Mineral rights issues change the landscape of real estate deals
Legal News Reporter
Published: December 21, 2012
There was a time when selling real estate almost always entailed things that were seen above the ground or surface rights, and in the case of cities, air rights, but the oil and gas boom is changing all that, making the job of a realtor more complicated.
“Mineral rights involve a lot more than just oil and gas,” said Richard Kiko, Jr., chief executive officer, broker and auctioneer at Canton-based KIKO Realtors & Auctioneers, a full-service auction and realty company. “In northeast Ohio companies often buy land and sift through it, looking for other components that can be sold such as peat moss, sand and gravel or oil and gas.”
While mineral rights can be very lucrative to the seller and buyer, figuring out who the rightful owner is can be difficult.
“The first oil and gas wells were drilled in Ohio in the 1860s, and since then both the mineral and surface rights have been sold and purchased at least several times,” said Kiko.
“What this means is that if Mr. Smith owned a 100-acre farm in the 1860s, he could have sold the mineral rights to one buyer and the surface rights to another person, and those owners could have sold their rights and so forth.
“Surface rights can be diced up and given to multiple owners and so can the mineral rights, so there could be multiple mineral rights owners.”
In the case of the surface rights, Kiko said a person needs two pieces of evidence to prove he or she is the rightful owner, evidence of title and a deed.
“Proving evidence of title on the surface is not that difficult because title companies pull together all the legal documents, including property liens and easements, and they issue an owner’s policy, which is insured,” Kiko said.
“So if the property was sold ten years ago, the title company would have written a policy and all that would have to be done is a search over the last ten years, which is pretty easy and inexpensive.”
But Kiko said that is not the case when it comes to mineral rights, where establishing control can be costly.
“Oil and gas owners do not have such policies, so every time the owner wants to sell, a search would have to be done dating back to the 1860s. Title companies do not do this work, so it has to be done by an attorney who can read oil and gas abstracts and determine who owns the rights, and then issue a mineral certificate.”
“The goal is to make sure that the seller owns the whole and complete interest,” said Michael Gruber, president of Zollinger, Gruber, Thomas & Co. in North Canton. Gruber often researches and prepares mineral title evidence for KIKO as well as realtors in other Ohio counties.
“It has to be done by an attorney because this is something that comes within the purview of the practice of law. A professional title examiner can do the search but cannot issue a legal opinion,” said Gruber.
“A lot of my work is done in the southern counties because in Stark and Summit there are a lot of properties that already have leases in place for Clinton and Berea wells.
“These are shallow wells that have been drilled over the last 100 years and are still being drilled,” said Gruber. “The excitement that we are seeing is over the deeper wells that are part of the Marcellus and Utica shale exploration.”
Gruber said if a landowner already has a Clinton or Berea lease, it would likely cover the deeper formations, including the Utica shale formation, so a company could come in and drill without having to get a new lease. In this case, the landowner would still be paid the royalty set in the existing lease.
But existing leases also create problems, said Gruber, including raising issues as to whether they can be set aside or whether they are deemed to cover the deeper formations.
“Every existing lease needs to be reviewed to determine what it covered and whether it is still in effect,” said Gruber.
Kiko said it is not always the property owner who pays the expenses. For example, large companies generally do their own searches once the potential owner signs a lease agreement and accepts a deposit. If a company does find problems, however, Kiko said the deposit would have to be returned since the agreement could not go forward.
“When a client comes to our office, we discuss ownership issues as well as the best way to sell. If someone is looking to make a sale quickly, auctions can be the best way to go. Traditional listings can take much longer to produce results.
“We also do live online auctions, where we sell to places around the world,” Kiko said. “I’ve sold tractors in Australia, firearms to the United Kingdom, oil and gas rights to other states outside of Ohio, including Iowa and antiques and collectibles all over the United States and around the world.”
Since more owners may opt to sell their mineral rights separately now and in the future, Gruber said real estate attorneys could find themselves dealing with an entirely new set of conflicts.
“If I am dealing with a property where one person owns the surface rights and another the mineral rights, the clients will have different interests,” said Gruber.
“For example, if the client owns the surface rights there will be issues such as how much acreage is being used, where the wells are located and how the wastewater is disposed of, but if the client only owns the mineral rights, the issue will be how to maximize the profitability and there will likely be little or no concern over what happens to the surface.”
Kiko said ownership and other issues would become even more important once the royalty phase begins.
“Right now we are in a leasing boom, but the significant money comes from royalties once the companies start drilling. In the past, issues over the ownership of mineral rights were not that important, but with the potential to make thousands off of a few acres people are paying attention,” Kiko said.
“Many realtors are comfortable dealing with traditional title issues but have no idea what is involved with mineral rights. KIKO has been doing this for years because we deal with large tracts of land, but those who have not are going to have to get up to speed.”