The Oil and Gas Addendum

Buyers and Sellers of Pennsylvania Real Estate Should Use Caution Pennsylvania Oil, Gas and/or Mineral Rights/Interests Disclosure Form Tries to Do Too Much

If you have bought or sold property in Pennsylvania, you have likely encountered the Oil, Gas and/or Mineral Rights/Interests Disclosure© form prepared by the Pennsylvania Association of Realtors as part of the sales documents. The Oil, Gas and/or Mineral Rights/Interests Disclosure© form serves an important purpose: identifying the seller’s knowledge about the status of oil, gas and mineral rights, and also identifying whether the seller intends to convey those interests to the buyer. Like other real estate sales forms, the Oil, Gas and/or Mineral Rights/Interests Disclosure© form attempts to take complex topics and to simplify them into relatively straightforward prompts.

The problem, however, is that the Oil, Gas and/or Mineral Rights/Interests Disclosure© form attempts to simplify concepts too much. While it uses correct terminology, the Oil, Gas and/or Mineral Rights/Interests Disclosure© form employs that terminology in an imprecise and inaccurate way. That can create unnecessary confusion for both buyers and sellers of real estate when attempting to evaluate whether oil, gas and mineral rights are being sold to the buyer or whether those rights are being retained by the seller. Sellers completing the Oil, Gas and/or Mineral Rights/Interests Disclosure© form should take care to be precise about what is intended to happen with the oil, gas and mineral rights in a property. Likewise, buyers should ask clarifying questions of sellers to confirm what interests are intended to be sold and what interests are being retained by the sellers.

The Oil, Gas and/or Mineral Rights/Interests Disclosure© form has several different sections. Those sections apply to different circumstances. Section 2 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form is entitled “Oil, Gas and/or Mineral Rights/Interests Excepted”. Its subsection (A) states that “[s]eller is aware that the following oil, gas and/or mineral rights/interests have been previously leased, sold, or otherwise conveyed by Seller or a previous owner of the Property (exceptions) as indicated and is not transferring them to Buyer. That description includes a number of different concepts that should be separated from one another in order to provide clarity and accuracy.

Section 2 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form correctly identifies that “exceptions” are not conveyed to the buyer. “Title to the thing subject to an exception remains with the grantor.” Wright v. Misty Mountain Farm, LLC, 125 A.3d 814, 820 (Pa. Super. Ct. 2015). And, an exception in a present conveyance can identify a property interest that was previously conveyed. If the seller no longer owns that property interest, or never owned that property interest in the first place, that property interest can be excepted in a deed. The seller retains whatever interest (potentially none) that the seller had in the excepted property interest at the time of the sale, and the buyer does not receive anything; the excepted property interest is not transferred to the buyer.

While an exception can reference property interests that were previously conveyed, Section 2 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form imprecisely treats exceptions as if they were entirely in the past. Subsection (A) suggests that “excepted” interests are those that have been “. . . previously leased, sold or otherwise conveyed by Seller or a previous owner. . .” [emphasis added]. That is not the case. A seller can except presently owned property interests in a deed to the buyer. See, Ralston v. Ralston, 55 A.3d 736, 741 (Pa. Super. Ct. 2012). If a seller owns the surface, along with the oil and gas rights in a property, and the seller only wants to sell the surface to the buyer, that seller can “except” the oil and gas rights in the deed to the buyer. An exception does not exclusively concern what happened in the past.

Section 2 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form also addresses the existence of oil and gas leases.  It does so in a way that can create confusion. The Oil, Gas and/or Mineral Rights/Interests Disclosure© form suggests that if oil, gas and mineral rights were previously leased, they are excepted from the conveyance and are not being sold to the buyer. That is inaccurate and the inclusion of prior leases should likely be separated from the Oil, Gas and/or Mineral Rights/Interests Disclosure© form’s section about “exceptions”.

Whether oil, gas and/or mineral rights were previously leased has little connection to an “exception” in the traditional sense. Section 2 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form is intended to identify interests that will not be transferred to the buyer. The fact that oil, gas and/or mineral rights were previously leased does not mean that they are necessarily “excepted” from a conveyance - and not transferred to the buyer.

