And Up Through the Ground…

A provision of the Regulatory Reform Act of 2014 further protects people who are buying and selling property by requiring that a new disclosure form regarding mineral, oil, and gas rights be included during real estate transactions. The legislation was signed into law this past September.

With the exciting prospect of oil and gas exploration starting in North Carolina next year (as authorized by the General Assembly with the passage into law of the Energy Modernization Act), there has been renewed interest among homeowners in protecting ownership of their property rights. Real estate can contain a number of property rights, including surface land, buildings, low-level air rights, and below-ground mineral and other rights (e.g. natural gas, oil, water, geothermal and precious metals).

In certain parts of the state, a drilling operation could set up shop to tap deposits of natural gas deep within the ground — but without certain legal protections in place, homeowners who have already surrendered their mineral rights could have the natural gas extracted from under their property and get nothing for it.

With that concern in mind, legislators have reinforced real estate disclosure laws by requiring sellers of residential property to conspicuously declare the status of mineral rights in real estate contracts. The changes are meant to help home buyers clearly understand landowner rights so they can make informed decisions about their property.

It’s not known at this point how much untapped wealth lies under the ground of North Carolina’s property owners, but according to a June 2014 study, the present value of untapped oil and gas below sections of land in Boulder County, Colorado — totaling just one square mile — is estimated to be between $1 billion and $2 billion. And oil and gas prices have certainly increased since Jed Clampett (a poor mountaineer who barely kept his family fed) discovered oil underneath his land some forty years ago.

The new language required in disclosure statement explicitly makes reference to oil and gas and mineral rights. The seller must ensure that the buyer is fully aware of the status of the oil and gas and mineral rights of the property being transferred, and the buyer must attest in writing to the fact that they have been informed of each of the following:

Mineral rights were severed from the property by a previous owner.
Seller has severed the mineral rights from the property.
Seller intends to sever the mineral rights from the property prior to transfer of title to Buyer.
Oil and gas rights were severed from the property by a previous owner.
Seller has severed the oil and gas rights from the property.
Seller intends to sever the oil and gas rights from the property prior to transfer of title to Buyer.

Perhaps most importantly, the new law requires the seller to make these disclosures no later than the time the buyer makes an offer to purchase the home.

Read the Fine Print

A recent dispute over proper real estate disclosures led to an investigation by the state Attorney General (AG) and the North Carolina Real Estate Commission.

In one case, a group of home buyers complained that they did not know they were giving away their rights to the natural gas, groundwater and other minerals beneath their homes when they signed their sales contracts.¹

A homeowner in Chapel Hill says he didn’t realize that the seller was keeping the mineral rights deep beneath his home until closing. “It was kind of hard to get out of it at that point because we had waited months for the house to get built and we were moving out,” Jay Mosesson says. “Plus we would have had to give our deposit up. We couldn’t say, ‘Oh, we’re not going to buy the home. We don’t have mineral rights.’ ” Real-estate agents say buyers often miss notifications of severed mineral rights buried in the multipage sales contracts they sign.

At the center of the disclosure controversy, D.R. Horton, the nation’s largest home builder, decided to voluntarily hand over mineral rights that they had retained at the time of sale and restored those rights to hundreds of home owners, although they were not legally obliged to do so.

Since 2010, D.R. Horton has routinely retained the mineral rights on every house they sell in the state. But in this case, they agreed to temporarily suspended the practice until the state legislature puts in place a regulatory framework for dealing with lease arrangements related to the newly-authorized technology of hydraulic fracturing.²

Deputy Attorney General Kevin Anderson echoed the homeowner’s dismay, when he said, “Our feeling was that normally, when North Carolina consumers were buying homes, their expectation was that they were purchasing all the normal rights with the home, as well as the land.”

The home builder told the AG’s office that it had intended “for its home buyers to be fully aware that the mineral rights under their lot have been severed and retained.”

“We’re putting our branches on notice to be looking for it anytime where D.R. Horton is the seller,” said Spencer Scarboro, senior vice president of loan originations for the State Employees Credit Union. “It’s just a small little blurb in the contract. It’s easily missed if you’re not looking for it.”

“We’re not looking to quarrel with anyone,” said Ken Bagwell, D.R. Horton’s chief counsel for the East region. “Our business is to make our homeowners happy.” Adding that the company wanted to reassure buyers that it was keeping its business focused on home building, not drilling or mining.

The sale of mineral rights separate from surface rights is common in other states, especially high-volume energy-producing states like Texas, but it is new to North Carolina.

In most states, sellers aren’t required to disclose to home buyers whether they are losing the mineral rights to the property. Sometimes builders indicate such an action in sales contracts or deeds and other documents. But buyers sometimes aren’t able to thoroughly review all the paperwork close enough to discover this detail, especially if they don’t have a lawyer to help them with the transaction.³

In 2012, the General Assembly passed a law requiring real estate transactions to include a disclaimer stating that “oil and gas rights can be severed,” which would in effect give the seller or someone else the right to drill, mine and explore on the property.⁴

Buyer Beware

Even without the prospect of energy exploration on their property, homeowners could face serious financial and legal consequences for losing their mineral rights. For example, they may not be able to secure a loan or refinance a mortgage. The North Carolina Housing Financing Agency states in their online guide that it will not back loans if mineral rights are excluded from the property.⁵

Homes that lack mineral rights are referred to as “toxic real estate” and may run into trouble with mortgage agreements because the buyer would have little control over the encroachments of natural gas operations. These properties could be more difficult to refinance and may lose market value, making the home harder to sell.

“We were surprised to find that a lot of the laws in other states didn’t seem to approach the issue from a consumer protection standpoint,” said Deputy Attorney General Anderson.⁶