Posted on February 19, 2012

“Brave New World” of Real Estate Transfers – Ignorance of Oil & Gas Law Is Not Bliss

Back in the fall of 2011, the Pennsylvania Bar Institute asked if I would plan and organize a new continuing legal education program on the fundamentals of oil and gas law. Based upon the overwhelming number of requests from lawyers seeking entry into this field of law, PBI (the educational arm of the Pennsylvania Bar Association) determined that the time was right, if not overdue, for such a program. After four months of planning we are now three weeks away from presentation of this seminar in four locations; Pittsburgh, Harrisburg, Philadelphia and Williamsport and I am told there are already hundreds of lawyers registered. This is a very good thing.

The media too is picking up on the growth of oil and gas law almost exclusively due to the boom in development of unconventional shale gas in various parts of the country, but especially Pennsylvania. The Pittsburgh Post-Gazette recently published a lengthy article on the subject for which I was interviewed. The author queried a cross section of oil and gas practitioners from across the Commonwealth about this trend and the most glaring take away from the story was the disparity between the knowledge level of counsel representing industry compared to that of the landowner’s bar. Exploration and production and midstream companies are employing armies of experienced lawyers and large law firms both in and out of Pennsylvania. For industry, intensive training of new legal talent is not even given a second thought. It is a cost of doing business.

While land and mineral rights owners are often intimidated by the thought of going toe-to-toe with industry titans over any number of potential disputes that may result from natural gas development activities, in my landowner practice I am seeing a tremendous increase in the number of disputes that occasionally, but only rarely involve the “Fortune 100.” The problems that are at the heart of a growing number of legal battles involve the question of who owns the natural gas beneath a plot of ground; in legal parlance, the law of mineral rights. This happens to be the subject about which I will be speaking next month at the PBI’s Fundamentals of Oil and Gas Law program.

The concepts at the heart of mineral rights disputes are grounded in the law of real property, but the peculiar aspects of oil and natural gas and the scant and ancient Pennsylvania law on the subject add an entirely distinct overlay of legal principles that must be understood to represent clients in an increasing number of what might otherwise be considered ordinary commercial transactions. I have written an article for The Pennsylvania Lawyer magazine that will be published in its March-April issue (I’ll post a link here and on my website shortly) in which I explore the impact of natural gas development on real estate transactions in Pennsylvania.

The problems I see developing are only partially based upon the manner in which natural gas exploration and production is carried out; that is an area which the Governor and  Pennsylvania legislators (many of whom are lawyers) have the exclusive responsibility to shape. A significant number of troublesome issues are the result of unintended consequences caused by legal practitioners who have not taken the time or gained the experience necessary to properly represent their clients. For starters, consider the most basic concept in mineral rights and how it might impact a landowner.

There are three “estates” or legal interests in real property: the surface, the subsurface and the right of the surface owner to be supported. The “subsurface” interest includes all the different minerals found there and each mineral and every stratum could be owned separately. A landowner in Pennsylvania owns all three of these estates and essentially everything from the surface to the center of the earth. When a property owner enters into a lease of or sells the oil and gas beneath his or her property the surface estate is separated from the oil and gas. The lessee, generally a development company, becomes the owner of a portion of the subsurface estate. Even if a lease is silent on the matter, the law implies a right in the mineral owner to “reasonable” access to the surface in order to extract the mineral. As between the surface owner and the oil and gas lessee, the latter is considered to have superior rights over the former.

Whether the oil and gas rights in a property have been leased in the last few years, or possibly more than 100 years ago can have an impact on the ability to transfer that land in the future. As a purchaser, one needs to know whether he is buying all three estates or something less. If the latter, familiarity with the terms of the document entered into by a prior owner conveying out an interest in one or more of those estates is crucial as the purchaser will be subject to comply with that earlier agreement. If a search of the title to a property uncovers a prior lease, it becomes essential to understand whether that lease is still in effect. An alarming number of clients have purchased land believing they have acquired an interest in an existing lease or oil and gas rights only to find out that the deed they received has no such effect.

In the context of a surface owner who has signed a lease for the oil and gas rights beneath his property, what are the issues that a person will face when he decides to sell the land? Will the surface only be offered, or will the rights to or an interest in the oil and gas lease be included? How will these decisions affect the market value of the property? What impact may result from permitted development activities on nearby acreage? Will potential buyers be concerned about the scope of activity that neighbors may have consented to and what may occur on adjoining properties in the future?

These are just a few of the kinds of questions that will confront buyers and sellers of land in the Marcellus shale. I authored an article for the March/April edition of The Pennsylvania Lawyer magazine and its special report on the impact of natural gas development in Pennsylvania in which I explain some of the issues that many lawyers did not consider when counseling their clients originally, but which may have a profound on real estate in the future. It is extremely important that members of the bar who hold themselves out as qualified to handle matters involving oil and gas issues invest the significant amount of time necessary to develop the expertise and provide the level of service that clients will require.

Ask questions before you retain an oil and gas practitioner. I would suggest that clients resist the temptation to be impressed with how many millions of dollars a lawyer has received for his clients or how many transactions he has handled. There is far more to this area of practice than leases and pipeline agreements and making the same mistakes on a volume basis may be highly profitable, but not for the client.

Ignorance of the law of oil and gas is not bliss.

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