From This Standpoint, Do Gas and Oil Mix?

Dear Forms Guy: We have a few questions about the new Oil and Gas Rights Disclosure that was added to the Offer to Purchase and Contract form last October. Are you the guy who can help? Sincerely, Moe, Larry and Curly

Dear Moe, Larry and Curly: I’ll do my best, guys. What are your questions? Sincerely, Forms Guy

Moe: Our first question is, how are we supposed to handle this section of the form when we’re helping a buyer prepare an offer? Is it up to the agent working with the buyer to complete that section of the offer, or should it be left blank for the listing agent fill in the information?

Forms Guy: This year’s N.C. Real Estate Commission’s update materials provide that in general, as with other representations found in the “Seller Representations” section of the Contract (paragraph 7), the agent working with the buyer should complete the Oil and Gas Rights Disclosure to the best of his or her knowledge and ability. Alternatively, the agent working with the buyer might choose to leave the Oil and Gas Rights Disclosure blank and require the seller to complete it. However, this would result in a counteroffer since terms of buyer’s offer had been changed.

Larry: How are we, as buyer agents, supposed to get the information necessary to complete the Oil and Gas Rights Disclosure?

Forms Guy: If feasible, I suggest that you contact the listing agent to get the information. The update materials state that prudent listing agents should get the information from their seller clients prior to marketing the property, and further suggests that the information might be attached to the Residential Property and Owners’ Association Disclosure Statement. For your information, it is likely that the Exclusive Right to Sell Listing Agreement (form 101) will be amended to address oil and gas rights. Also, a field for such information may well be added by your local MLS, in which case you’ll be able to get the information there.

If you can’t get the information, I also think it would be appropriate for a buyer agent to check and initial the “No Representation” box in the first disclosure and the “No” boxes in the second and third disclosures, as these choices are, in my opinion, the choices that the seller will make in the great majority of cases. As pointed out in the Update Materials, it is up to the seller to review any seller representations completed by the buyer and correcting any that are inaccurate.

Curly: Why do you suggest that the “No Representation” box be checked instead of the “No” box in the first disclosure? Wouldn’t it be better for the buyer if the “No” box were checked?

Forms Guy: Great question, Curly. Others might have a different opinion, but my thinking is that the seller almost never is going to know with any degree of certainty whether oil and gas rights were severed from the property by a previous owner, and is not likely to engage an attorney to conclusively determine that they have not been severed. That’s why I think it’s probable that the seller is going to select the “No Representation” option in most cases. If that’s correct, I think it would make sense for the buyer agent to choose the “No Representation” option over the “No” option when assisting the buyer in preparing the offer in order to avoid setting up a certain counteroffer situation. In addition, whether the seller chooses “No” or “No Representation,” if a title examination performed by the closing attorney reveals that oil and gas rights were in fact severed by a previous owner, the seller likely would be unable to comply with the obligation to deliver “good” title to the property according to paragraph 8(f) of the contract, and this likely would be a material breach of contract that would relieve the buyer of the obligation to complete the transaction and entitle the buyer to a refund of any Due Diligence Fee and Due Diligence costs according to paragraph 8(l).

Moe: If the seller doesn’t know whether oil and gas rights were severed by a previous owner and isn’t required to find out, what obligation does the listing agent have to discover whether there has been a severance of oil and gas rights?

Forms Guy: It is not up to either the listing agent or the buyer agent to conduct an independent investigation to determine whether oil and gas rights have been severed from the property. The severance of such rights affects the title to the property, and discovering and rendering opinions on matters affecting title to real property is outside the scope of a real estate broker’s expertise and constitutes the practice of law. A North Carolina real estate attorney should be engaged to determine whether such rights have been severed from the property. This determination typically would be a part of the title search performed by the closing attorney. Although the attorney could do the title search during the Due Diligence Period, it isn’t required under the terms of the Contract. That’s because, as I just noted, one of the seller’s obligations is to deliver a general warranty deed for the property conveying fee simple marketable and insurable title free of encumbrances and defects. This obligation survives the end of the Due Diligence Period. If oil and gas rights (or other similar rights) have been severed from the property, the buyer should consult with the attorney about the potential consequences of proceeding with the transaction.

Larry: What if the listing agent or buyer agent had reason to suspect that oil and gas rights may have been severed from the property?

Forms Guy: Of course, if oil and gas rights (or other similar rights) have been severed from the title to a parcel of real property, it would be considered a material fact that a real estate broker would be required to disclose, but only if the broker knew or should have known about the severance. Typically, a broker wouldn’t know or have reason to know. However, a good example when a broker did have special knowledge was recently brought to our attention by an NCAR member. The broker happened to know that mineral rights had been severed from the title of at least one lot in an older subdivision in his marketplace. Why? Because the broker himself lived there and he knew that that the mineral rights had been retained by the developer when the broker’s own lot had first been conveyed!

Curly: What should the broker do in a situation like that?

Forms Guy: Suppose that broker becomes involved in listing or selling another lot in that same subdivision. He doesn’t know for sure that mineral rights have been severed from the title to the other lots in the subdivision, and, as I said previously, he wouldn’t be expected to do a search of the seller’s title to find out. If he’s taking a listing, we would suggest that he discuss the matter with the seller up front. If the seller doesn’t know whether rights have been severed from the title to the property, the seller might be encouraged to engage a real estate attorney to make that determination and to make an appropriate disclosure to prospective buyers. If the seller doesn’t want to do that, I think the listing agent should advise the seller that the listing agent will be under an obligation to disclose to prospective buyers the possibility that mineral rights have been severed from the title to the property.

Moe: I’ve got a better idea! If the seller won’t cooperate, I think the listing agent should squeeze the seller’s nose real hard with a pair of pliers and bop him over the head with a big mallet at the same time. That’ll get the seller’s attention!

Larry and Curly: Woo-woo-woo-woo!!

Forms Guy: I’ll just pretend as though I didn’t hear that. Good luck to you guys!