Just because oil, gas and/or mineral rights were leased does not automatically mean that the buyer is not receiving those rights that were leased. The oil and gas could have been previously leased, but never developed. That could result in the lease being inoperative. See, T.W. Phillips Gas & Oil Company v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012). If the oil and gas has been leased and has been in production, the lessee (the gas company) obtains fee simple determinable ownership of the oil and gas that automatically ends when a specific event (identified in the lease) occurs. Id. That is usually the failure to produce in “paying quantities”. When the oil and gas has been leased and is under production, “the interest held by the grantor after such a conveyance is termed a ‘possibility of reverter’”, meaning that the leased oil and gas rights will automatically return to whoever holds the ‘possibility of reverter’ when the lease terminates. Jedlicka at 267.

Long story short, the fact that a property was previously leased for oil and gas development does not necessarily mean that the oil and gas are “excepted” from a conveyance and that oil and gas rights are not being transferred to a buyer. Even if the oil and gas rights are under development, a buyer can still acquire a “possibility of reverter” along with the rights to receive rentals and royalty payments from a lease. Section 2 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form’s suggestion that a prior lease of oil, gas and mineral rights means that they are not being transferred to the buyer is imprecise. Both buyers and sellers should inquire into this to avoid unknowingly selling or purchasing a broader set of rights than the parties intended.

Section 3 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form is entitled “Oil, Gas and/or Mineral Rights/Interests Reserved”. Its Subsection (A) describes that “Seller is reserving the following oil, gas and/or mineral rights/interests as indicated and is not transferring them to Buyer.” This prompt is imperfect because it misapplies the legal concept of a “reservation”. “A reservation pertains to incorporeal things that do not exist at the time the conveyance is made.” Ralston v. Ralston, 55 A.3d 736, 741 (Pa. Super. Ct. 2012). There can be situations where new rights are being created in a deed - and those are considered “reservations”. But, Section 3 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form is clearly focused on oil, gas and mineral rights that the seller already owns and which the seller does not intend to transfer to the buyer. Because those property interests already exist, that is an “exception”. Id. at 741-42. The Oil, Gas and/or Mineral Rights/Interests Disclosure© form’s reference to those interests as being “reserved” is inaccurate.

As a final point for this discussion, Section 4 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form is entitled “Surface Rights”. Its Subsection (A) calls for a description of “Surface rights owned by Seller” and its Subsection (B) asks for a description of “Surface rights excepted.” The obvious purpose of Section 4 of the Oil, Gas and/or Mineral Rights/Interests Disclosure© form is to alert the buyer to “who” has surface rights to the property at-issue. The difficulty is that, when it comes to oil, gas and mineral rights, there can be an overlap between these categories. Also, these categories can fail to encompass the different types of rights involved.

For instance, the property could be subject to an oil and gas lease that allows for surface development. The surface rights could still be “owned” by the seller. But, in an oil and gas lease that allows for surface development, the gas company has the right to enter the surface to develop oil and gas to the extent of the rights that were granted (or that the lessor could have granted) in the lease. That scenario is imprecisely captured by the Oil, Gas and/or Mineral Rights/Interests Disclosure© form.

Also consider a situation where oil and gas rights were sold years ago. While the seller in a transaction may “own” the surface rights, that ownership could be disturbed by the oil and gas owner. The subsurface owner has a right to enter and use the surface of the property to produce its subsurface resources. The subsurface owner’s right to enter and use the surface is not the same thing as owning the surface. The Oil, Gas and/or Mineral Rights/Interests Disclosure© form does not fully take these details into account.

The Oil, Gas and/or Mineral Rights/Interests Disclosure© form endeavors to provide buyers and sellers of real estate with straightforward identifications of oil, gas and mineral interests being sold and retained. It attempts to synthesize complex topics in order to provide understandable information to buyers about what they are purchasing and for sellers to clearly understand what they intend to retain.

But, like many things in life, there are trade-offs. The problem here is that by presenting different options as if they were singular choices, the Oil, Gas and/or Mineral Rights/Interests Disclosure© form oversimplifies matters and creates the potential for misunderstandings about parties’ intent. While a “check-the-box” approach may be useful and consistent with other disclosure forms employed in real estate transactions in Pennsylvania to accurately address these details.

Houston Harbaugh, P.C.’s Oil and Gas Law Practice Group assists buyers and sellers in the preparation and review of Oil, Gas and/or Mineral Rights/Interests Disclosure© forms. If you have any questions, please contact Brendan A. O’Donnell at 412-288-2226 or odonnellba@hh-law.com