The new buyers' market

In an era of gas drilling, owners increasingly want to exclude a property's subsurface rights from sale



Heidi Powell had a motivated buyer. The buyer wanted the Butler County property even though the seller insisted on keeping the oil and gas rights below the house. He didn't care. But his bank did.

"At the eleventh hour, seriously, the day before closing, the bank called and said they can't make the loan," said Ms. Powell, owner of Re/Max Dynamic, Realtors in Freeport.

It wasn't because the bank was worried about potential water contamination, she said. It was the suspicion that there's unrealized value in the oil and gas rights. Otherwise, why would the seller reserve them?

"They almost pulled the plug on the whole transaction because of that," Ms. Powell said.

More and more sellers seem to be motivated by the same suspicions as they decide to reserve their oil and gas rights, local real estate agents say. Some even keep the rights when selling homes in the City of Pittsburgh, where there is a moratorium on fracking and no interest from companies to drill.

"It often makes the transaction more complex than is probably necessary," Ms. Powell said.

"When I advise clients of mine who are listing property, I try to provide the insight of what a buyer's perspective will be if you're withholding something. That's the same type of seller that would put in a new chandelier and say, ’I'm taking it with me.’"

Severing oil and gas rights — splitting them from the surface rights — is enjoying a resurgence thanks to shale gas in Pennsylvania. But given that the last time this happened ­was during the first oil and gas boom in the latter half of the 19th century, it's not at all clear who owns the oil and gas rights for any given property.

Costly decision

A typical residential title search goes back about 60 years. To know definitively who owns the oil and gas rights requires an extensive title search, one stretching back to 1860. That involves attorneys, thousands of dollars, and several months to complete. Often, that's too long to wait for a residential real estate transaction.

The first time Ms. Powell went through the process was about four years ago, when it was still possible to pay less than $2,000 for a title search. Now, it can run anywhere from $4,000 to $10,000 for a residential property.

Her buyers then were interested in two parcels of land on either side of their property to serve as buffers to future drilling activity. They needed to make absolutely sure they would be in control of the oil and gas rights on those parcels, so they shelled out the money for the title search.

Most buyers and sellers don't do that.

In March, Ms. Powell's client got the house he wanted in Butler County. The bank acquiesced and no extraordinary title search was performed.

Elsewhere in Butler, Kevin Brown's client fell in love with a house on a 10-acre patch of land. The seller, who also happened to be the listing agent, wanted to reserve the oil and gas rights.

"I asked this particular seller, do you know if you own them or not?" said Mr. Brown, an attorney, real estate agent and president of Praedium Real Estate Services in Mt. Washington.

"She said no. But just in case ..."

Mr. Brown advised his client not to pursue the house. He said he likely would advise all of his clients not to buy property where the oil and gas rights have been severed. "There's a little piece that's out of your control and it's right under you." 

For sellers, Mr. Brown said it's probably wise to spend the money and get an extensive title search if keeping the oil and gas rights is important. "Know you have them before you make a big deal out of it,“ he said

No perfect titles

Most of the in-depth title searches are being ordered by oil and gas companies. The searches constitute about 95 percent of the work that Michele Frederick, a title reviewer and business development specialist with Bird Dog Abstracting in Crafton, has been doing for the past several years.

Oil and gas leases are typically contingent on a title search that proves the right person signed the lease.

Companies may collect hundreds of leases before doing title searches. Sometimes, Ms. Frederick said, they find out they leased from the wrong person.

If the situation can't be corrected — for example, if the rightful owners can't be found or it's not clear who they are — the leases are abandoned and companies won't drill there.

"In Western Pennsylvania, there’s no perfect title," Ms. Frederick said.

Lawyers and abstractors swap stories of ambiguous and kooky deeds from the 1800s, attempting to define a properly line by using a cow's napping spot as a marker.

"I recall seeing such directionals as 'to a dead oak tree' and 'to the edge of the barn' and other such phrases that can only offer more confusion as to the tract of land being conveyed," said Jonathan Hall, an attorney with Wexford-based Lawrence D. Brudy & Associates Inc.

Brudy & Associates has done about 3,000 deep title searches, according to its president, Lawrence Brudy. Very few have been for residential property buyers or sellers, even though it's not uncommon for people to reserve rights they may not be sure that they own, he said.

More disclosure

In 2010, the Pennsylvania Association of Realtors developed the oil and gas addendum, a document that's partly a disclosure and partly a statement of intention that the organization recommends should accompany any new sales agreement. Large real estate agencies attach it to every sale, even those in Downtown Pittsburgh.

It asks sellers to disclose if they think they own the oil and gas rights below them and if they plan to keep those rights when they sell the property.

The fact is, unless those sellers have done a full title search, they can't be sure the information they're providing in the addendum is accurate, Ms. Frederick said.

"Our experience certainly has been that most sellers don't know if they own their oil and gas rights," said Linda Carnevali, regional manager for Berkshire Hathaway HomeServices The Preferred Realty in McMurray.

Ms. Carnevali, who sells real estate in Washington County, the epicenter of wet Marcellus Shale gas drilling, said she's seen sellers with oil and gas leases on their land sell not just the surface property but also the lease to a buyer, figuring it makes a better package.

Others choose to reserve the rights. Unlike Mr. Brown, Ms. Carnevali said she'd never advise a client not to pursue a property with severed rights. Splitting the subsurface resources from the land is a fact of life in Washington County -- it has been for decades because of coal activity in the area -- and real estate interests can't avoid that.

"If you love the home that you're buying, some buyers don't care what's happening underground," she said.

In the next few months, West Penn Multi-List, Inc., a regional listing service, will revise its regular seller disclosure form, which must be filled out by anyone putting a property up for sale, to include a series of questions about oil and gas activity. This is in addition to the oil and gas addendum.

The new disclosure, currently in draft form, asks homeowners to disclose any issues with water supplies as a result of oil and gas drilling on their properties or neighboring parcels. It also asks whether there is an oil and gas lease on the property and whether the homeowners are aware of any plans to drill on their land or nearby.

"It's all in educating our buyers," Ms. Carnevali said.

Anya Litvak: alitvak@post-gazette.com or 412-263-1455.

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