, and gas rights demand that homebuyers understand fully what, if any, rights are severed from the land they seek to purchase.
With very few exceptions, state law now requires all sellers, even builders and sellers of new construction, to disclose in the sales contract the status of oil and gas rights regarding any property offered for sale. The limited exceptions deal primarily with transfers of property pursuant to court order or the administration of an estate, sales between co-owners of the property, and lease with option to purchase contracts where the lessee occupies the dwelling. Notably, parties negotiating a real estate sale cannot waive this oil and gas rights disclosure even if they agree not to complete a residential property disclosure statement pursuant to N.C. Gen. Stat. Chapter 47E.
Mandatory Language
To find the mandatory language that all real estate contracts must now include in boldface type, see N.C. Gen. Stat. § 47E-4(b2). The law requires the seller to answer three specific questions, and then obtain the buyers’ initials to acknowledge the oil and gas disclosure as part of the real estate contract. The seller must answer the following:
1) whether the oil and gas rights were severed from the property by a previous owner;
2) whether the seller has personally severed such rights from the property in the past; and,
3) whether the seller intends to sever said rights from the property prior to transfer of title to the potential buyer.
All three questions must be answered “yes” or “no,” except that question 1) may be answered “no representation” by the seller.
Severance of mineral rights will also be disclosed in a deed in the chain of title of the property being sold. However, it is important to inform consumers about any severance or reservation of mineral rights at the time they are considering making an offer and going under contract for the purchase of the property. Since the conveyance or severance of mineral rights is a material fact, it must be disclosed to potential buyers at or before the time a buyer makes an offer to purchase. To ensure that you provide the best service for your clients, be diligent when reading all contracts to determine what the seller discloses as to the conveyance of mineral rights.
This article came from the October 2012-Vol43-2 edition of the bulletin.